Worth dumping cash into pension before 40% rate dropped ?

[SunsetZed]

PurpleMoonlight said:

PorkInsider said:

Computer programs wouldn't need to change in order to prevent most people claiming tax relief on higher contributions, would they?

Most (I won't say all as I don't know how it works in the public sector pension schemes) higher rate taxpayers will need to either fill in a tax return or call HMRC directly to ask for the additional relief, so wouldn't it just be a case of saying 'no' to claims for contributions after the chosen cutoff date?

Yep.

It will be easy to restrict tax relief where contributions are paid under relief at source, there would simply be no tax refund for higher rate tax payers.

However, most occupational pension schemes deduct personal contributions from pay before income tax is assessed. That needs payroll programming changes if tax relief is restricted to, say, basic rate.

Occupational pension schemes could of course swap to relief at source, but they would have to make a specific application to HMRC for it and, to be honest, the administration and reporting of it is a right ball ache on a smaller scale.

Edited as PurpleMoonlight covered most of my points without me noticing so I'll just add that at medium and large companies salary sacrifice pension schemes are widespread and automated. Changing the terms instantly would be a nightmare similar to the changing of the VAT rate at very short notice, in fact possibly worse because with some schemes this would be a fundamental change and there is normally a negotiation period in the terms and conditions for people to opt out before they take affect etc. so you'd end up with employees complaining that they didn't get the option to review the changes before being automatically signed up which wasn't in line with the T&C's blah blah...

Edited by SunsetZed on Monday 29th February 16:02

[Ozzie Osmond]

PorkInsider said:

I think what 98' is talking about is the possibility that they're also going to scrap the tax free lump sum at some point.

As of today you can,

• Get 40% tax relief on all contributions
• Cumulate gross tax free investment returns, and
• Quite probably only pay 20% tax on the pension received at the end.

That's a great long term investment opportunity even without the tax free lump sum.

Although the balance may change a bit I will be astounded if the "new" regime is a poor deal for savers. On the other hand people who are looking for an excuse not to save for their own future will always find that excuse.

[98elise]

Ozzie Osmond said:

98elise said:

If all the rumored rules to arrive then there will be little point in saving.

I don't think that a logical conclusion.

The government keeps lowering the Lifetime Allowance cap on pensions because they know that saving in the tax exempt environment is still very attractive. A decade ago the maximum was at £1.8m but now they're dropping it all the way down to £1m.

So what can you get for your £1m at, say, age 60?

• £250,000 of tax free cash, plus
• good quality pension of maybe £30,000 p.a.

The tax free element seems to be on the chopping block, plus if high rate relief is reduced then the money is taxed in and then back out.

If that's the case I'd rather have the money now and know that its mine rather then a future chancellor deciding he wants an even bigger slice because I was sensible/silly enough to save.

[SunsetZed]

98elise said:

Ozzie Osmond said:

98elise said:

If all the rumored rules to arrive then there will be little point in saving.

I don't think that a logical conclusion.

The government keeps lowering the Lifetime Allowance cap on pensions because they know that saving in the tax exempt environment is still very attractive. A decade ago the maximum was at £1.8m but now they're dropping it all the way down to £1m.

So what can you get for your £1m at, say, age 60?

• £250,000 of tax free cash, plus
• good quality pension of maybe £30,000 p.a.

The tax free element seems to be on the chopping block, plus if high rate relief is reduced then the money is taxed in and then back out.

If that's the case I'd rather have the money now and know that its mine rather then a future chancellor deciding he wants an even bigger slice because I was sensible/silly enough to save.

I absolutely agree with this, the only incentive as I see it to put money in the pension in this scenario is the employer contributions. Against this is the fact that the government can decide when you will be able to access the cash so if the employer contributions are not generous then I would rather save the money in a stocks and shares ISA.

[theboss]

SunsetZed said:

I absolutely agree with this, the only incentive as I see it to put money in the pension in this scenario is the employer contributions. Against this is the fact that the government can decide when you will be able to access the cash so if the employer contributions are not generous then I would rather save the money in a stocks and shares ISA.

Same - I've putting what I can afford to into SIPPs for my wife and I, and at 34 I hoped I'd be able to defer the topmost slice of our incomes into these schemes, under the current rules (i.e. entirely gross / intact), for some time to come.

The moment this changes all incentive is lost.

Yet another 'pulling up of the ladder' in my mind - it's not such a big deal for people 10-20 years older who have already accumulated a fair wedge whilst the going was good.

