A very illiberal idea

The Liberal Democrats are reported to be about to press for a very unwise measure at their conference next month, one that deserves to be cut off at its roots.  Their idea is to limit tax relief for pension contributions to 40%, even for those paying a higher rate of tax.

I have long argued against this sort of top slicing on the basis that income tax is a tax on income (and capital gains) and any amounts contributed to a pension pot are not income at the time they are made, but at the time they are paid out with interest.  If a person makes pension contributions for 40 years and then drops dead at the age of 64 instead of after 65, he or she gets zip, nada, nichts & rien from the pension fund, so why should they be taxed on any deemed income before they die?

Ah but, say the would be taxers, making a pension contribution buys you the right to a pension, so it must be worth something and that should be taxed.  You can see where they are coming from but their logic is flawed.  A pension right buys you absolutely nothing until such time as the pension may be drawn and any rights you have in the fund have no value until such time as you reach the retirement age because the pension fund doesn't owe you anything until you do.

And anyway it is the most empty tax measure ever considered.  If it isn't actually possible to set up pension arrangements without passing them through salary  arrangements, the double taxation is avoided by taking the taxed salary and investing it outside a pension fund.  The return on capital is taxable (like the pension) but the return of capital is not taxed, so the investment is taxed only once, not twice.