Latest Pension Bombshell Betrays Poor Thinking

The proposal to impose a punitive tax on the impact of pay rises on final salary pensions, which was hidden in the budget, is another breathtaking example of the inability of those in charge to properly understand, and think through, the consequence of what they propose and implement.  It is no surprise that so many things go wrong, when the thought and investigation is not put in beforehand.

The proposals (which thankfully are only proposals for consultation at this stage), recognise that the pay rises of people in final salary schemes also impact their final pension, since this is determined by the staff member’s salary.  The ‘recognition’ is that, to meet the additional pension amount, a company would have to make an additional contribution to the pension scheme and this addition, which could be sizeable, must be taxed – and that tax paid by the individual.

The example quoted is a pay rise of £6k.  The assumption is that the scheme provides 2/3 of final salary, which equates to a rise of £4k in the pension.  The calculation is that this would require an additional contribution of £80k to a pension scheme and, taxed at 30%, this means that, for a pay rise of £6k, the individual gets a £24k tax bill.

What this doesn’t take into account is that, unlike MPs, anybody in private enterprise doesn’t know what their pension will be until they start drawing it.  This is because, unlike MPs, the 2/3 of final salary has to be earned over the working life (usually at the rate of either 1/60th per year, or 1/720th per month); if you only work for the organisation for 10 years, you would only get 1/6 (10/60ths) of your final salary.  When you got that pay rise, you might have only completed 10 years, and therefore it would be unfair to assume that you were going to get 2/3rds of it added to your pension too.  Therefore, to be taxed as if you were would be unfair.

This is a classic example of something being put forward (and quite possibly implemented in due course!) based on an incomplete understanding of the detail.  We see so much of this going on in both Government and commerce these days, and this is because too few people can be bothered to descend into the detail, and even fewer see the value in it.  We have to arrest this trend if we are to get back on our feet.  We need to relearn to value people who can dissect things in this way – we certainly don’t at the moment.

This ‘scheme’ is not going to work.  If the Government really wants to get yet more financial benefit from pension arrangements, it would be better downgrading MPs’ arrangements, and those of the entire public sector, rather than raping the beleaguered private sector again – especially with an ill-informed and ill-thought out proposal such as this.