Its looking more and more certain to happen - http://www.telegraph.co.uk/news/politics/georgeosb...

Edited by theboss on Tuesday 1st March 16:24

[PurpleMoonlight]

theboss said:

Its looking more and more certain to happen - http://www.telegraph.co.uk/news/politics/georgeosb...

Edited by theboss on Tuesday 1st March 16:24

I really don't see the tax relief for basic rate tax payers being greater than the tax paid. This whole exercise isn't about redistributing the tax relief, it's about restricting it so that more tax is paid to the exchequer.

[theboss]

PurpleMoonlight said:

theboss said:

Its looking more and more certain to happen - http://www.telegraph.co.uk/news/politics/georgeosb...

Edited by theboss on Tuesday 1st March 16:24

I really don't see the tax relief for basic rate tax payers being greater than the tax paid. This whole exercise isn't about redistributing the tax relief, it's about restricting it so that more tax is paid to the exchequer.

I'm not so sure - I think they'll put a positive spin on the reform by offering some minor concession to basic rate payers. They love offering tiny little carrots to the masses whilst beating higher earners with great big sticks to pay for it.

[Ozzie Osmond]

SunsetZed said:

I absolutely agree with this, the only incentive as I see it to put money in the pension in this scenario is the employer contributions. Against this is the fact that the government can decide when you will be able to access the cash so if the employer contributions are not generous then I would rather save the money in a stocks and shares ISA.

Question: If you don't trust the Chancellor on pensions why would you trust him on ISAs?

With a pension you KNOW you've pocketed your 40% tax relief right upfront. In an ISA a lot of the tax relief comes at the end so a future Chancellor can easily change the rules from "tax free" to "full Capital Gains Tax" and then apply CGT at whatever rate he chooses.

[Phooey]

Ozzie Osmond said:

Question: If you don't trust the Chancellor on pensions why would you trust him on ISAs?

With a pension you KNOW you've pocketed your 40% tax relief right upfront. In an ISA a lot of the tax relief comes at the end so a future Chancellor can easily change the rules from "tax free" to "full Capital Gains Tax" and then apply CGT at whatever rate he chooses.

You are not locked into an ISA

[ringram]

If you put it in you would get a £5k refund on your tax assuming you have PAYE everything.
So its not as if its all gone, you will get the tax credit

The other 20% will be added by the pension provider.

Seems a no brainer to me assuming you dont need it for the time being. (excepting the £5k rebate..)

[98elise]

Ozzie Osmond said:

SunsetZed said:

I absolutely agree with this, the only incentive as I see it to put money in the pension in this scenario is the employer contributions. Against this is the fact that the government can decide when you will be able to access the cash so if the employer contributions are not generous then I would rather save the money in a stocks and shares ISA.

Question: If you don't trust the Chancellor on pensions why would you trust him on ISAs?

With a pension you KNOW you've pocketed your 40% tax relief right upfront. In an ISA a lot of the tax relief comes at the end so a future Chancellor can easily change the rules from "tax free" to "full Capital Gains Tax" and then apply CGT at whatever rate he chooses.

But in future that could be say 20 or 30% (so minus 10-20% tax). Then when you draw it down its taxed again. That could be 20% or 40%, or whatever the tax rate is then. In addition you can only have it when the chancellor says, and however he/she says. For someone mid way through their working life thats quite a gamble.

It would make having the money mow much more attractive.

[Ginge R]

A good friend of mine has just received a briefing from someone close once removed to GO.

He wants a pensions ISA with government contribution and a lower lifetime limit, that's on very good authority. It's whether the party lets him. At the risk of adding to the speculation already, I'll say no more but it throws investing and retiring principles not so much out of the window, but once more, into doubt and uncertainty. GO knows what he wants to do; (namely) part money that has already been saved from savers surreptitiously, and defer the outcomes of retirement planning for those quite a bit younger.

It promises to be a focused, intricate, fascinating and challenging time for planners for sure, and once again, annoying and worrying for savers. Get your investment strategy, ideology, outcomes and objectives completely squared away, otherwise you're going to be picked off by the Treasury without even realising it. The days of picking funds should now be over, the talk should be on decumulation risk, tax planning, regulatory risk, sequential return risk, using ALL available wrappers, asset allocation etc.. they must be the important things.

[SunsetZed]

98elise said:

Ozzie Osmond said:

SunsetZed said:

I absolutely agree with this, the only incentive as I see it to put money in the pension in this scenario is the employer contributions. Against this is the fact that the government can decide when you will be able to access the cash so if the employer contributions are not generous then I would rather save the money in a stocks and shares ISA.

