The EU’s proposed Tobin tax will raid pension funds. But not in France and Germany
TAX pension savings now! Not a slogan you are likely to see emblazoned on banners in the Occupy the City demonstration outside St Paul’s or even on the lips of European commissioners, but that is precisely what is being proposed with the EU’s Financial Transaction Tax (FTT). Worse yet, not all EU citizens will face this tax on their pension and those that do probably have the least secure pension arrangements. The UK may be holding out on the FTT for now, but these perverse consequences for savers make it even more important to fight this tax before the damage is done.
The tax will be levied on transactions by pension funds and therefore will be a direct cost to the fund. But members of defined benefit pension schemes will not pay it, because they are promised a pension based on their final salaries. Any additional cost to the pension fund will have to be made up by the employer, assuming it can afford it.
Meanwhile, those in unfunded or pay-as-you-go pension arrangements such as state-backed pension schemes will not pay it either, as there is not a fund that makes investments to be taxed. However, the burden of the tax will fall on members of defined contribution or money purchase schemes – which are increasingly the only arrangements available to private sector employees in the UK.
Proponents of the FTT will argue that the tax of 0.1 per cent on financial transactions and 0.01 per cent on derivatives is tiny compared with stamp duty, which it will replace. But as every intermediate transaction is taxed, the cost soon mounts up. And once established, who is to say that the rates will not go up? Income tax was originally introduced in the UK on a temporary basis at the rate of 10 per cent. There are estimates that the FTT will cost pension funds as much as 1 per cent a year, which could easily reduce the size of the fund by 20 per cent over its working life. Not only that, once the pension pot is traded for an annuity, the income it will buy in retirement will also be reduced, as the annuity provider will be taxed on its investments.
From October, millions of people in the UK are going to be auto-enrolled into a pension scheme, often for the first time, as a result of new legislation. Those joining private sector money purchase schemes, sometimes with relatively low levels of contributions, will have to pay the FTT on investments. The government is going to great lengths to encourage people to save for retirement. Surely adding new taxes on these savings is counter-productive?
Pension arrangements across Europe vary considerably. Some countries such as France rely more on unfunded, state-backed schemes, while Germany has private sector unfunded schemes. Neither variety is subject to the FTT. But other countries rely far more heavily on funded pension schemes – the UK, the Netherlands and Ireland account for 85 per cent of defined benefit pension schemes in Europe. The tax will bite much more heavily in those countries with funded pension schemes. As a result, it will not only discriminate between citizens but between nations.
The European Commission has identified the FTT as a source of revenue for its own direct taxation, rather than having to rely on member states to agree to provide it with income. It is budgeting that the tax will raise €37bn (£30.75bn) in 2020, or 23 per cent of its total €160bn budget. Given that this new tax represents a significant transfer of resources from citizens to the EU, surely it should be done on a more equitable basis so it falls on all EU citizens, not just those who have to save for their own pensions? If the EU wants to raise money from taxing pension provision it should be done fairly, through a levy on all citizens accruing pension rights across all EU countries, whether in a funded private scheme or an unfunded state scheme. What is the chance of EU citizens or governments agreeing to that?
Although the UK government is not planning to implement the FTT in the UK, not least because it will hit jobs in UK financial services, it should also be campaigning to exclude pension schemes from the tax wherever applied in the EU as a matter of principle. There is no guarantee that the UK will be able to hold out against the FTT forever. Some organisations have been specifically excluded from paying the tax, EU institutions for example. Why not pension schemes?
Christopher Clayton is an independent pension scheme trustee.
The FTT could easily reduce the size of a pension fund by 20 per cent over its life