I know I've posted on this before, but I had to write an article on this today (I'll tell you if and when it's published) and so here are the up-to-date figures:
1. HMRC's Table 1.5 gives the net figure after deducting income tax withheld from pensions in payment as £18.9 billion and the PPI's Pension Facts Table 29 gives us the figure for income tax deducted from pensions in payment as £8.4 billion, so total income tax relief gross is £27.3 billion.
2. HMRC's Table 1.5 also gives us the value of National Insurance (NI) contracted out rebates as £9.3 billion and NI relief for employer contributions as £8.2 billion. The figure for NI relief for employee's contributions must be about 12/13.8 x £8.2 billion = £7.1 billion, so total NI relief is £24.6 billion.
3. You could argue that the £8.4 billion tax on pensions in payment (i.e. annuities) should be deducted, but in the absence of pension scheme tax breaks, income tax would only be applied to the interest element, so in today's low interest environment, it would be negligible.
4. ONS Pension Trends, Chapter 8, Figure 8.12 tells us that total contributions to funded pension schemes are about £86 billion a year. Assuming that's the net cash contributions and the £51.9 billion income tax/NI reliefs are on top, the average value of the tax relief is 38%.
5. If we work backwards from the £8.4 billion income tax deducted at an average rate of 20% from annuities, total annuities being paid out are £42 billion.
6. So that's £137.9 billion going in every year and £42 billion coming out, leaving us a missing figure of £95.9 billion - this must either be going into higher pension funds values (it isn't - see 8); being lost on the Stock Exchange (probable) or being soaked up in fees, charges, commissions and other profits of the pensions "industry" (definitely).
7. There is - unsurprisingly - no official figure for the total fees and charges of the pensions "industry". The Daily Mail quoted a shock-horror report saying that total fees were £67 billion a year, which seems on the high side, so let's round that down to £50 billion a year (2.5% per annum on assets under management of about £2,000 billion). A report by Consumer Focus (see page 12) said that fees and charges reduced the final value of private pension schemes by 40%, i.e the entire average 38% value of the tax relief was soaked up in full by the providers.
8. So that leaves us net cash inflows to pension schemes of £45.9 billion a year.
PPI's table 28 tells us that the total value of assets (mainly quoted shares) in pension funds went up from £1,560 billion in 2003 to £2,120 billion in 2010. Simply investing £1,560 in the FTSE 100 back at its low point in 2003 and reinvesting dividends (assume 4% yield) for seven years would have built up a fund of £2,052; the FTSE 100 index went up by (say) 20% so that's £312 capital gain; and had you invested another £45.90 every year for seven years you'd have contributed another £321, so a very rough and ready calculation says there ought to be +/- £2,685 in your fund now for every £1,560 in 2003.
That expected +/- £2,685 billion is only £2,120, so £565 billion has simply gone missing over seven years, or £81 billion a year over and above the £50 billion fees and commissions mentioned in 7.
Nothing
1 hour ago
20 comments:
I think you'd expect money going in to be more than money going out even if the expenses were zero. As far as I am aware that is always the case since pensions savings fund future liabilities which are affected by inflation.
Whilst I totally agree that many past pensions schemes - especially private arrangements - were possibly more beneficial for the insurance company than the saver this is need not be the case nowadays.
Overall the 'philosophy' behind pensions is that they are 'deferred pay', and the tax regime reflects this, that is you are not taxed on the income or gains now but your pension (annuity) will be taxed as earned income - that is it will, as you say, be taxed on the full amount of payment not just the interest element.
Taking this argument on a bit, all this argues for a massive reduction in income tax which will automatically massively reduce pensions tax relief. Ideally, of course, you'd scrap IT completely.
Just to be clear you can now buy a pp scheme with total annual costs of about 0.3% to 0.45%. This seems a reasonable fee to access the capital markets where a typical mixed fund should achieve real returns of about 6% per annum. (Funny money returns will be about twice that - on average over time, and I am talking about a 44 year working life.) So, depending how you look at it it's either 0.45/6 = 7.45%, or 0.45 / 12 = 3.75% of your hard earned that goes in charges each year.
So where is all the money you found missing going...?
That was worth persevering with because N6 was the crux. Sounds as if some creative accounting was going on there.
L: "all this argues for a massive reduction in income tax which will automatically massively reduce pensions tax relief."
