Who benefits from the pensions tax breaks?

Somehow, we drifted off KLNs and started discussing the taxation of/subsidies to pension savings.

Me: “The bulk of the [tax breaks] superficially goes to higher rate taxpayers (who would save up for their old age anyway, with or without ‘encouragement’) but is actually largely siphoned off by the FS sector.”

Lola: “… as I may have said before, you can now buy pension funds with costs capped at about 0.5% p.a. Actually the worse siphoning off of tax subsidies is in cash ISA’s.”

Agreed to the last bit. For some mad reason, people who can afford to save would rather have 0.6% interest ‘tax-free’ than 1% gross taxed at 40%. Basic rate taxpayers should really choose 1% gross taxed at 20% rather than 0.6% tax-free, but the numbers are so small, it doesn’t really matter in practice.

By analogy, if they scrapped tax breaks for pension savings or ISAs and cut the headline income tax/NIC rates to match, the final outcome wouldn’t be much different. The pay-as-you-go state pension is still the best way to go; it’s cheap, reliable and effective on whatever measure. And for about a third of actual voters (pensioners are only one-quarter of the adult population, but they have the highest voter turnout), the state pension is pretty much the number one issue – pensioners vote for whichever party makes the most generous promises (it’s not their money), and this is one thing in party manifestos that they stick to if they get elected.

To my first point, the total cost/value of tax breaks for pension savings is at least £40 billion a year (trawl HMRC stat’s at your leisure). The ONS says that the total value of assets held in pension or annuity funds was £6,100 billion (in March 2018 – it might have gone up or down since then).

Charges of 0.5% seem fair enough, let’s round that up to 0.75% for all the extra charges they sneak in – the cheekier ones, the hidden profits they make on paying out stingy annuities, the transfer fees etc. On that basis, the total charges are 0.75% x £6,100 billion = £46 billion.

I rest my case.