What would you do with pension law if you were in charge?

[JulianPH]

anonymous said:

[redacted]

Sorry, I hadn't read this when I replied to the posts above. My suggestion seems a close match to your own.

[mikeiow]

JulianPH said:

By making the state pension tax free you would effectively be doing this as the personal pension provision would likely be covered by their personal allowance meaning it will go much further in retirement.

There are no caps on adviser fees. The most effective way to get advice is usually from an adviser who charges an hourly fee (just as an accountant or solicitor), rather than a percentage of your pot.

Hourly fees certainly sound more appealing: most I have read suggest it was almost always a percent of the pot....mind you, if the hourly fees are really high..... !!
Ought to look around the Leicester area for one at some point....mind you, another year can probably pass!

[JulianPH]

mikeiow said:

Hourly fees certainly sound more appealing: most I have read suggest it was almost always a percent of the pot....mind you, if the hourly fees are really high..... !!
Ought to look around the Leicester area for one at some point....mind you, another year can probably pass!

Don't forget it is the annual adviser fee that will hurt the most over time. I don't understand how people can't work out that a 1% annual fee may sound small, but adds up to 25% over 25 years...

[mikeiow]

JulianPH said:

Don't forget it is the annual adviser fee that will hurt the most over time. I don't understand how people can't work out that a 1% annual fee may sound small, but adds up to 25% over 25 years...

Is this a fee once you start drawing on the pension? Or leading up to that point? (the latter could be why I have *cough* self-managed thus far!)
Is that some mandatory requirement? I was only aware of the need to take advice for pots over £30K, which I *thought* was usually done as a %.

Yes, annual nibbles like that could devastate the pot....

[sidicks]

JulianPH said:

Don't forget it is the annual adviser fee that will hurt the most over time. I don't understand how people can't work out that a 1% annual fee may sound small, but adds up to 25% over 25 years...

No idea how any IFA can justify an going (fund-based) fee like this, particular when they’d be made to try and advise on investment strategy on an annual basis!

[JulianPH]

mikeiow said:

Is this a fee once you start drawing on the pension? Or leading up to that point? (the latter could be why I have *cough* self-managed thus far!)
Is that some mandatory requirement? I was only aware of the need to take advice for pots over £30K, which I *thought* was usually done as a %.

Yes, annual nibbles like that could devastate the pot....

Advisers are free to charge what they like providing you agree and sign to say so. 3% initial and 1% a year is pretty standard . There are some that charge less (0.5% a year, for example). Their fees are applied throughout the entire period you retain their services, regardless of whether you are growing your money or drawing an income from it.

Adviser fees are not mandatory unless you are transferring a DB scheme (not a DC scheme) with a value greater than £30k.

In reality though they are usually mandatory when you want to take benefits as if you have not taken advice liability can fall on the pension adviser for simply following your instructions.

[JulianPH]

sidicks said:

JulianPH said:

Don't forget it is the annual adviser fee that will hurt the most over time. I don't understand how people can't work out that a 1% annual fee may sound small, but adds up to 25% over 25 years...

No idea how any IFA can justify an going (fund-based) fee like this, particular when they’d be made to try and advise on investment strategy on an annual basis!

Hi Sid, I have no idea either. But they do, on a daily basis and with their clients' agreement.

[mikeiow]

JulianPH said:

Advisers are free to charge what they like providing you agree and sign to say so. 3% initial and 1% a year is pretty standard . There are some that charge less (0.5% a year, for example). Their fees are applied throughout the entire period you retain their services, regardless of whether you are growing your money or drawing an income from it.

Adviser fees are not mandatory unless you are transferring a DB scheme (not a DC scheme) with a value greater than £30k.

In reality though they are usually mandatory when you want to take benefits as if you have not taken advice liability can fall on the pension adviser for simply following your instructions.

Ouch - 1% sounds pure theft from old people to me!!
Yes, the 3% is what I had heard - a hefty lump from a pot perhaps approaching £1m I thought it was compulsory if you want to take a drawdown - maybe that is what you mean with the last line.

So.....maybe the best one can hope for is a fee-based advice (£10K ?) and a 'generous' 05% annual fee?!!

Guess I will just keep paying in.....the more that gets taken, I guess the more I have earned.....

[sidicks]

mikeiow said:

Ouch - 1% sounds pure theft from old people to me!!
Yes, the 3% is what I had heard - a hefty lump from a pot perhaps approaching £1m I thought it was compulsory if you want to take a drawdown - maybe that is what you mean with the last line.

So.....maybe the best one can hope for is a fee-based advice (£10K ?) and a 'generous' 05% annual fee?!!

Guess I will just keep paying in.....the more that gets taken, I guess the more I have earned.....