Of course, this is all part of my cunning plan. That's what I suggested in the ConHome article, and some twat "tax partner at PwC" claimed it would be unfair to tax people on the pension at higher rates than they got relief. Firstly, that's exactly what I didn't say, and secondly, if they proposed that, then people would shun approved schemes and just save up for themselves.
JH, I don't know what sort of accounting is going on, we can only guess where the missing figure goes, or even how big it is.
Dear Mark,
That £81bn-a-year black hole you give in the last paragraph is just so huge it's prompted me to delve a bit deeper into the figures.
Having done so, I'd like, if I may, to quibble with some of your analysis.
Firstly, Figure 8.12 & Table 8.13 in the ONS pensions document include substantial contributions from unfunded occupational pensions (i.e. public-sector ones -with the exception of the local-government one beloved of our council chums - which allegedly will be paid out of future tax revenues, and where there are no assets to manage - the employees' 'contributions' merely corresponding to reductions in their salaries).
Ignoring these unfunded pension contributions, and just totting up those into funded occupational pensions and personal pensions, I get an average value of circa £58bn per year going into pension assets from 2003-2009 - substantially less than the £86bn figure that you give.
Secondly, are you sure that these amounts are net of tax/NI relief? The legend for Figure 8.11 dealing with personal pensions states that the individuals' contributions include basic-rate tax relief (as well as rebates for those who have contracted out of S2P). Is the same true for the occupational pensions in Figure 8.12?
Thirdly, I wonder if the sum paid out in annuities is much larger than £42bn per year you suggest, as most pensioners over 65 get substantially increased nil-rate bands, meaning that, in many cases, a considerable amount of their annuity income will be tax-free. In addition, some pensioners choose to receive their pensions as income drawdown rather than annuities, which will increase the amount being taken out - and what about the tax-free lump sums?
Finally, two other points:
1) Quoted shares (equities) currently make up 40-50% of pension assets - with another 40-50% in bonds and the balance in property, cash etc.
2) The FTSE 100 has increased by circa 50% from the beginning of 2003.
I'd like to do some more investigation into this; unfortunately, time precludes this week. It's certainly a fascinating topic (to me at least!). Thanks for doing this post - and for the blog in general.
LA
LA, if you can do more digging that would be great. As to your specific points, here were my assumptions, some of which will inevitably be inaccurate:
1. I assumed that £86 bn was the net-of-tax contributions (and didn't adjust for fictitious contributions to unfunded schemes). £86 bn net looks 'about right' because add the £51 bn tax rebates to that gives gross contributions £137 bn and the £51 bn works, because that means the average tax/NI relief is about 40%. Perhaps the £86 billion is overstated, in which case effective tax relief rate is much higher (quite possible).
2. See point 1. I'm not sure on this, it's just an assumption.
3. True, but the bulk of pensioners' higher personal allowances are used with state pension so not much is taxed at 0%, the bulk is taxed at 20% and some pensions are taxed at 40%, so the zero % and the 40% bits average out to 20% (it might be lower or higher than that, but not much either way). The NAPF boast occasionally that private pensions paid out are "more than the basic state pension" but the basic state pension (excluding SERPS) is only about £50 billion.
4) point 2) yes of course, but they also invest in bonds and commercial land and buildings which might have gone up less than 50%, my 20% was just a "very much on the low side" estimate.
So my 1) is overstated and my 4) is understated, so the missing figure is still huge.
Dear Mark,
Thanks very much for addressing my points in detail. I'm still not convinced that your £81bn figure is right though. As, to my mind, an amount such as this can only be accruing in some way to pension fund managers, then, combined with your £50bn-a-year estimate for pension fees, it would mean that £131bn per year is going to the pensions 'industry' - that's around 10% of UK GDP. Shurely that can't be right?
I may get some time to look into this in more detail at the weekend.
LA
LA, that's another valid point. Maybe it's less going in (must be about £100 bn in total though, because the tax relief alone is £51 bn).
If you can do your own workings we can have a proper debate, there's no point me re-working my figures and making the same mistakes.
You can make it the first post on your blog!
Truly we can find things online if we are eager to find things we are looking for we can find it here and this one is a great example how reliable our technology nowadays.
Sell My Pension
I don't really have the time to blog (plus I could hardly hope to match the standard of your own) - I only set it up so that I could post comments here.
