| 13 December 2009
I don't myself have an income over GBP150,000 in the UK (or anywhere
else, for that matter), so this week's tightening up of the rules for pension
saving in the Chancellor's pre-budget report (aka election manifesto) doesn't
really affect me; but at all the dinner parties I went to since Wednesday (OK,
two of them) nobody talked about anything else but that, and the tax on bankers'
bonuses of course.
Since I try to be a financial journalist, obviously many of my
friends are in financial services, and most of them, boys and girls alike, tend
to be well into the range where they will be hit hard by the new 50% tax rate,
the increased national insurance contributions, and now the pension business.
Every time there is a tax increase, people always talk loosely about going to
Zurich, Dubai or Cyprus, and some of them do, especially if they're hedgies;
but this time there is a more meaningful tone to what they are saying. Taken
all together, someone on GBP175,000 and expecting a bonus of GBP100,000 (just
a middle range investment banker) will be paying out an extra GBP35,000 in tax
this year, and even that will cost their employer an extra GBP60,000.
The bonus tax is only short term, of course, and it's probably
fairly easy to get out of it one way or another, but the extra cost of pension
saving is long term. Then, once you have saved, you're trapped by HMRC rules
in low-yielding investments, plus who knows what the rate of UK tax will be
when you finally receive your pension? The national books are in such a mess
that it will be fifteen years before taxes can come down again. One crumb of
comfort for my friends (Tories, every one of them) is that 'we' will be in power
again in the summer - perhaps! 'We' will then have to work hard for ten years
to claw our way back to prosperity, and our reward will be that the electorate
will then bring back the socialists to spend the money we have saved!
Since Labour came back in, they have systematically attacked the
pensions savings system, beginning with Gordon Brown's infamous decision in
1997 to scrap tax relief on pension fund dividends. Altogether, the socialists
have 'raided' pensions savings by in excess of GBP10bn a year since 1997, which
amounts by today to a total lost by pension schemes of at least GBP200bn, representing
more than double that amount in eventual lump sum benefits. And what has the
money been spent on?
So this time it's for real, say my friends. It won't happen in
a blaze of publicity, because that attracts the unwelcome attentions of HMRC,
but little by little, one by one, companies and individuals will move to less
offensive tax regimes. And in the meantime, people will - should - save into
such funds as are permitted under SIPPs rules and which they will one day be
happy to have as investments when they no longer live in the UK.
There is no way out of HMRC rules as long as you remain a resident,
of course. If you want the benefit of not paying tax on the income you put into
your pension, then you have to accept the rules, and it is only after you have
been non-resident for at least five years that you may be able to use the QROPS
mechanism to transfer your pension assets into a more favourable regime which
will not compel you to invest in over-priced annuities. For younger people,
it may make more sense to bypass the system altogether from the beginning: if
you know that you are leaving eventually, and if you have spare cash, it may
be more logical to invest in high-yielding overseas assets regardless of the
tax saving. But be careful! All the people who saw their Dubai apartments as
some kind of substitute for boring old UK fund investments, including several
of my friends, are now regretting it big time.
Ah, the problems of having money! Luckily they pass me by.
You have been reading an entry on the following blog:
Penelope Wise
Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.
Penelope blogs on investment and financial services around the world: mainstream and alternative. Contact: penny@lowtax.net
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