A Tax on All Your Pensions

Amid all the fracas about public sector pensions, we've forgotten what happened to those in the private sector in Gordon Brown's first budget.

We had a simple approach before then. For money taken as income, you were taxed twice: once as income and once as you spent it. Pensions were taxed the same way: once as income when the pensioner was paid, and once when they spent it. In Gordon Brown's first budget, he obviously decided that saving for a pension was bad behaviour to be discouraged, so he made it that pensions had extra tax: each year as the investment to finance the pension built a value, and then again when it was paid as annuity, and again as it was spent.

Now, clearly the £5bn per year which was taken from future (private sector) pensioners to be spent by government isn't wholly responsible for the ending of defined benefit private sector pensions. There was also some ghastly regulation during boom times, so that instead of building a war chest against future bust times, the funds were encouraged (and in many cases compelled) to take pension holidays, meaning that the displaced money would be subject to corporation tax. And there was no war chest when the bust came.

We are now clearly in a mess. Most private sector employees are now in defined contribution schemes, which means that the individual her/himself is directly exposed to market vaguaries. And then, what's more, there are siren calls to put even more tax on people who are saving for pensions by subjecting their contributions to some degree of tax (and, in a clever use of language, this is called "removing the higher rate relief" rather than "taxing the money you are saving, and which will be taxed again when you withdraw it").

This is why I feel little sympathy with the public sector workers: the expansion in public sector employment which has partly led to the current shortfall was itself financed by the raid on my pension. So far from the slogan being "My pension is my pay", the slogan should be "My pay is your pension".