Taxing wealth or income – earnings and pensions

Summary

Private pension wealth is related to an individuals earnings and capacity to save money for a pension.  Higher earners put more into their pension pots than lower earners.  Higher earners also get more tax relief thus adding to the future pension earnings.

 

Data from 2022 suggested that 929,000 savers had pension wealth of between one and two million pounds.  In the Taxing Wealth report of 2024, a number of reforms were mooted including limiting the rate of tax relief to the basic rate.   “… the likely cost of pension tax reliefs for those in the highest decile of income earners in the UK are likely to amount to at last £25.6 billion. Of this sum almost exactly £23 billion relates to higher rate (40 per cent) taxpayers, meaning that if their relief was restricted to 20% the saving would most likely be £11.5 billion per annum.” 

 

The Office for National Statistics estimated that 64% of all private pension wealth was held by those in the top pension wealth decile.

 

Conclusion

The level of private pension earnings reflects an individuals earnings during their working life.  Disparities in earnings of those in work leads to inequalities in earnings for pensioners.

 

Background information

“According to figures collated in 2022, statisticians estimate that some 929,000 savers have accrued pension wealth of £1-2million, with 128,000 sitting on pensions worth £2-3m, and 46,000 investors in the £3m+ bracket.

The ONS estimates you need to have pension wealth of £374,500 to be among the top 10% of retirement savers, with the median or typical figure standing at £637,500”  [Brewin Dolphin, 2023].

 

Taxing Wealth Report

2) Restricting the rate of tax relief on pensions to the basic rate of income tax, whatever tax rate a person pays, would raise £14.5 billion of extra tax per annum.

 

To restrict the rate of tax relief available on pension contributions to the basic rate of income tax, meaning that those on higher income will not enjoy additional tax relief as a result of the pension contributions that they make above the rate available to those paying tax at basic rate on similar sums. An additional suggestion is made to restrict national insurance tax relief on pension contributions for those earning in excess of £100,000 a year. 

 

Those in the top decile of UK wealth owners in the UK own, on average, more than 48 per cent of the UK’s pension wealth.

 

In other words, whilst those with the highest levels of income in the UK are likely to own about 48 per cent of pension wealth, they claim 58 per cent of pension tax reliefs.  Taking these facts together, the likely cost of pension tax reliefs for those in the highest decile of income earners in the UK are likely to amount to at last £25.6 billion. Of this sum almost exactly £23 billion relates to higher rate (40 per cent) taxpayers, meaning that if their relief was restricted to 20% the saving would most likely be £11.5 billion per annum.  [Funding for the future, (2024]

 

 

Data

  

Private pension wealth decile	Median (£)	Percentage of total private pension wealth (%)
Decile 1 to 3 (lowest)	0	0
Decile 4	1200	0
Decile 5	7800	1
Decile 6	24400	2
Decile 7	56700	4
Decile 8	117500	9
Decile 9	244100	20
Decile 10 (highest)	637500	64

 

[Office for National Statistics, 2022].

 

 

Sources

Brewin Dolphin, (19 July 2023),  UK’s biggest pension is worth £11m, News & comments. https://www.brewin.co.uk/group/media/news-and-comments/2023-07/uks-biggest-pension-is-worth-11m

 

Funding for the future, (2024), Taxing Wealth Report.

 

Office for National Statistics, (17th June 2022), Savings for retirement in Great Britain, July 2006 to March 2020.