Pension Taxation Policy, Nietzsche and Ethical Egoism

Neil Copeland

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Persuasion. The psychological technique, not the Jane Austen novel. How do we persuade people to exhibit a particular behaviour?

According to Wikipedia persuasion is the process of guiding people and oneself toward the adoption of an idea, attitude, or action by rational and symbolic (though not always logical) means. The Wikipedia article cites lots of techniques and barriers to persuasion, but misses the big one as far as I can see.

In my experience the best way to persuade someone to pursue a particular course of action requires one fairly straightforward question to be answered;

“What’s in it for me?”

Slightly cynical perhaps but, in my experience, someone can be persuaded to do just about anything provided that you can demonstrate that, for them personally, it will result in a positive outcome. This has been described by greater minds than mine as ethical egoism. Nietzsche, for example, pointed out that the ancient Greeks did not associate morality with altruism in the way that we do now and Aristotle (being an ancient Greek himself) held the view that we have duties to ourselves as well as to other people. We do what’s in our own best interest and if this benefits others as well, then it’s a happy coincidence. Doesn’t mean you’re a bad person.

Lots of people – Parliament, policy makers, advisers, even me – are agreed in principle that persuading people to save for their retirement through work based pension schemes is a good idea which should be actively encouraged. So we have to persuade individuals that it’s a good idea and, more importantly, if we are going to see anything more than minimum National Employer Savings Trust (NEST)-type provision, we have to persuade those who manage workplaces that pensions matter to them personally. If the decision makers see an advantage in having a pension personally, then there’s a good chance that they will take more than a passing interest in ensuring that there is a decent scheme established in their workplace.

You get the gist of how this persuasion lark works then? What’s good for me is good for others. What’s pointless for me is, well, if its pointless for me then I’m not going to invest any of my valuable time speculating on whether its pointless for others, or not.

So can someone explain this process to the Government? Slowly and avoiding big words. The people who are in a position to influence the approach to workplace pensions in many companies are “high earners”. And these days, when a high earner asks the question “Pensions, what’s in it for me?”, the honest answer is “Not much, actually”

People earning more than £130,000 will see their tax relief on pensions cut from April 2011, tapering from 40 per cent to just 20 per cent for those earning more than £180,000. The Government also introduced complex “anti-forestalling” measures this year to prevent said high earners making top-ups of more than £30,000 a year to their pensions before 2011.

There is much talk in all the comment around this issue about the “generous” tax reliefs available to pension schemes but this seems to miss the point that this is largely tax deferred rather than tax truly saved (and that’s true for all tax payers, not just high earners). Those earning over £180k will receive tax “relief” at 20% and probably pay tax on their pension income at 50%. Are you persuded that that’s a good idea?

The only true tax saving available currently is where members take a Pension Commencement Lump Sum (PCLS) on retirement. Is it paranoid of me to note that these were once called Tax Free Cash Sums and that the Tax Free reference has been dropped? It is not inconceivable that PCLSs will be the next target for restricted tax relief.

Is limited tax deferral sufficiently valuable to you to persuade you to hand your funds over to an annuity provider at 75 and be hit by penal levels of taxation if you have the effrontery to die and try and pass what’s left of your pension fund on to the next generation? I would suggest not.

I suppose some of you will consider having to pay 50% tax on your pension as a nice problem to have and the current populist mood seems set fair against high earners – more “bash a banker” than “hug a hoodie”. However this should be of interest to all of us because:

  • Once a principle has been breached, taxation creep tends to extend the effect to more and more people.
  • If those who determine pension policy for companies perceive little or no value in pensions from their own perspective they will not accord wider pension provision in their organisation any level of priority or importance and we will sees workplace pensions “level down” to the minimum.

In case some of you think I overstate the risk of the latter there is a lot of commentary out there suggesting that “levelling down” is a likely consequence of the introduction of NESTs. Making pension provision pointless for high earners removes another barrier to levelling down.

Compulsion has its place and is set to deliver a minimal level of pension saving for all. Persuasion can be much more powerful in delivering a system that gives people a meaningful income in retirement.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.