Pay (per hour) for the upfront advice and then by the hour for any follow-up reviews you want (every 5-years, or sooner in the event of a major life event)!

[JulianPH]

sidicks said:

mikeiow said:

Ouch - 1% sounds pure theft from old people to me!!
Yes, the 3% is what I had heard - a hefty lump from a pot perhaps approaching £1m I thought it was compulsory if you want to take a drawdown - maybe that is what you mean with the last line.

So.....maybe the best one can hope for is a fee-based advice (£10K ?) and a 'generous' 05% annual fee?!!

Guess I will just keep paying in.....the more that gets taken, I guess the more I have earned.....

Pay (per hour) for the upfront advice and then by the hour for any follow-up reviews you want (every 5-years, or sooner in the event of a major life event)!

What sidicks just said. 100%. There is no other sensible way. It should also not cost you anything like £10k and have no annual fee.

[anonymous-user]

Two oddities continue despite the limit on annual contributions and the lifetime allowance.

• A 25% tax free lump sum is worth massively more to a 40% taxpayer than to a 20% taxpayer.

• Lower earners get 20% tax relief on their contributions and will probably pay 20% tax on their pension. High earners get 40% tax relief on their contributions and may well pay 40% tax on their pension. However, there's a "sweet spot" in the middle where people can get 40% tax relief on their contributions and will only pay 20% tax on their pension - with the added bonus of receiving 25% tax free.

Tax free cash has already been covered in this thread.

A case could be made for limiting tax relief on pension contributions to a maximum of 20%, with a matching change so that all income from pensions is taxed at 20%. This would remove the current oddity whereby pension tax relief is worth much more to higher earners than to standard workers.

Anyone in the sweet spot should be filling their boots!!

[JulianPH]

rockin said:

Two oddities continue despite the limit on annual contributions and the lifetime allowance.

• A 25% tax free lump sum is worth massively more to a 40% taxpayer than to a 20% taxpayer.

• Lower earners get 20% tax relief on their contributions and will probably pay 20% tax on their pension. High earners get 40% tax relief on their contributions and may well pay 40% tax on their pension. However, there's a "sweet spot" in the middle where people can get 40% tax relief on their contributions and will only pay 20% tax on their pension - with the added bonus of receiving 25% tax free.

Tax free cash has already been covered in this thread.

A case could be made for limiting tax relief on pension contributions to a maximum of 20%, with a matching change so that all income from pensions is taxed at 20%. This would remove the current oddity whereby pension tax relief is worth much more to higher earners than to standard workers.

Anyone in the sweet spot should be filling their boots!!

Steve, we usually agree, and in many ways we do here. It is not possible though to have any tax incentive that does not have a sweet spot where certain people get more benefit than others.

I pay tax at the highest rate. I therefore have no personal allowance, no child credit, and my pension contribution is limited to £10k a year. So, as a net contributor, from my viewpoint the questions are:

• If I didn't make as much would the government be 'subsidising' me by allowing me to put £40k a year into my pension with full tax relief?

• If I didn't make enough for that, would the government be 'further subsidising' me by allowing me to have a tax free personal allowance?

• If I didn't make that much I would be 'even more subsidised' by being allowed child credit?

• If I made nothing at all I would be 'fully subsidised 'by the government with a completely tax free income, a home and full NI contributions to ensure I have a full pension in retirement. Is that right?

Yet I am one of the 1% of people who pay 27% of all income tax.

So it all depends on which way you approach something. I understand exactly where you are coming from, but you say;

rockin said:

A case could be made for limiting tax relief on pension contributions to a maximum of 20%, with a matching change so that all income from pensions is taxed at 20%. This would remove the current oddity whereby pension tax relief is worth much more to higher earners than to standard workers.

This would render the whole point senseless. There is no incentive if you say to people "pay tax now, or save for retirement and pay it then". The tax free element is a big hook.

Progressive taxation is the issue here. If everyone paid the same level of tax (in return for entitlement to the same level of benefits) then there would be no question about pension tax relief or many other matters.

I appreciated and look forward to your thoughts on these matters.

[NickCQ]

JulianPH said:

This would render the whole point senseless. There is no incentive if you say to people "pay tax now, or save for retirement and pay it then". The tax free element is a big hook.

It's a big hook but it's not the only hook - it's as a 'discipline device' as well. By which I mean that by preventing people from accessing those savings before a set age (which keeps changing!) helps those that might lack willpower to save for retirement - once it's in the pension, it's in there for good! This is probably the motivation behind Automatic Enrollment.

[NickCQ]

rockin said:

Anyone in the sweet spot should be filling their boots!

