David Prosser: Pension funds should be a tempting target if the Chancellor wants to be progressive

 

There are just four weeks to go to his autumn statement, and the Chancellor needs all the help he can get with ideas for hitting borrowing targets that look increasingly challenging, given the way economic growth continues to disappoint.

One contribution definitely worth considering comes from Centre Forum, a think-tank with close links to George Osborne's Liberal Democrat Coalition partners. It proposes a restriction on pension tax breaks – the challenge for Mr Osborne would be to explain why such a policy, characterised in the past as an attack on middle England, is actually more of the "we're all in this together" kind of thinking.

The tax break that really irks the think-tank is a popular one: the option for those with private pensions to take up to 25 per cent of their funds as a tax-free lump sum on retirement.

The cost of that relief is £2.5bn a year, according to HM Revenue & Customs – Centre Forum thinks some of the money should be clawed back by making lump sums taxable above the higher-rate income tax threshold at the full 40 per cent rate.

The effect would probably be that that many higher-rate taxpayers opted to take a smaller lump sum on retirement, choosing instead to buy more annuity income with their funds. Since these pensions are taxable in the normal way, the tax take from retirement annuities would be higher in future, perhaps by as much as 5 per cent a year, according to the think-tank.

It is a powerful argument. Wealthier savers do receive a disproportionate share of the billions of pounds spent every year on pension tax breaks – not least because they also get higher-rate relief on pension contributions. And while there have been some attempts to curb the cost of these reliefs, chiefly by imposing a lifetime limit of £1.5m on private pension funds, it is still possible, on retirement, for someone to take as much as £375,000 from their savings without paying a penny of tax.

The Chancellor would need to tread carefully. The tax-free lump sum is one of the most important reasons why people choose to save for old age via private pensions rather than, say, an individual savings account where their money otherwise gets the same level of tax relied but is not locked up. In that sense, it is a useful incentive.

Still, those who would be affected by such a move would still be entitled to take, at today's thresholds, more than £40,000 as tax-free cash on retirement. And they are likely to be the sort of people for whom Isas do not provide sufficient investment allowances for their retirement savings.

Moreover, this would be a progressive tax reform. Too many of the Government's attempts to raise more tax have been regressive – look at yesterday's VAT figures from the Office for National Statistics, for example.

 

Diamond continues todefy expectations

It is the arguments about regulation that tend to make all the headlines but for Bob Diamond, the chief executive of Barclays, the refusal of investors to buy his bank's story has been as big a frustration as his run-ins with reformers. The stock market has consistently failed to accord the bank the rating its performance has deserved, let alone to value it on the basis of the targets set publicly by Mr Diamond.

In particular, the Barclays boss's promise in June to raise Barclays' return on equity to 13 per cent by 2013 – it is 8 per cent today – was met with scepticism. And yet the bank continues to surprise on the upside.

Yesterday's figures were no exception: the strong performance of the retail operations, the further cost reductions and the falling bad debts all exceeded expectations. There will be no new capital raising, Barclays insists, and exposure to the eurozone has been pared back.

Even the disappointing bits of Barclays' update came with silver linings. Barclays Capital may have been the only part of the bank to perform less well than in the same quarter of last year, but it has outperformed rivals such as Goldman Sachs. And the dip in profits does at least mean Barclays will be paying lower bonuses this year (despite putting a little more of its revenues aside for compensation), which is handy politically. So, too, is the fact that it is on target to hit its lending promises.

The results also undermine the arguments of those who believe Barclays' days as a universal bank may be numbered. Not only would splitting out BarCap be more damaging to the retail bank than one might imagine – the businesses are interwoven – but the two operations are currently working as useful counterbalances.

Will Mr Diamond hit the magic 13 per cent? It is going to be difficult if the global economic outlook continues to deteriorate. Even if he only gets close, however, the market will owe Barclays a very generous re-rating.

 

Do as we say on pay, but not as we do

Why do institutional shareholders not complain more loudly about excessive executive pay at the companies in which they are invested, as highlighted again by Incomes Data Services last week? One reason may be that they fear being charged with hypocrisy.

Data published yesterday by PwC reveals that European fund managers' remuneration has risen by an average of 18 per cent over the past year. On the whole, the more senior the fund manager the larger the increase has been.

The explanation given for these whacking pay increases will be familiar to those who follow the debate about executive rewards. Competition for the best fund managers is both cut-throat and global, we are told.

That may or may not be the case. But it is hardly surprising that fund managers aren't making a fuss about the executive pay gravy train – they appear to be passengers on it, too.

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