"We should never trust the government — any government — to look after us in old age"
Two hundred years ago the House of Commons voted to abolish income tax. After Waterloo, this wartime expedient was no longer justified or needed. Even the records should be destroyed — and so they were, but the wily taxmen had kept copies. Back came a “temporary” tax which is still with us. Indeed, by now we have two income taxes and a third is on the way, labelled “automatic enrolment”. Look out.
The second is, of course, national insurance, the tax that dare not speak its name. The standard rate is 12 per cent (and employers may pay more) bur no one now pretends that these payments are premiums or represent a claim on a fund. There is no fund. Chancellors every so often admit this and look for ways of merging the two taxes. Today’s Chancellor is only the latest. Until now the complications have been too much for them.
Now comes a new complication. Devised in Tony Blair’s time by a commission under the omnipresent Adair Turner (since ennobled), it is a scheme for forcing people and employers to make pension contributions. National insurance, Mark II? Not exactly. The money will be looked after by pension providers, including some familiar names and also a state-owned owned entity, at first called Natspis but quickly renamed Nest.
This has all the marks of a consultant’s dream, so we are being allowed to wake up to it slowly. Auto-enrolment began three years ago, but only at minimal rates, and only with the biggest employers, whose back offices could cope with it. By this time next year it will extend to employers of fewer than 30 people. One will be enough. Everyone will be caught, the office work will be a dead weight on the smallest business, and the rates will be on their way up.
In less than three years’ time, these “contributions” will be levied on people in employment at a rate of 5 per cent but will qualify for relief against income tax — the original version, that is. Their employers will chip in another 3 per cent. This will apply to everyone over 21 who is not adequately covered by a pension scheme. There will be a right to opt out, but woe betide any employer who makes opting out attractive. If (for instance) he offers a pay rise — cash now, rather than the hope of cash many years later — that would break the law and he could go to jail.
You might well suspect an insurance promoter who has to rely on such threats to sell his policies. If his scheme represents such good value, why can’t it stand on its merits? By the time we find out it will be too late to ask, but we know that the providers will charge for their services, and that the modest individual contributions will be costly to handle. As always, we shall have to hope that the funds will keep pace with the fees.
Even if they do, no one who is enrolled in this scheme should rely upon it for an old age of undiminished prosperity. The numbers cannot be made to add up. When Bismarck first gave Prussians a state pension, their average expectation of life was 46, so he could set the retirement age at 65 and run a solvent scheme — but since then lives and retirements have lengthened and the cost of providing for them has rocketed. While we wait, some government is sure to change the rules, not necessarily in our favour. The history of our state pension and the second income tax tells that unhappy story.
Now we have a new scheme that will work like a tax. Employers must suffer their share and must also carry the costs of collection. Their employees will feel it as a hole in their pay packets. They will be told that their bread is being cast on the waters and will return to them, as the Scripture promises, after many days. That may not enthuse them if they have bills to pay at the end of the week.
It may not enthuse the Chancellor, either. He is counting on them to keep the recovery going and he does not want to prune their spending power. Observe his sudden conversion to the joys of higher wages — if need be, compulsory. It would not serve his purpose to hit those wages with a higher tax from which he does not even benefit. On the contrary: the tax relief on their contributions will make his arithmetic worse.
He is now audibly casting doubt on the whole structure of this tax relief. It is meant to encourage us to take out pensions, or to have them taken out for us — but when we collect them, we pay tax on them. May we be doing this the wrong way round? Imagine, instead, that we paid tax first and saved later, but that from then on our savings were tax-free.
This model, in fact, has been working well for decades, under different governments. It is known as the Individual Savings Account, or, less formally, ISA. We get no tax breaks for contributing to an ISA, and pay no tax bills of any sort on the money in the account. Pension contributions are, of course, a form of saving. Why not say so?
If the Chancellor is minded to say so, he will need to hurry, for the third income tax is tightening its grip. He could begin by explaining that the scheme will be genuinely optional. For a start, anyone who is offered a better deal should be free to take it, without the police turning up to arrest his employer. Then tax reform would follow.
Two principles should be at work here. First, we should never trust the government — any government — to look after us in our old age. Next, as the Commons so sensibly recognised, one income tax is more than enough.