I suppose that I fall within that sweet spot. But I don't think it's unreasonable that I am allowed to spread my earnings over my lifetime and reduce my average tax rate. Whilst at the present moment I'm in the top marginal tax rate band, the vagaries of my industry mean that this might not continue for ever - it's possible that my lifetime aggregate earnings could be less than someone who never tipped over into the top band.

Not to mention that my generation is unlikely to benefit from the massive tax free gains provided by the residential property market in the last 30 years (although that's an argument for another thread!)

[anonymous-user]

All I can add is to draw attention to the considerable benefit of tax-free accumulation of investment returns throughout someone's working life and on, if they are in, for instance, SIPP drawdown, into retirement.

Yes, my suggestion would make pension similar to ISA although one having tax relief on contributions and the other having tax relief on withdrawals. However,

• with pension you effectively get a long term cumulative investment return on the deferred tax, "which is nice".
• with pension the 25% tax free lump sum remains a big additional attraction.

There's a lot to be said for,

• funding pension to the max, and
• topping up with ISA

not least because the Lifetime Allowance of £1m is now modest.

For instance, retire with a pension pot of £1m and ISA of £500k

• £250,000 tax free cash lump sum from pension. Spend, say, £10k p.a. for 25 years.
• Draw down 4% from remaining pension so £30,000 p.a. and pay income tax at about 20% (roughly £6,000)
• Taxable state pension c.£11k essentially uses up the income tax free Annual Allowance
• Draw 3% from ISA tax free for an additional £15,000 p.a.

Total annual "income" is £10k + £30k + £11k + £15k = £66k
Tax payable is roughly £6,000
Net income £60,000 p.a. so effective tax rate c.10%, "which is nice".

[anonymous-user]

A bonus question - perhaps for Sidicks or other numbers gurus,

• Assume no inflation
• Assume regular monthly pension contributions at a flat level
• Assume a working life of 40 years (for instance age 25 to age 65)
• Assume continuing investment returns in line with long term experience and sensible reallocation towards retirement

What monthly pension contribution is needed to hit a pot of £1m at age 65?

[NickCQ]

rockin said:

with pension you effectively get a long term cumulative investment return on the deferred tax, "which is nice"

I’m not sure that’s true. Abstracting from whether the tax rates are the same or not, it’s mathematical equivalent whether you reduce the amount by 40% first then apply 40 years of equity returns or apply the growth vector first then reduce the total amount by 40%.

EDIT: actually I think I am wrong because I forgot that you have to pay tax on investment income in cash before you retire if it’s outside a pension.

Edited by NickCQ on Sunday 7th January 18:27

[NickCQ]

rockin said:

A bonus question - perhaps for Sidicks or other numbers gurus,

• Assume no inflation
• Assume regular monthly pension contributions at a flat level
• Assume a working life of 40 years (for instance age 25 to age 65)
• Assume continuing investment returns in line with long term experience and sensible reallocation towards retirement

What monthly pension contribution is needed to hit a pot of £1m at age 65?

ignoring inflation my very simple excel gives me this:

Growth Rate Contribution
-- 2,083
1.0% 1,697
2.0% 1,367
3.0% 1,090
4.0% 861
5.0% 675
6.0% 524
7.0% 405
8.0% 310
9.0% 237
10.0% 180

EDIT: sorry the formatting is messed up. That's to hit £1m over 40 years (hence at 0% growth you need £1m / 40 / 12 per month)

[anonymous-user]

Thanks Nick.

I think your numbers demonstrate the point that although "A Million Pounds!" sounds like an impossibly big target it's entirely practicable for many people to get there without needing to be Richard Branson, Lord Sugar or some sort of footballer.

Key ingredients,

• Start early, and
• Keep going

The raw power of long-term tax-free accumulation is astounding.

This is how and why stock market investment should, in the long run, beat heavily taxed BTL (buy-to-let residential property) by a considerable margin for many people. BTL is taxed on the way in, taxed on the way through and taxed on the way out. Nonetheless, I recognise that once tax wrappers like ISA and SIPP have been maxed-out BTL can be a useful ingredient in a diversified portfolio.

[sidicks]

NickCQ said:

ignoring inflation my very simple excel gives me this:

Growth Rate Contribution (Assuming payments increase at 2% below growth rates)
-- 2,083 3,007
1.0% 1,697 2,023
2.0% 1,367 1,366
3.0% 1,090 926
4.0% 861 631
5.0% 675 431
6.0% 524 295
7.0% 405 203
8.0% 310 140
9.0% 237 97
10.0% 180 68

EDIT: sorry the formatting is messed up. That's to hit £1m over 40 years (hence at 0% growth you need £1m / 40 / 12 per month)

Edited to add an extra column, showing the (approximate) payments assuming that they increase at 2% less than the growth rate figures.