Charles Amos: Unused pension funds must be protected from Reeves’ desperate grasping

Despite Britain heading for serious demographic difficulties, Chancellor Rachel Reeves has now decided to include unused pension funds in the ambit of inheritance tax. This is a short-sighted measure of the highest order and will only diminish the prosperity of the nation as pensioners switch from capital retention to increased consumption, and reduced initial savings.

Not only that, though, the measure represents yet another thieving operation from savers who have done the right thing to finance a bloated welfare state for those who haven’t. Prudence is being punished once again.

From the 6^th of April 2027, unused pension funds will be included in the ambit of inheritance tax. The Treasury forecasts this to raise about £1.46 billion annually by 2030. The average bill for inheritance tax with pension assets is expected to go up by £34,000 as a result.

According to the Treasury, the measure is designed to stop pension schemes from being used as tax planning tools instead of as for retirement proper – and they claim that it is ‘not expected to have any major macroeconomic impacts’. With a budget deficit of £137 billion and national debt at £2.8 trillion, or, £98,000 for every household in the UK, it is no surprise the state is in full-on grasping mode.

As with all taxation, this will damage our prosperity. What is especially bad about ending this tax relief, however, is it will seriously diminish investment in the economy because pensioners – instead of living modestly and keeping their capital in business – will spend so the taxman doesn’t get his hands on it. Currently the tax rate on spending from an inherited pension pot for a higher rate taxpayer is 40 per cent, after this measure it will rise to 64 per cent. Aware of this, pensioners at the margin will spend their pension as opposed to bequeathing it. This reduction in investment relative to the counterfactual will diminish wages and crucially it will also reduce the incentive to pay into a pension in the first place.

Even if the measure only reduced savings by £5 a month, not unlikely, over a 46 year period of 4 per cent interest rates, the economy would be worse off to the tune of £7,547 per saver. Although it might seem a minor change now, due to the miracle of compound interest – or, rather, the disaster of not embracing it – the effect could be huge. A back of the envelope calculation of the £7,547 loss over a conservative twenty per cent of the working population gives a staggering loss of £51bn by 2071. In the long term it is an iron law of social reality – a constant cause and effect relation – that taxation diminishes prosperity.

Huge reductions to savings are especially problematic going into the future because the old-age dependency ratio is only getting worse. According to Paul Morland’s excellent new book, No One Left, the percentage of old people to working age people is set to go from 30 per cent today to 60 per cent by 2100.  With this pension tax change, the effect of the increase will be much worse because at any one time more people will be buying consumption goods, which means high inflation is the likely result making everyone worse off too.

Perhaps worst of all though is the blatant expropriation of wealth that will occur under this measure. Theft is taking a person’s property without their consent; inheritance tax takes a person’s property without their consent – therefore, inheritance taxation is theft.

The natural principle of human respect dictates people should be free to pursue their own happiness in their own way absent theft and violence against them. Only by adhering to this principle is a proper harmony of interests ensured in mankind. Doesn’t ensuring important public services warrant taking money from wealthy pensioners, or, here, their children?

No. To begin with the £1.6bn will probably not go to public services. Instead it’s likely to finance the £5bn of higher welfare spending Reeves failed to cut after Labour backbenchers revolted, but this is by the by. Essentially, men are not serfs to the alleged greater good. Just as you aren’t obligated to give up your leisure to help a stranger lift his heavy sofa up the stairs even though overall stress will be reduced, analogously, you aren’t obligated to give up your savings to the state to reduce the overall stress teachers might get by having a larger budget. Constrained by respect for the person and property of others, we should each pursue our own happiness in life.

Egalitarians will press it is only 38,500 wealthy estates who enjoy the tax relief currently, and equality demands they don’t. This argument, however, doesn’t just warrant ending the current relief, but ending the triple lock for wealthy pensioners too and taking away their free television license as well.

Why doesn’t Labour start there. Answer: That would be very unpopular. Additionally, why is equality valuable in itself? Greater welfare for the poor at least has intuitive appeal, but Jim having a £1m pension pot and John a £2m pension pot is surely better in every moral respect than Jim and John having an equal pension pot of £800k each. Equality per se is valueless.

By taxing unused pension funds, i.e., effectively increasing taxation on savings, this measure is likely to seriously damage the prosperity of future generations who will be deprived of much needed capital investment given the smaller workforce that is predicted. Moreover, it rides roughshod over respect for the property rights of people who have done the right thing and been prudent by thieving from the bequests they wish to bestow. For both reasons, Reeves’s attack on wealthy pensioners must be opposed.

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