A million used to be serious money

Half of the people who benefit from the Chancellor's abolition of the £1m lifetime pension cap are public sector workers. A third are in the NHS alone.

Photo by Marek Studzinski on Unsplash

Remember when a million pounds was a lot of money? We still casually refer to the filthy rich as “millionaires”. We don't expect that to include teachers, doctors, local governmnet employees even senior nurses. The government has lifted the lifetime tax free cap of £1,073,000 on pension pots because, apparently, too many public sector workers, not just doctors, have been taking early retirement. It isn't worth their while working any longer. So they say. You might as well trouser the million now, before it is further eroded by inflation, since that's all you're going to be able to save. It’s tough.

Now, it’s understandable that people who can only dream of having million pound pension fund are rather sceptical of this use of public money – abolishing the tax free lifetime allowance will cost over a billion. The government hopes much of this will be recovered from the taxes that doctors and other older professionals will pay in the extra ten or so years they keep working. The Chancellor, Jeremy Hunt, also seems to have plans to encourage defined contribution pension funds to invest in infrastructure.

Labour has attacked the move as an unjust Tory “bung” to the wealthy “one percent”. But half of the people who will benefit from the lifting of the £1m cap are actually in the public sector, according to the former Labour leader, Ed Miliband, last week. A third are in the NHS alone. Who knew? Also, Labour's health spokesman, Wes Streeting, is on record as supporting the raising of the cap – though he claims now that he only meant this for doctors. But that would have raised a host of issues.

Why would a hospital administrator be denied concessions granted to a GP? Indeed, why should any non-medical professional be so discriminated against? Head teachers and local government officers might well have taken the government to court if they had been excluded. And why should it only be public sector workers who get special treatment? They already get extremely generous pensions paid for by the taxes of private sector workers.

It's not entirely clear just how many doctors will return to work now they can continue to pump cash, up to £60,000 a year, into their pension pots. The BMA's Dr Vishal Sharma told the BBC's World At One on Thursday that that many retirees are already asking to come back. Given the chronic shortage of doctors, especially GPs, that is probably a good thing. The BMA say that the number of hospital consultants taking early retirement had tripled in the last ten years, and the number of GP's swapping stethoscopes for golf clubs had quadrupled.

“Stuffing their mouths with gold” has always been the way the NHS gets doctors to work since Aneurin Bevan set it up in 1948 and delivered that quote. But the real problem here is that we have lost touch with the erosion of the value of money. A million genuinely is actually not a lot of money any more to fund a pension that may last thirty years.

Though annuity rates have gone up recently, you would be lucky to get much over £35,000 a year, index linked, from a million pound annuity taken out at 60. Less if it includes rights for your spouse. That is really not a very great deal of money to retire on. You can imagine GPs who earn on average £98,000 a year (again, who knew?) thinking that this would be a very substantial fall in their standard of living.

Also, you have to remember that with pensions it isn't the value of money now that matters, but the value in future. Many of those taking out pensions today have no idea just how much they need to contribute over their lifetime to get a decent pension. The average pension pot for those aged between 55 and 65 is currently only £37,600 according to the Office for National Statistics. That is chicken feed pension-wise.

Speaking personally, I loathe pensions. It is an industry with a very chequered history, and though the miss-selling scandals and the outrageous annual charges are mostly a thing of the past, pensions still seem very poor value for money. You hand your hard-earned savings to these people to do as they will with it and don't see it again for decades. There is no real transparency.

It has long been known that most of the pension contribution tax relief finds its way into the salaries of the pensions industry. In many ways, tax-free stocks-and-shares ISAs look a better way of saving for retirement, though that requires close attention to the stock market which most of us lack the time for. There is obviously no point in saving money in bank accounts, given inflation. That is just organised theft.

We really need a total overhaul of pensions and the introduction of something like the state-managed pension system that has been operating in countries like Denmark. They use the huge volumes of personal pension contributions, collectively, to drive down the charges of the insurance companies who provide pensions. It's estimated that UK personal pension contributors lose a third of the value of their pension pots through fees and other charges levied by the asset management industry.

But they have us over a barrel and that's just that, I'm afraid. The lifting of the pension allowance ceiling has of course been heavily canvassed by the private pensions industry who stand to make extra fees. This may explain why the Chancellor Jeremy Hunt, lifted the ceiling entirely and not just to the £1.5 million ceiling ( over £2m inflation-adjusted) that obtained under the last Labour government.

This looked, on the face of it, like bad politics. If the cap had simply been raised, say to £1.8 million, and not abolished altogether, it would have been very difficult for Keir Starmer to attack it. He could hardly have called it a Tory bung to the rich if it was actually less in real terms than the “bung” given by the former Labour Chancellor, Gordon Brown 20 years ago.

It occurs to me that Hunt may have pulled this particular rabbit out of the Budget hat for a crafty reason. Did he expect Labour to react in haste saying they would reverse Hunt’s giveaway and restore the cap? I wonder. It has given a lot of higher-earning professionals, especially civil servants, GPs, journalists and many other member of the liberal elite a very good reason for backing the Conservatives at the next election. The Chancellor couldn’t be that cynical. Or could he?