I'm not sure if I'll be able to solve the mystery of the missing pension billions - but I'll try to take heart from the philosopher Siryoz0's words: truly we can find things online if we are eager to find things.
I'll keep you posted - watch this space.
LA
LA, you've given me a couple of pointers, I'll see what I can find. Ta for philately.
Right, I've now been through the numbers in more detail and convinced myself that the £85.6bn figure for pension contributions in 2009/10 figure (from Table 8.13 in the ONS Pension Trend doc) includes most of the tax breaks. The only ones I think it doesn't contain are those for employers' NI, the additional income tax relief for higher-rate taxpayers contributing to personal pensions (which they get back via their tax return), and those for SIPPs.
The PPI document you link to in the post states that employers' NI reliefs for 09/10 were £8.3bn. In some cases the employer is the state and, in those instances, employer NI reliefs are essentially meaningless. Assuming all the funded schemes are not run by the state (which isn't true for the LGPS, but hey-ho), Table 8.13 shows that 73% of employer contributions came from private companies, so they get NI relief of about £6.0bn, which basically accrues to company funds. They probably get additional tax breaks arising from the way contributions to pension schemes affect their corporation tax liabilities, but I don't know enough about that to make an estimate.
I've estimated the breaks claimed back by higher-rate contributors to personal pensions to be about £1bn based on the total employee contributions of £9.3bn (Table 8.13), and the breaks for SIPPs to be £0.8bn based on an estimate (can't find figures anywhere) of total SIPP contributions of £2bn by financially savvy higher-rate taxpayers (perhaps an overestimate?)
So, to sum up:
Total income tax relief for 2009/10 = £28.3bn (from the PPI document)
Total employees' NI relief on contributions of £22.9bn (Table 8.13) = £2.7bn (i.e. 12% - assuming that this is NI rate for all income - not the case for higher-rate people - therefore probably a slight overestimate)
(I don't think you can count contracted-out NI rebates as a tax break, as people who have contracted out are not entitled to SERPs/S2P).
Private employers' NI relief = £6bn (see above)
Additional relief for higher-rate personal pension & SIPP contributors = £1.8bn (estimates)
Total tax/NI relief for pensions in 09/10 = **£38.8bn**
- which is 44% of total pension contributions (adding my £2bn estimate for SIPPs to the £85.6bn figure in Table 8.13).
Hope all of that is of some help. I'm now working on trying to ascertain how much of people's pensions assets is being siphoned off by the pension providers. Chapter 9 of the ONS Pension Trends document seems to be a good starting point for this. I'll keep you in the loop as they say.
LA
LA, thanks
1. Your total of £38.8 bn seems about right, but HMRC's figures include the value of tax exemptions for pension funds, they don't pay income tax on interest or rental income, and these reliefs are worth around £5 bn - £10 bn a year, shall we split the difference between your £38.8 bn and my £51.9 bn and call is £45 billion all in?
We can round down the £85.9 bn to (say) £60 billion so as not to double count tax relief paid direct to pension funds, which gives us:
Net contributions £60 billion
Tax relief on top £45 billion (maybe £5 billion of this does not go into pension funds?)
Total money into pension funds each year £100 billion.
Can you agree to those nice round figures?
Thanks for your reply Mark.
My income tax relief figure of £28.3bn (taken from the PPI document does include investment income relief of £7bn (though this is probably an underestimate as it assumes relief at the basic rate and some scheme members will be higher-rate taxpayers who would otherwise have to pay tax on this income at a rate of 40%).
So let's say the total relief is £40bn.
So by your metric, in 2009/10:
Net contributions to pensions - £55bn
Tax/NI relief - £40bn (£7bn of which doesn't go into pension funds - mainly to corporate balance sheets).
Total money into pension funds in 09/10 - £88bn
Are those figures round enough for you?
None of this undermines your point the these tax breaks should be replaced by a flat income tax rate.
Lastly, from my preliminary crunching of the data for 2003-2009, I can't see how the pension providers are making anywhere near £50bn a year out of pensions. I'll provide further updates as and when I refine stuff.
LA
LA, I took the figure for tax reliefs from HMRC tables.
1. Yes, you could argue that contracted out NIC £11 billion doesn't count, so let's exclude those gets us to £41 billion for gross relief.
