Two things you need to know about me before I continue; I love pensions (and so should you because you’ll need them when you retire!) and I hate tax (or more specifically, over-taxation, but who doesn’t). So understandably my ears pricked up when the words ‘Financial Transaction Tax’ rattled my ear drums, for the reason that the pensions industry is the largest financial transaction market in the globe.
This proposal is a European Commission brainchild, known affectionately as the ‘Robin Hood’ tax, and would impact financial transactions so long as one of the financial institutions involved resides in a member state of the EU.
That may not sound like much, but consider that the European derivatives market is worth as much as £348 trillion a year (let me repeat that; £348 TRILLION a year, that’s £348,000,000,000,000) a tax of just 0.01% would bring in £34 billion in tax revenue to be distributed across all member states.
I can appreciate the reasons for those who view this as a positive tax. With £34 billion a year of extra tax revenue lining the accounts of the EU Government treasuries, this is money that can be smartly invested into national infrastructure, work and skills training or even cover the cost of social mobility. In times of austerity (an act implemented and favoured by the EU I’ll have you know, for all you Trade Unionists who are still in favour of this transnational Government) any mechanism to bring in much needed credit would be warmly embraced.
All perfectly valid reasons, but here are where my issues lie.
Government likes to waste money, and it does so at the drop of a hat and with little recognition of the damage it causes. Most of these people have never worked professionally in their life as a coffee barista, let alone as an investment analyst, so how do they expect to know what is a smart investment or a downright dog’s dinner waste of an investment?
Do the words HS2, wind farms and foreign intervention spring to mind? Enough said.
£34 Billion a Year Not Going into Pensions
In simple terms, when you contribute to your pension you receive a tax rebate at your nominal rate of tax, this total amount is then invested into whatever fund your particular pension arrangement has. As you contribute more the size of your pension increases and the investment return grows; this is the bread and butter of retirement planning and if you’re fortunate to start this process in your twenties, then odds are you’re going to retire with a hefty pot to fall back on.
But, guess what, this aforementioned fund relies predominantly on the continual transfer of stocks and shares, the ability sell them at short notice and transfer the money into a different bunch in order to reduce risk. A vast majority if not all are also linked to the derivatives market, therefore opening the door to a potential double taxation whammy.
So in plain and simple terms, the EU Commission is proposing to tax and therefore reduce the very lifeblood of your pension. To make matters worse, the extra costs involved with implementing this new tax will be reflected in the charges put in place by your pension provider, depleting the value of your pension even more!
And last, but by no means least…
As is the case with all new tax legislation aimed at bringing in increased revenue, those who pay the highest marginal rate of tax are the ones who can afford to pay experts, legally, to help them avoid it. Tax avoidance is not illegal (don’t confuse it with tax evasion, which on a scale of 1 to Gary Barlow is very illegal) so yet again, it will be those who are worse off who will feel the full brunt of this new regime.
Despite all of this, what really makes my blood boil is that this isn’t the first time the Government has attempted to destroy the pension industry.
Earlier Pension Fund raids
Before 1997, a rather good pension arrangement was the Defined Benefit or ‘Final Salary’ pension. As the name suggests, this pension guaranteed to pay you a proportion of your final salary for the rest of your life, and the company you had worked for was in charge of ensuring you received the pension income you were entitled to; if for whatever reason the investment return on pension fund was unable to match the income you were guaranteed in a particular year, it was your company who filled in the short gap and not you.
Then Gordon Brown bulldozed in and scrapped tax relief on pension firms’ dividends in 1997.
It paved the way for the end of final salary schemes because it made them so much more expensive. Pension funds went from being in surplus to having their funds drained at a significant cost to the companies.
As a result, Defined Contribution pensions took over, whereby the amount you get in retirement is directly linked to how much you contribute to it through your lifetime, but it is now this pension which is under threat.
It never ceases to amaze me the length to which Politicians will blissfully put in place legislation that has a catastrophic effect on the voting public, but yet unsurprisingly has little if no significant consequence on their own lives.
I say this because who are the few remaining who are privileged to have a Final Salary scheme? Oh that’s right, Members of Parliament, and it’s your taxes that are paying for it. How do they thank you? By proposing to tax you more.
Back to the Financial Transaction Tax
To conclude, we know from past experience that simply removing the tax relief on a particular segment of a pension arrangement is enough to bring down an entire industry, so imagine what actually taxing it could do! You may be glad to know that George Osborne is challenging this tax and is willing to take it to court if necessary, but like most challenges to the EU the UK is in the minority and looks set to lose.
If this goes ahead then in my view the reliance on the state post retirement will inflate, and if another set of austerity measures come into play the predicament will simply reach apocalyptic scale.
Nonetheless, if all the above sounds rather rosy and fair to you and you’re in favour of having new legislation imposed against the wishes of our Government, then by all means vote Labour, Lib Dems, Conservatives or Greens.
If not, you know what to do.