One of the common misconceptions about pension tax is that any increase in the amount the Exchequer takes will only be felt by rich retirees.
Even if this were the case, why should those who have worked hard and saved all their lives for a decent retirement be targeted? But as anyone who isn’t gripped by class and intergenerational warfare knows, it is working people who will pay if the Chancellor presses ahead with an ill-advised raid on pensions. The younger they are, the worse it may be.
This is because the taxes will hit those still in work saving for retirement – not those already there. People save for their pensions for decades. In doing so, they are forgoing income they could take today on the condition they will receive it in future.
The pension tax system is set up to make this fair and incentivise people to defer their income until later life. This explains one of the so-called tax breaks seemingly in Rachel Reeves’ crosshairs – relief on pension contributions. Pension contributions are exempt from income tax, as are investment returns within a pension fund. Instead, tax is deferred to when the money is taken out in retirement. This is known as ‘exempt-exempt-taxed’ treatment, or EET.
ISAs work the other way around – money is taxed before contribution but returns and withdrawals are exempt.
In practice, workers on the basic rate of income tax get 20 per cent relief on their pension savings and those on higher rates get 40 per cent or 45 per cent. So desperate is Reeves for cash to fund her expansion of the state even as the economy flounders, the reliefs enjoyed by higher earners are now a target.
In the crosshairs: So desperate is Rachel Reeves for cash to fund her expansion of the state even as the economy flounders, the reliefs enjoyed by higher earners are now a target
Cutting these reliefs would be a direct tax on the money set aside by millions of workers for the future – a tax on savings, a tax on retirement, leaving people worse off in old age.
There are more than 7m higher rate taxpayers who would be hit. The freeze in income tax thresholds means this number will rise to close to 10m in the coming years. And many of those paying the basic rate will be sucked in as their careers progress and their pay rises.
If relief is cut as feared, this army of prudent workers would effectively pay tax on the money they put into their pensions and pay again when they take the money out as income. An underhand form of double taxation for simply doing the right thing. Instead of ‘exempt-exempt-taxed’, pension savings would be ‘taxed-exempt-taxed’. There are other areas of the pension tax system under threat, including the tax-free lump sum. Pension savers are able to withdraw up to a quarter of their pension pots tax free from the age of 55 – up to a maximum of £268,275.
Pensions minister Torsten Bell, who used to run the Resolution Foundation think-tank and is writing the Budget alongside Reeves, has called for this threshold to be cut to just £40,000. Such a move would hit the retirement plans of millions – including many who do not have large retirement pots. Anyone with more than £160,000 would be hit because anything over £40,000 taken out as a lump sum would be taxed.
And who would pay? Not anyone over the age of 55. Such a tax change would be likely to take time to implement, allowing those old enough to withdraw their lump sums unimpeded. No, it would be those in their early 50s, 40s, 30s and 20s, working hard and saving what they can into their pensions, so they need not rely on the state.
The Chancellor claims to be on the side of working people. A tax raid on those saving for retirement would show she is, in fact, at war with them.
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This article was originally published by a www.dailymail.co.uk . Read the Original article here. .