Inflammatory budget?

These are the days of being offended. It seems that, unsurprisingly, opposition parties and in particular the Labour party are having kittens about announcements around pensions in the Budget. The criticism is that this helps the rich and not the poor. There is some truth in this of course, but this goes to the political heart of wealth redistribution. In case you are concerned about my political bias, I don’t like any of them.

A million pounds seems like a lot, (it is!) but it’s not as much as it was. The sense we have of £1m is due to ‘anchoring’ as most of us grew up believing that £1m was a lot of money; a millionaire was a very rich person. Search for a home online in the south east and quickly you appreciate that perhaps a million doesn’t buy very much. The TV show “Who Wants to be a Millionaire” with the prize of £1m was first aired in April 1998, almost 25 years ago. £1m then bought you rather more than the same prize fund does today. In fact in real terms, the prize should be adjusted to £1,776,802 … but that doesn’t really fit with the show’s title.

An adult approach is of course to recognise the impact of inflation. I’m going to speculate that politicians know this, but are always selective about the things that vex them. Your house is worth more perhaps because you have done some refurbishment, but also due to inflation. Anyone living in the South East (or indeed swathes of the country) knows that house prices are eye-watering and this is a problem for those trying to buy and for those paying inheritance tax. Inflation in house prices has been higher.

THE PENSION REFORMS WERE REALLY ABOUT NHS CONSULTANTS

The main thrust of the pension reforms are aimed at NHS Consultants, because they have been leaving in droves, because simply by working a normal week they end up owing tax on income that they have not had, in a pension they dont get until 67 at best. Ask any doctor. If we assume health and the NHS is important, it would seem that Labour politicians suggesting that they will reverse pension changes announced in the Spring Budget 2023 have not understood very much at all. If Labour are serious about looking after the health of the nation, we need to rethink pension rules that basically punish them from working. Sadly, few politicians understand the true impact of pension rules.

An alternative would perhaps be to have a simplistic approach, cut doctors and those in similar schemes out of the annual allowance tax calculations entirely. I suspect this would make them happy, it would certainly make my life easier. However the NHS pension is a Defined Benefit or Final Salary scheme, what you do for one, legally you have to do for others. The only other group of people with excellent “old school” final salary pensions are people with long service in big companies or institutions and almost certainly on high incomes – precisely the sort of people that Labour seem to loathe along with their multinational employers. So such a “cut out the problem” isnt actually a solution.

Reality is always an irritation for an MP or political party of any persuasion. A few non-partisan (I hope) facts for you to consider. The last time Labour won an election was in 2005. David Cameron formed a Coalition Government following the election in May 2010 (tax year 2010/11).

1. Under the new proposals, those earning £200,000 or more do not get an automatic allowance of £60,000 into pensions. This is the threshold at which a lot of calculations need to be done, some doctors will still have to do this. As a result, they may well suffer a reduced annual allowance (how much they can put into a pension).
2. Those earning £260,000 or more will certainly have a reduced (tapered) annual allowance from £60,000 and will need to do some sums.
3. Those earning £360,000 or more can only contribute £10,000 gross into pensions, which is less than they can pay into an ISA. So these three facts would suggest that Labour are not happy that people paying 45% tax and have no personal allowance are somehow able to load pensions like a kid in a sweet shop. Its not true.
4. The tax-free cash from a pension is capped at 25% of today’s lifetime allowance (£268,275). That means those retiring in the future have an allowance that does not keep pace with inflation, meaning in real-terms lower tax-free cash sums will be available. Tax-free cash of 25% of £1.8m or Primary/Enhanced protection, was higher under the last Labour Government than at any point since. Pension income is taxable, it is a future revenue for HMRC. It is also a possible solution to care costs rather than the State paying, I digress.
5. The last Labour Government had an annual allowance (how much can be paid into a pension) of £255,000, there was no Tapered or reduced Annual Allowance.
6. The main gripe of Labour about salary austerity wage inflation would appear not to apply to pension benefits being inflation/austerity-repaired since 2010. In short, the LTA would be £1.8m+ inflation, the Annual Allowance would be £255,000+inflation. Tax-free cash from pensions would be higher at a minimum of £450,000+ inflation. Additionally, the £100,000 income threshold for loss of the personal allowance has reduced in real terms. In short they are using the same facts to argue for higher wages, but not higher allowances that benefit… well, taxpayers.
7. A-Day was introduced by Labour and will turn adult (18) on 6/4/2023. Perhaps adults should be allowed to save for their own financial independence rather than penalised/restricted on both what you can pay in and what you can take out. The original intention of pension simplification and A-Day was to increase the Lifetime Allowance, it started at £1.5m and increased substantially each year until 2010.
8. The current Government will, from 6/4/2023 take more tax, starting the 45% rate of tax at £125,140 rather than £150,000. There are more people are paying additional rate tax.
9. The personal allowance is currently £12,570 (up substantially from 2010 but removed from those earning over £100,000. In tax year 2009/10 it was £6,475, the rule to gradually remove the personal allowance for those earning £100,000+ came into effect in 2010/11 set by Labour, in the likely event of a change of Government and in light of the credit crunch.
10. According to the Bank of England’s own inflation calculator, £100 in 2010 would be £141.10 now. If this were applied the following might be observed.

• The £6,475 personal allowance would be lower at £9,155.82 (its actually £12,570, so brownie points for Conservatives?)
• £100,000 income before loss of personal allowance would be £141,402 (it’s still £100,000)
• The Lifetime allowance of £1,800,000 would be £2,545,248 (its currently £1,073,100 and about to be abolished, this is what they are complaining about)
• 25% tax free cash would be £636,312 but it is not even half that amount, capped at £268,275, reducing in real terms every year.
• The annual allowance of £255,000 would have become £360,576, yet apparently it is act of serving the wealthy to increase it from 6/4/23 from £40,000 to £60,000. Note that those “rich people” earning over £360,000 will be able to put in £10,000 as opposed to £4,000 into their pension, which has been the case for several years now. Just for the record someone earning £360,000 pays a lot of income tax.
• In Labour’s last tax year, the basic rate of income tax (20%) applied to £37,400 if this had been linked to inflation, it would now be £52,885, the higher rate extended up to £150,000, which would otherwise be £212,104. In short, Conservatives have evidently cut allowances and increased tax

Chancellors of all persuasions have a knack are implying positive changes are their own doing all whilst completely ignoring the impact of inflation. You think you have been paying more tax? Well, clearly you have. We all have paid for the mismanagement of the economy by our underqualified political masters. Despite what is said in the media, even by supposed pension experts, if you earn more than £360,000 you can only place £10,000 into a pension and get tax relief, for the record a minor (child) can place £9,000 into a tax free Junior ISA.

We will have to see if Labour really will win an election and then change the lifetime allowance again. It seems entirely unhelpful to keep messing around with people’s planning for retirement and financial independence, apparently this is democracy in action. It would seem that politicians from both parties do not really like you benefitting from earning more, particularly if you earn between £100,000 and £200,000 or have I missed something? As for the media, well they don’t like you either unless you own the newspaper you are reading.