It is estimated that only 4% of the working population reaching the age of retirement will earn anywhere near two thirds of their final income and that includes civil servants, MPs, NHS, teachers, emergency service employees et al who are on fantastic schemes and reach their full entitlement.
So it is very clear that there is simply a massive issue about the amount being saved for retirement. The Government initially attempted to try and plug the looming holes for the future by attempting to incentivise people to take up private pensions via the stakeholder scheme and force employers to contribute into them on their behalf. It was a pitiful attempt to cover the cracks and most of the schemes are pretty laughable. One of the points about the credit crunch and recession was that while we were all leveraging our assets to borrow more money to bolster our actually diminishing wages, savings were going negative.
The facts are simple - nobody is putting enough away for the future.
Changing Thinking
Again, one of the features of the boom of the last 12 years is that we have lived the 'here & now' and forfeited much of our future planning and specifically on pensions. For some odd reason many believe that their property portfolio will sort this out but we have had a stark reminder of 'what goes up up must come down' lately. Plus, Mr. Darling has suddenly got very hard on second homes which for many was seen as wise investing for the future.
At some point, society in general will have to turn its thoughts to how it is going to keep itself in the same standard of living in retirement. I can safely say that it is a matter about which I am very concerned for my family. Despite prudent savings and pension planning, it is nowhere near enough to get me anything like two thirds of my current earnings.
So it came as some surprise that Darling would start to throw cold water on those that change part of their salary and bonus to pension contributions.
Government View
True to the 'here & now' Darling has seen that those around the £150,000 total salary and bonus will be keen to sacrifice some of the salary to get below the threshold for 51.5% (maximum rate plus NI increase) and take the missing part as an employer's contribution on which no tax is currently paid. But Darling is looking at stopping that with a tapering tax system on employer contributions to be paid by the employee that will, for those on £180,000 or more, be up to 30%.
It is seen as stopping tax avoidance as not only is the tax relief saved but the employer pays no NI on the contribution. But it is a false economy - we really need to be pushed to save more for pensions and decrease burdens on the state. If people can maintain their living standards in retirement then there is a fair chance that the strain on the NHS will be less as more people will afford private healthcare as an example plus we will pay more tax (again). It's more than that - society needs to look forward and make sure it is putting aside more - we need to get that discipline in us all.
The tax relief is seen as being unfairly biased to top earners - that's rubbish as all that is happening is that tax already paid is being claimed back. If this were to be widened to all pension contributions then people will have to start thinking about how they can mitigate costs in retirement and that will almost certainly mean that retired people will look to countries like Cyprus where tax is 20% and pensions are portable. I know I have looked at Cyprus and other places like Malta to find a good alternative as this may just be the difference between being above or below the 'two thirds' earning level in retirement. Even if it is not that close, it is now a serious consideration.
While everyone seems to be fixated on the current top earners fleeing the coop, there is more of a danger that middle earners will leave the country in retirement and it is just as barmy as they will be tax payers.
Short Termism
What we are seeing from the Government is a number of short term moves to try and stimulate the 'here & now' again and try to get people to start spending while grabbing money off the top earners which they seem to believe will be popular amongst most earners. After all there are not that many people in Britain that earn over £150,000 a year, and many of those will only be just above it as normal employees and not Directors who may get supplementary goodies.
This may be a precursor to the phasing out of tax relief on pension contributions for PAYE taxpayers and the fall of the employer contributions as part of people's packages. I think it's opening up a gaping problem for the future.
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