The art of taxation, according to Louis XIV’s finance minister, Jean-Baptiste Colbert, is to pluck from the goose the maximum number of feathers while provoking the minimum of hissing.
This is the effect Chancellor Rachel Reeves is hoping to achieve by attacking ‘salary sacrifice’ pension schemes in the Budget. Many have never heard of salary sacrifice and find retirement finances impenetrable. So she probably thinks she can do it without unduly loud hissing.
Not if I can help it. This iniquitous folly needs to be shouted – no bellowed – from the rooftops.
In the long term, it is likely to be a catastrophe for pension saving on the scale of Gordon Brown’s 1997 blunder – which is when Reeves’s Labour predecessor as chancellor helped destroy the UK’s gold-plated final salary pensions system (once the envy of the world) by scrapping dividend tax relief for pension funds.
With salary sacrifice, employees give up part of their gross pay, which goes directly into their pension before tax and National Insurance (NI) is deducted. Employers also save on NI.
Reeves is slashing the annual limit on this from £60,000 to contributions of just £2,000. Employees and companies would be forced to pay NI on anything they put into their pensions above that figure.
The move will raise £4.7billion when it is eventually introduced. But it would also be a false economy with dire long-term consequences.
The chancellor implied that salary sacrifice is a niche part of the system used mainly by City fat cats to shelter their bonuses from tax and NI. But that is far from the truth
In a sly aside, the chancellor implied on Wednesday that salary sacrifice is a niche part of the system used mainly by City fat cats to shelter their bonuses from tax and NI.
But that is far from the truth. Salary sacrifice is widely used by mainstream companies and ordinary employees up and down the land.
Setting the cap at £2,000 could easily affect employees on moderate salaries of £40,000 a year, for example. Any idea it would just hurt those with broad shoulders is entirely misplaced.
The one ray of light in the statement is that this pension hammer blow is to be deferred until 2029. By that time, there might be a chancellor wise enough to consign this piece of utter stupidity to the oblivion it deserves.
Reeves, who views Gordon Brown as a role model, had a framed picture of him on her bedroom wall as a student. But by aiming her guns at pensions, she could not have chosen a worse example to copy from her mentor.
The move will leave people dramatically worse off when they retire – if, indeed, they can ever afford to do so.
AJ Bell, the wealth-management firm, found that someone aged 35 earning £40,000 a year could be £20,101 poorer at retirement age under the plans, assuming current pension savings of £30,000 and annual investment growth of five per cent.
The figures also assume the person contributes five per cent of their salary and their employer puts in three per cent.
A 35-year-old earning £50,000 and using salary sacrifice could expect to have £564,113 by age 65 under the current system. Under the plans, their eventual pot would be £542,053, leaving them £22,060 worse off.
On the same basis, anyone on £75,000 a year and using salary sacrifice could be £37,201 worse off at retirement.
It doesn’t take a genius to divine that this will deter individuals from saving and discourage companies from offering decent pension schemes.
Indeed, a survey of 2,050 people by the Association of British Insurers (ABI) found that nearly 40 per cent of workers said they would save less into their pension if these plans came into effect.
AJ Bell, the wealth-management firm, found that someone aged 35 earning £40,000 a year could be £20,101 poorer at retirement age under the plans, assuming current pension savings of £30,000 and annual investment growth of five per cent
It comes as an estimated 14.6 million people are already saving too little for retirement. Experts say the proposals are another tax on business and will discourage workers from saving for the future.
This is a terrible decision from Reeves – and don’t just take it from me. No less a figure than Dame Amanda Blanc, boss of insurance giant Aviva, warned the chancellor earlier this month it would be ‘bad news for Britain’.
As Blanc says, the message it sends out is dire: that it’s a bad idea to pay into a pension.
Salary sacrifice is just the latest in a series of broadsides Reeves has considered firing against pension savers trying to do the right thing. She is creating insecurity and discouraging prudence.
The chancellor appears to be fuelled by the politics of envy, where people trying to amass a nest-egg are not admired as role models but viewed as targets. Easy for Labour parliamentarians to think that way when they enjoy gold-plated pensions – along with the rest of the public sector.
Unlike those of us who work in the private – productive – part of the economy, the vast majority of state employees are guaranteed an income for life thanks to these schemes, which puts them in a hugely privileged position. They don’t have to worry about whether the stock market is rising or falling.
And, as a result, they are an increasingly unsustainable burden on taxpayers.
Liabilities for these unfunded public sector pensions are estimated at a staggering £1.4trillion by the Treasury’s Office for Budget Responsibility. The cost of salary sacrifice is dwarfed by these huge state-pension liabilities.
Yet rather than tackle this scandal, Reeves has taken the easy option of attacking ordinary savers and appeasing Labour’s union backers.
Hitting salary sacrifice will be yet another blow to companies reeling from NI rises, hikes in the minimum wage and Angela Rayner’s looming ‘workers’ rights’ Bill.
How can we generate growth with a chancellor who is making employers less eager to hire?
Those hurt most by Reeves’s anti-pension vendetta will not be the old, but the young. They are the ones who will, in future, be deprived of a tax-friendly environment, the sort that encourages them to save.
It is feared Reeves will wreak irreversible harm to the entire pension savings system, following in the footsteps of Gordon Brown
I fear Reeves will wreak irreversible harm to the entire pension savings system, following in the footsteps of her baleful exemplar, the pension-wrecker Brown.
His £5billion-a-year tax raid on pension fund dividends in 1997 ultimately left millions of Britons facing a poorer old age. Now, Reeves seems determined to finish the job he started.
By snatching the pension savings of middle Britain, the chancellor will also deplete a pool of capital that could be used to finance infrastructure and innovation – another of her stated aims. The fall in investment will be piled up cumulatively – or compounded – with every passing year until the hole is impossible to fill.
And by pick-pocketing future generations of pensioners, she is storing up even larger welfare costs in decades to come – as those who are unable to save enough to fend for themselves turn to the state.
To return to Jean-Baptiste Colbert: in her assaults on pensions, Reeves is not merely plucking feathers, she is killing the goose that lays the golden egg.
