There are reputedly 9,000 public servants who earn more than the Prime Minister, which tells us a lot. It tells us that taking a £4bn axe to pensions has been as much about punishing those on obscene remuneration packages as trimming retirement incomes.
Increasing taxes beyond a top rate of 50 per cent would have been a non-starter, politically. But the Treasury has increased the tax hike by £40,000 per head on our richest 100,000, if mandarins’ estimates about the numbers hit are correct, which is doubtful.
Companies and public bodies used to justify paying huge salaries on the grounds they needed to attract the best staff. But the last three years has blown such arguments out of the water.
Shareholders have paid dearly for an atrocious service. As such, fat cat pensions are too often a reward for failure and an embarrassment for all political parties. The new rules restrict to £50,000 the amount, which can be saved into a pension each year, and limits to £1.5 million lifetime contributions.
The new regime for final salary schemes is different, because contributions do not reflect their worth. Here the annual increase in the value of the pension is multiplied by a factor of 16 ( rather than 10 as previously the case). In future, therefore, someone whose pension increases by around £3,125 following a pay rise and further accrual, may find themselves paying tax.
Companies and public bodies used to justify paying huge salaries on the grounds they needed to attract the best staff. But the last three years has blown such arguments out of the water.
But the Treasury left another key final salary multiple unchanged, which means discrepancies continue between money purchase and final salary arrangements.
When it comes to evaluating a final salary pension at retirement to measure it against the life-time allowance, a multiple of 20 is used. This means an employee with a final salary pension could receive a maximum pension of around £75,000 untaxed, while anything above a £60,000 annual pension from a money purchase scheme might breach the £1.5 million lifetime allowance and incur a tax bill. You need to be fairly gold-plated to pay your taxes, go to work, run a home and still manage a £50,000 annual pension contribution. Even the self-employed, who historically start pensions much later, and fill their pots with a few mega injections of cash, are safeguarded. Unused contributions can be carried forward, effectively allowing £200,000 to be paid in every four years.
In the public sector, it will be those with big promotions, who will face stiff bills. A deputy headmaster earning £50,000 with 35 years service, promoted to an £80,000 headmaster will see pension entitlement leap overnight by £14,125 annually, from £21,875 to £36,000. Multiply this by 16 and you get a deemed contribution of £226,000, £176,000 of which will now be taxed.
In fact, his bill will be higher still, as teachers also receive a lump sum on retirement, which would have to be included. Some senior executives in industry will be further hit by scrapping of tax concessions available to unapproved “super executive” schemes, such as employer-funded retirement benefit schemes. These have now gone, as part of the new regime.
So how will the super-rich respond? Some will go and live abroad, carefully calculating the days they spend in the UK. Others may look at the taxbreaks in Enterprise Investment Trusts or Venture Capital Trusts. Similarly, investment strategies which maximise Individual Savings Accounts and exploit capital gains tax allowances, will ensure that money taxed on the way in will be tax-free on the way out.
Some staff may switch pension for other benefits. In the public sector, we are likely to see more aggressive switching to average salary schemes, where sharp pension increases do not occur. This would be in step with the Hutton report into public sector pensions which pointed out that final salary schemes benefited high flyers disproportionately.
So will the Treasury achieve its £4 billion pensions raid? Possibly not, or rather not immediately. But, there are no provisions for increasing these thresholds, which means that over time we can expect to see much more tax paid by many, many more people.
Teresa Hunter is personal finance editor of Scotland on Sunday