Sunday, 9 March 2014

A Tax on Ignorance and Inflation - Pensions and Government Debt

An interesting article by Merryn Somerset Webb in the Weekend FT.

Many commentators see pensions as a likely target for indebted governments. 
Most blatantly governments may seize or nationalise pension scheme assets, as in Poland,or insist on certain holdings of government bonds for "safety". A longer list of government meddling with pensions is HERE.
There has also been discussion in the UK of limiting the tax free contributions which can be made to the schemes, particularly for higher rate tax payers.

In the FT Merryn discusses another set of rule changes which are being put in place to "lifetime allowances". Through the usual fiscal drag of not changing these limits in line with inflation and the usual compounding of returns, particularly due to inflation as well as "real", it is suggested that many more people than imagined will exceed the limits and be subject to 55% tax rates on "excess savings" aswell as tax on incomes paid out. 
Pension tax relief is very expensive and politicians are looking at ways to reduce it without being too obvious. Doing it via cuts in the real LTA has the twin benefit – from a politician’s point of view – of being simple to implement and hard to understand.
Combine this with Full Circle's summary on government financing and QE and it is clear governments could find ways to fund deficits for some time.
Last month, the Bank of England said it would not consider selling assets until it has raised interest rates (perversely, thereby reducing the value of the gilts it owns) and the Office for National Statistics has said that it makes no sense to label the policy as temporary. In the autumn, the interest paid on government bonds held by the Bank of England (which has been paid back to the Treasury since November 2012) will cease to count as public spending, confirming that QE is cheap government financing. The Bank’s holdings represent over one quarter of all the gilts in issue and account for around £10bn in interest each year. Will any future government want to add £10bn to its annual deficit? The Bank of England has already said that the unwinding of QE would need to be closely coordinated with the government and must not disrupt the normal financing of the state – so much for an independent central bank

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