Question: If you don't trust the Chancellor on pensions why would you trust him on ISAs?

With a pension you KNOW you've pocketed your 40% tax relief right upfront. In an ISA a lot of the tax relief comes at the end so a future Chancellor can easily change the rules from "tax free" to "full Capital Gains Tax" and then apply CGT at whatever rate he chooses.

But in future that could be say 20 or 30% (so minus 10-20% tax). Then when you draw it down its taxed again. That could be 20% or 40%, or whatever the tax rate is then. In addition you can only have it when the chancellor says, and however he/she says. For someone mid way through their working life thats quite a gamble.

It would make having the money mow much more attractive.

This would pretty much have been my answer. Plus historically since ISA's were introduced they've not been tinkered with and as Phooey says you aren't locked in to an ISA.

My point is that the tax free element of pensions is a great incentive to save (especially for people like me, 32 and a higher rate tax payer but highly unlikely to be a 40% tax payer upon retirement unless the threshold drops / inflation is rampant). With this element removed the employer contribution is the only thing that makes it worthwhile locking the money up for at least 23 years.

[Ozzie Osmond]

"23 years" - you'd get the massive benefit of tax relief over that time,

• 40% taxpayer invests £6,000 in pension and gets £10,000 of investment (simplified)
• i.e. You invest £6,000 and the government gives you £4,000 to invest.
• Over 23 years at, say, 7% compound return your £6k becomes worth £28,000
• Over 23 years at the same compound return your £4k gift from the government becomes £19,000

Seriously, that's the best deal we're ever going to see - a gift of £19,000 from the government at retirement!

ISA's have also been tampered with. There used to be PEPs, now there are ISA's. The annual limit on investment used to be around £5,000 - now it's £15,240. This is so generous that there's every risk of ISAs being either capped, tax relief reduced or withdrawals taxed in some way in future. However, that's no reason not to invest in them now albeit you don't get the generous up-front tax relief.

Ozzie's guide to savings,

• Stick 50% in pension for later life
• Stick 50% in ISAs so that you have some money which is accessible at any time.

[Revisitph]

theboss said:

I'm not so sure - I think they'll put a positive spin on the reform by offering some minor concession to basic rate payers. They love offering tiny little carrots to the masses whilst beating higher earners with great big sticks to pay for it.

Absolutely - the cost of registering probate is likely to be cut from £215 flat rate to zero for small estates (the tiny carrot) but then steeply tiered from £300 to £20,000 - effectively a stealthy hike in IHT which will raise £250M in extra revenue.

[Ozzie Osmond]

Revisitph said:

theboss said:

I think they'll put a positive spin on the reform by offering some minor concession to basic rate payers. They love offering tiny little carrots to the masses whilst beating higher earners with great big sticks to pay for it.

Absolutely - the cost of registering probate is likely to be cut from £215 flat rate to zero for small estates (the tiny carrot) but then steeply tiered from £300 to £20,000 - effectively a stealthy hike in IHT which will raise £250M in extra revenue.

And what really annoys is these changes generally hit "higher earners" very hard while the truly wealthy continue to enjoy huge tax exemptions on their activities. Similarly, wealthy foreigners living in the UK and the likes of Tony Blair who go "offshore" can cruise through life paying little or no tax. In global terms UK is essentially a tax haven - unless you are unlucky enough to live and work here! A high earner is paying 45% income tax and then 20% VAT plus all the other duties on petrol, booze etc. Effective overall tax take from such people must be around a staggering 65% of what they earn.

[theboss]

Ozzie Osmond said:

Revisitph said:

theboss said:

I think they'll put a positive spin on the reform by offering some minor concession to basic rate payers. They love offering tiny little carrots to the masses whilst beating higher earners with great big sticks to pay for it.

Absolutely - the cost of registering probate is likely to be cut from £215 flat rate to zero for small estates (the tiny carrot) but then steeply tiered from £300 to £20,000 - effectively a stealthy hike in IHT which will raise £250M in extra revenue.

And what really annoys is these changes generally hit "higher earners" very hard while the truly wealthy continue to enjoy huge tax exemptions on their activities. Similarly, wealthy foreigners living in the UK and the likes of Tony Blair who go "offshore" can cruise through life paying little or no tax. In global terms UK is essentially a tax haven - unless you are unlucky enough to live and work here! A high earner is paying 45% income tax and then 20% VAT plus all the other duties on petrol, booze etc. Effective overall tax take from such people must be around a staggering 65% of what they earn.