2. £7 billion of that is exemptions for income in the funds and £7 billion goes astray (as you explained) so £27 billion is actual tax relief on contributions going into pension funds.
3. £86 billion contributions minus the £11 bn contracted out payments = £77 billion. minus £28 billion tax/NIC relief which does go in = net cash contributions £49 billion.
4. As a check: £49 billion net cash contributions attract £28 billion gross tax relief, that's an average rate of relief of 36% (28/28+49) which is what we'd expect (some sort of mish mash of 20%, 40%, 49% and 58%).
The Daily Mail shock horror figure for pensions charges was £67 billion, clearly overstated. My £50 billion is a mid-range guesstimate of lots of different ways of calculating it. Maybe it's only £40 billion. BUT my point still stands - the total commissions and charges are ball park the same amount as the tax reliefs.
Nice to see that we've agreed on a figure of roughly £40bn for total tax/NI reliefs for pensions. The difference between that and your initial figure of £52bn is due to the fact that I'm not counting the contracted-out NI relief of about £9bn, and the fact that I reckon that employees' NI relief is about £3bn rather than £7bn.
I still don't agree with your £40bn figure for fees and commissions though. I reckon it's somewhere in the region of £15-20bn.
I'm basing this mostly from the data in Chapter 9 of the ONS Pension Trends doc, which deals mainly with 'Self-Administered Pension Funds' (i.e. those run by trustees on behalf of companies and their employees). According to Figure 9.1 these are responsible for just over half of total pension assets (roughly £1000bn). In my view, unless the trustees are generally incompetent or corrupt, I can't see how annual fees/commisions for these can be much above 0.5% (i.e. about £5bn per year).
Evidence for this comes from my attempts at playing fantasy 'no-fees' fund manager with their assets from 2003-09 using the FTSE All-Share as a proxy for their shareholdings (assuming that their mutual funds invest exclusively in shares), and UK 10-year gilts (+ an additional 1% yield) for their bondholdings - taking members contributions, paying pensions, and generally investing income (inc. dividends)into bonds in accordance with the general trend for increased exposure to bonds as outgoings (pensions) increase. I can't generate any significant comparative outperformance with this model, meaning that their fees/commisions are likely to be very low.
If both this and your £40bn per year figure for overall fees are correct, it means that those funds administered by insurance companies etc. (i.e. all the others) are charging £35bn in fees per year - roughly 3.5% of their total assets. This will seriously eat into returns, and whilst this is probably true for some of them (particularly the individual personal pensions sold by unscrupulous IFAs to naive punters as detailed in the Consumer Focus report), can it really be a representative average for all of them? I don't think so.
So that's why I'm sticking to my £15-20bn figure, which corresponds to roughly half of all the tax/NI breaks, but not all of them.
Maybe if I get the time, I'll do a bit of modelling for the insurance company-administered funds to see if I can generate much outperformance; but as I can't find any figures for their asset holdings, I'll have to make some serious assumptions.
Hope all of this has been of some use to you and anybody who happens to have been following this thread - probably unlikely.
Declaration of interest: I currently have a long position in Aviva.
LA, excellent, so it's £40 bn for tax/NIC breaks and £10 bn for contracted out NIC (separate debate whether we count that as a tax break or not).
As to fees, it's not just the dealing charges, there are costs on the way in, auditors, legal fees, they mainly invest in unit trusts or investment trusts which add another layer of 0.5%, they stiff you on the way out, annuities are reasonably competitive but it's a limited number of players, and they must make some sort of profit (if not, they just renege - see Equitable Life) etc.
Don't forget that final salary schemes are still quite important, and they do not publish figures for costs, it;s not as if anybody really cares.
I agree that the DM's £67 bn is overstated, but not by a factor of 3 or 4. I suppose what I would have to do is go through the accounts of every single pensions company and find out (probably impossible).
The other way of guesstimating it is look at what goes in (£86 billion + investment income + capital gains) and look at what comes out (£50 billion-ish), see para 8 of my original post.
Dear Mark,
I'm still sticking to my £15-20bn figure. I agree that the insurance co. managed funds probably invest mainly in unit trusts etc., but according to the figs in Chapter 9 of the ONS doc, as of 2009, 'mutual funds' only amounted to about a quarter of the assets in the trustee-managed ones (although their prevalence has increased hugely over the last decade). If we assume the charges on these are typically 1.5% p.a. (hedge funds only charge 2%), then the cost of these amounts to 0.4% p.a. Adding another 0.5% p.a. for other expenses still leaves us with annual charges of less than 1% for these funds (i.e. £10bn).
