Golem Runs Amok
The Golem, Chancellor of the United Kingdom and Tony Blair's presumptive successor, believes in an odd sort of activist government, with broadly higher taxes paying for a smorgasbord of small "incentive" programs. He appears to have erred on the side of eagerness with this one; the Times article is headlined "Step this way to get free cash from Gordon Brown".
From April next year, taxpayers will be able to make thousands of pounds in their pension fund risk-free.The Times goes on to explain how you can then withdraw a quarter of the £125,000, and then reinvest the entirety to get another tax credit, and so on ad infinitum.
... The ploy centres on the ability to take tax-free cash out of your pension and immediately reinvest it to earn extra tax relief.
You can already do this, but it is cumbersome under the present rules because you have to take an income from what is left. [After the change] you won’t have to draw benefits, making it much more appealing because your fund stays intact. Members of company schemes might have to set up a private pension to benefit.
It works like this... anyone aged over 50, rising to 55 in 2010, will be able to take a quarter of their fund as a tax-free lump sum. Say you have a pension worth £500,000 and you earn £150,000. On your 50th birthday you ask your pension company for your tax-free cash. It will probably send you a form, and in due course you receive £125,000 — a quarter of £500,000. You put £75,000 of that cash back into your pension and get tax relief, boosting the overall contribution to £125,000.... But you have kept £50,000 of the tax-free lump sum you removed — and you don’t stop there.
The Continental Europeans, having grown accustomed to The Golem's public criticism of their finances, may have left a tingle of schadenfreude when Britain began running excessive deficits, despite a long run of City-driven growth:
From the East, the EU’s Joaquin Almunia formally charged the Chancellor with the sin of running excessive deficits, not just for the past two years but most likely for the next two as well. Britain is becoming the new Germany. From the West, Rodrigo Rato, managing director of the IMF, said that growth would be lower and deficits higher than consistent with Mr Brown’s own budget rules, let alone Mr Almunia’s or anyone else’s.
Both attacks are stingingly embarrassing. The Chancellor has persistently lectured IMF members and, as chairman of Ecofin, is continuing to tell fellow European finance ministers how to run their affairs.
Britain is not part of the eurozone and Mr Brown has quite reasonably criticised the rules of the Stability and Growth Pact that he is now charged with breaking. He has even helped France, Germany and Italy to get round them. Mr Almunia, the EU’s Economic and Monetary Affairs Commissioner, conceded that Britain’s budget deficit was only a little over the 3 per cent limit permitted to member states at the bottom of the economic cycle.
Mr Brown, however, had no excuse to run any kind of deficit. As Mr Almunia so damagingly noted, the UK has not been languishing in recession. Until the past few months, the economy has enjoyed several years of above-average growth.
Unfortunately, these problems are not confined to England. Expensive and meddlesome government is easy to find; who is offering anything else?