What irritates me is the political motivation to avoid being seen to give any form of tax concession to the 'wealthy' higher rate earners... take the recent savings interest allowance... £1k for basic rate payers but halved to £500 for higher rate payers. Why not just say everyone gets a £1k savings allowance, what does having a two tier allowance really save? Same with the paltry married couples tax allowance - this gets removed so that higher-rate paying single income families don't stand to gain the same few hundred quid tax saving that basic rate payers are now entitled to. In these cases the amounts involved are trivial but the principle is very revealing.

[SunsetZed]

Ozzie Osmond said:

"23 years" - you'd get the massive benefit of tax relief over that time,

• 40% taxpayer invests £6,000 in pension and gets £10,000 of investment (simplified)
• i.e. You invest £6,000 and the government gives you £4,000 to invest.
• Over 23 years at, say, 7% compound return your £6k becomes worth £28,000
• Over 23 years at the same compound return your £4k gift from the government becomes £19,000

Seriously, that's the best deal we're ever going to see - a gift of £19,000 from the government at retirement!

ISA's have also been tampered with. There used to be PEPs, now there are ISA's. The annual limit on investment used to be around £5,000 - now it's £15,240. This is so generous that there's every risk of ISAs being either capped, tax relief reduced or withdrawals taxed in some way in future. However, that's no reason not to invest in them now albeit you don't get the generous up-front tax relief.

Ozzie's guide to savings,

• Stick 50% in pension for later life
• Stick 50% in ISAs so that you have some money which is accessible at any time.

I think that you've missed the point, this right now is the deal which is good, we're talking about if, as anticipated the rate changes from say 40% to 20% so instead of £6,000 for the £10,000 investment it becomes £8,000. The investment growth is largely irrelevant now as you can get the same in the ISA wrapper.

Agreed on the ISA part I explained it badly. Money here is not locked in and changes have largely been positive, it's a much simpler investment vehicle and historically less of a target for politicians looking to save money than pensions which is why I have more faith in it.

I'm not sure you can simplify the savings to 50/50 as it depends on the terms that you get on the pension, for example for a basic rate tax payer who doesn't get employer contributions what advantages do you see in them locking into a pension?

[Ozzie Osmond]

SunsetZed said:

for a basic rate tax payer who doesn't get employer contributions what advantages do you see in them locking into a pension?

20% tax relief into a pension. 0% tax relief into anything else. Clearly an employer contribution swings the deal and with new Workplace Pensions this should always be available. People who "opt out" are bonkers IMO (unless they genuinely cannot afford).

TBH I think this is exactly the issue which Budget 2016 is likely to address - namely that wealthier people are costing the government most of its "free money" while it's the lower paid who they want to encourage.

One possibility is a new system where,

• Higher paid people get only 25% tax relief, not 40%
• Lower paid people get 20% tax relief PLUS a 5% top-up from the government - making 25%

This sort of approach would level the playing field but it remains to be seen what will actually happen.

As regards "locking in" we are all going to get old unless we die young. In the event of early death pension savings can be left to family members with no tax so long as they add it to their own pensions.

[SunsetZed]

Ozzie Osmond said:

SunsetZed said:

for a basic rate tax payer who doesn't get employer contributions what advantages do you see in them locking into a pension?

20% tax relief into a pension. 0% tax relief into anything else. Clearly an employer contribution swings the deal and with new Workplace Pensions this should always be available. People who "opt out" are bonkers IMO (unless they genuinely cannot afford).

TBH I think this is exactly the issue which Budget 2016 is likely to address - namely that wealthier people are costing the government most of its "free money" while it's the lower paid who they want to encourage.

One possibility is a new system where,

• Higher paid people get only 25% tax relief, not 40%
• Lower paid people get 20% tax relief PLUS a 5% top-up from the government - making 25%

This sort of approach would level the playing field but it remains to be seen what will actually happen.

As regards "locking in" we are all going to get old unless we die young. In the event of early death pension savings can be left to family members with no tax so long as they add it to their own pensions.

Yes but tax relief does not mean tax free, in reality it's just delaying the paying of the tax until the pension is taken.

Agreed on the getting old however it may be advantageous to access the money early for both personal reasons and also financial reasons. Also as you say it can only be left to other family members tax free in pensions, if they wanted it earlier then it would have been better held in an ISA.