If your £40bn figure is right, it means that the insurance co. managed ones must carry average charges of 3% p.a. - across the board. I think this just about may be possible - but I'd be very sceptical.
I agree that to find out for sure we need to do the forsenics on the insurance company accounts - which would be very tedious but not impossible.
As to the composition of the assets held by the insurance co. managed funds, going by the figure of £7bn avoided in tax by pension funds on investment income in 09/10, and my guess that the average yield on bonds held by pension funds was 3.5% then (10-year gilt yields +1%), I reckon that, overall, pension funds hold about £1000bn in bonds. As the trustee-managed funds hold about £500bn of these, so too must the insurance co. ones. (i.e. the asset compositions of both types of pension fund must be similiar, which should give us some pointers for our/my models (not that I have time for that at the moment).
Onre more thing: the £86bn figure for contributions in 2009 includes those being redirected to public-sector la-la land - only about £62bn went into funded schemes. The trustee-managed schemes paid out about £42bn in pensions in 2009, and figures I found from the Association of British Insurers state that about £12bn was paid out in annuities in 2010. This means net non-investment income for pension funds in 2009/10 was only about £8bn, though it was probably more in previous years.
Lastly, if the £40bn figure is correct, and guesstimating that managed assets not held in pensions are half as much again, then probable total UK fund management revenues could be in the region of £60bn, which would comprise nearly half on revenues generated by UK financial services (9% of GDP) which include banking (retail + investment), general insurance, accountancy etc. Can this really be the case?
Will I have to reconsider my position as regards Aviva on ethical grounds?
LA
LA, you make good points as usual. Chart 8.12 does indeed refer to "contributions to unfunded schemes" which is a contradiction in terms.
We are going to have to call it a score draw on the charges as I am clean out of ammo.
For sure, the pension fund trustees, actuaries, auditors, lawyers, the pensions companies and so on might only swipe 1% of assets on average in fees, up front and exit charges, but they then invest in unit trusts, bonds funds etc who also swipe 1% in fees. Their portfolio churn is enormous, if a unit trust charges 0.5% management fee and holds shares on average for 12 months and lose 0.5% in dealing commissions and spread each time, that's another 1% (not to mention 0.5% in Stamp Duty).
All these charges quickly add up to 2%. They have over £2,000 bn under management, 2% of that is £40 billion, ka-ching. £60 bn is overstated, I always said that.
So can we maybe split the difference between your upper estimate of £20 bn and my lower estimate of £40 bn and call it £30 bn, which is three-quarters of the tax beaks (as previously agreed, we'll exclude contracted out NICs)?
Deal?
Looks like you've got yourself a deal Mark.
However, I think your 0.5% dealing commissions + spreads is rather high - unless they buy lots of AIM stuff. I probably pay less than 0.5% with my £2k punts on Self-Trade.
I had forgotten about stamp duty though - which reminds me: is it just me who thinks that the fact this still exists renders Cameron's strop over the proposed EU Tobin tax of 0.1% a bit nonsensical? Lord knows there's enough reasons to despise the EU but this is hardly one of them.
The £30bn figure would actually swallow up most of the tax breaks for pension savers as £6bn of the £40bn total reliefs goes to companies in unpaid employers' NI, so, if true, you're probably almost right with your initial contention.
Anyway it's been good arguing the toss with you. Maybe in the not-too-distant future I'll get some time to attempt the modelling for the insurance company-managed funds. I'm currently pre-occupied with modelling density functional theory as applied to condensed matter at the mo.
Best,
LA
LA, and thank you for your efforts, it is much appreciated.
Clearly, its a bit unfair to count stamp duty as income of pension funds, it's a tax... BUT it still comes out of your pot, and the managers could easily save you the expense by buying and holding.
I'd wondered about the rampant hypocrisy of Stamp Duty versus Tobin Tax argument. Stamp duty is another awful tax which most other EU countries have got rid of, and as a result the UK stock exchanges are losing business to other stock exchanges. I don't know how much, but probably enough for it to make us better off if we scrapped it.
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