Good bit of maths in The Telegraph

Unsually for them, the Telegraph* have published an article largely based on facts and logic rather than their own hysterical view of the world.

Example: how public-sector workers could find themselves hit with an unexpected tax charge:

• Mr Smith been a member of his [final salary] pension scheme for 30 years. He builds up 1/60th of his final salary for each year he is a member of the scheme. His salary at the beginning of the year is £55,000, which increases to £60,000 at the end of the year as he has been promoted.

• So at the start of the year he is on track to retire on a pension of £27,500 – which is 30/60ths (or a half) of £55,000. With most pension schemes this is now revalued in line with inflation (as measured by the consumer prices index), so it will be worth £28,188.

• But at the end of the year his pension is now set to be £31,000 (which is 31/60ths of his new salary, £60,000). This means that his pension will have increased by £2,812 over the course of the year (that is, £31,000 minus £28,188).

• In order to calculate the equivalent amount that would have to be invested in a notional fund to produce this kind of increase, this increase in pension is multiplied by 16. This gives an annual pension “contribution” of £44,992 [16 x £2,812], which will be above the new annual limit of £40,000.

• This means that this teacher or doctor would face a tax charge on the excess. In this case it would be a £1,997 tax bill (40pc of the £4,992 by which he is over the threshold).

Please note, the public sector worker in question has received a nine per cent pay rise, which seems very generous.

And, I think, that is the whole point of this tax charge (which the last Labour government invented, the Tories were bold enough to increase the multiple from 12 to 16), it's not really on the pension at all, it is there to discourage public sector workers on already good salaries from awarding themselves even better salaries.

But it is still worthwhile giving yourself a hefty pay rise, in the above example, Mr Smith is little better off in the first year (extra £5,000 salary minus 42% tax and NIC minus £1,977 tax on pension), but so what? In future years he will be a lot better off. Maybe they should increase the multiple to 40, which implies an annuity rate/return on pension assets of 2.5%?

* Emailed in by MBK.