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

[JulianPH]

Given the many posts on pensions I thought this might be interesting for some.

I'll start it off:

• Remove the Lifetime Allowance. It is pointless and penalises hard saving and successful investment decisions

• Give everyone the same level of contribution entitlement with full tax relief. Stripping those who can actually save of their ability to do so is wrong. The more you earn the greater your tax level becomes (0% 20% 40% 45%), yet your capacity to take advantage of tax breaks reduces to very little (No 0% and pension contributions limited to a quarter of what everyone else can make)

• Pledge not to make any further changes in law for existing pensions. Any new changes can only apply to new ones taken out after (the same or next day) new rules come in

• Really simplify things A, B & C. That should be it.

Over to the PH collective to point out the errors of my ways..!

[JulianPH]

gd49 said:

Agree with points A and C. Not sure I agree with point B, are you suggesting high earners should get more tax relief on their allowance? I don't see the benefit to society as a whole of this, we need to incentivise those on lower incomes to save, hence the tax breaks so society doesn't have to support them in retirement, those on highest tax rate incomes should be able to save enough for their retirement without tax breaks.

No I am not, I'm saying that higher earners get the same tax relief on pension contributions as they would have paid tax had they not deferred this income for retirement. This is not the same as getting 'more' tax relief.

I'll add one more thing to my list though, make the state pension tax exempt.

It is after all a NI funded benefit and I am not aware of any other benefits that are taxable.

You can't incentivise people to save when they simply can't afford to. But by making the state pension tax free (like all other state benefits) you will certainly incentivise all those who can afford to save.

[JulianPH]

mikeiow said:

Although clearly I like the sound of all three, I am inclined to agree that actually those on lower tax bands ought to be given incentives to put more into their pension provision by giving THEM the highest tax band benefits.

Are there caps on the % fees advisors can charge for those who are mandated to take advice on how to use their pot?
As I am now in my 50's and starting to pay more attention to these things, it strikes me that a big old lump of a pension can disappear in those fees!!
What is the most effective/efficient way to get that kind of advice?!

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.

[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.

[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...

[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.

[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.

[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.

[JulianPH]

will_ said:

In essence, it should simply be that you can recover as much tax as you have paid against pension contributions, up to a set amount over a lifetime (with that amount increasing with inflation or at a set rate). You should then be able to withdraw it at any rate you like from a set age, paying income tax as you do so. It is then up to the individual to retire when they want, and pay tax only on the retirement income they need.

I am sure that there are many holes in the above, but as this thread shows trying to work out pensions is very complicated, unnecessarily so in my view.

In essence, you have just discribed exactly how pensions work!

[JulianPH]

Another idea (I have copied over from a different thread):

Get rid of pensions altogether and replace them with a Tax Free Contribution ISA to sit along side the current Tax Free Withdrawal ISA (better names obviously required!).

Make the annual limit for both £25k.

The TFC ISA (formerly a pension) can also have a "loyalty bonus" of 25% tax free withdrawals if you do not access funds before you hit 55 (not available if you do access early).

It is effectively the same as what we have now for pensions (with an added early withdrawal facility), but far simpler to understand.

The government should be happy too as they have removed £15k a year from tax relief and if people do dip in early they get the tax back more quickly and don't have to allow the 25% tax free cash.

For a cherry on top, abolish Employer NI and replace with a TFC ISA contribution of the exact same amount. This would be cost neutral for businesses, well received and meaningful for the public, and off-set by the reduced tax relief at source (and early withdrawal taxation) for the government.

[JulianPH]

rockin said:

Following recent tax changes direct property is mainly for people who enjoy paying taxes which include - Stamp Duty, Income Tax, Capital Gains Tax (at a special high rate) etc. So I'd like to say a big "thank you" to people who choose to prop up the Treasury.

SIPP/ISA is likely to deliver massively higher net returns for investors.

If they so choose investors can hold property shares in their SIPP/ISA and enjoy all the tax benefits without dealing with tenants, property repairs, estate agents, tax returns or any of the other hassle.

An excellent point Steve, and in most cases the benefit of the management provided seriously outweighs the cost of the fund..

This is not necessarily the same with larger property portfolios though.

[JulianPH]

sidicks said:

An ISA is just a wrapper. What investments did you choose to invest in within your ISA?

Some of the assets within my ISA increased by over 30% last year - beats property by a long way...

Edited by sidicks on Monday 8th January 16:34

No mate, an ISA is an investment. Some bloke told me all about it down the pub.

Turns out, "insert stock/fund of your choice" is what you are after.

And so on...