Worth dumping cash into pension before 40% rate dropped ?

[98elise]

SunsetZed said:

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.

Exactly. lets say it drops to a flat 25%.

For every £1 earned subject to high rate, you can either pay 40% now and have the cash, or 15% now and look the money up until you retire. At that point you will pay an additional say 20%, or even 40% (being simplistic) so possibly 35% or 55% over all.

The big danger is you are have to rely on whoever is in power not move the goalposts again.

[Ozzie Osmond]

For people who don't want to save there is always an excuse available if they search for one hard enough.

[walm]

SunsetZed said:

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.

I'm with Ozzie on this.

Your comment fails to take into account that unless you are fairly extraordinarily wealthy you would be VERY lucky to get into the 40% rate in retirement.

Let's say it is £40k when retirement happens.
That means you need a £1m pot.

AND EVEN THEN - if it is JUST that pot, your actual effective tax rate is obviously still NOWHERE NEAR 40%.

Oh and don't forget the 25% that is genuinely tax free!!!!

If you pay 40% tax then the CURRENT system is an absolute no brainer.

God knows what happens if they remove the 25% tax free bit or reduce the rebate but RIGHT NOW you can still shove in a BOAT LOAD at the 40% rate.

[SunsetZed]

walm said:

SunsetZed said:

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.

I'm with Ozzie on this.

Your comment fails to take into account that unless you are fairly extraordinarily wealthy you would be VERY lucky to get into the 40% rate in retirement.

Let's say it is £40k when retirement happens.
That means you need a £1m pot.

AND EVEN THEN - if it is JUST that pot, your actual effective tax rate is obviously still NOWHERE NEAR 40%.

Oh and don't forget the 25% that is genuinely tax free!!!!

If you pay 40% tax then the CURRENT system is an absolute no brainer.

God knows what happens if they remove the 25% tax free bit or reduce the rebate but RIGHT NOW you can still shove in a BOAT LOAD at the 40% rate.

For a 40% tax payer with the existing system then I absolutely agree with you but I think you missed this comment:

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?

Good point on the 25% tax free, I'd overlooked that.

To your last point that was exactly what I was debating, what are the advantages to saving if the rebate is reduced.

Ozzie Osmond said:

For people who don't want to save there is always an excuse available if they search for one hard enough.

Completely agree, I was debating which vehicle should be used for the saving. For some I have no doubt that having savings locked away where they can;t touch them is a good thing as it removes temptation they can't resist.

[PorkInsider]

Ozzie Osmond said:

For people who don't want to save there is always an excuse available if they search for one hard enough.

That's the second time you've said that in this thread.

People questioning the prudence of putting large sums of money into a pension considering the coming changes and others which may happen is not the same as not wanting to save.

I haven't seen anyone in here say they don't want to save or otherwise prepare for retirement..

[walm]

SunsetZed said:

Good point on the 25% tax free, I'd overlooked that.

To your last point that was exactly what I was debating, what are the advantages to saving if the rebate is reduced.

Don't debate save some NOW!! If you can.

However, given we don't know the outcome it is hard.
I think the attack will be 40%+ payers not 20% payers.

So let's say you save like a champ and end up with a £1m pot earning you £40k in income per annum.
That pot only cost you 80% of what it would cost in an ISA.
BUT you get taxed on that income.
So (ignoring the 25% free) you pay 20% on c.£30k so £6k which is an effective rate of 15%.

So you get 5% FREE! (the difference between getting 20% back and paying an effective 15%).

Including the 25% free means you pay:
25% at ZERO
75% then is now only generating £30k per annum (and you supplement by eating into the £250k).
That's an effective 13% rate.

So the weighted average is around 10% effective which means 10% FREE.

[98elise]

PorkInsider said:

Ozzie Osmond said:

For people who don't want to save there is always an excuse available if they search for one hard enough.

That's the second time you've said that in this thread.

People questioning the prudence of putting large sums of money into a pension considering the coming changes and others which may happen is not the same as not wanting to save.

I haven't seen anyone in here say they don't want to save or otherwise prepare for retirement..

Agreed. I've not put any money into pensions for the past 4/5 years as I wanted to save/invest in something more flexible. That investment is now where i want it to be, and with the new draw down options pensions became a good proposition so ii planned to start contributing again.

The changes will put me off going back into pension saving.

[Kendrik]

I've put the full £40k in this year on the basis that once the tax relief is gone, there isn't any other investment that gets that tax kicker to start you off. Yes it is taxed on the way out but so is everything else. It's a lot of money that you currently get from the Govt. and is a no brainer to me.

As an aside, I've also been advised to set-up a monthly contribution by DD before the budget to (potentially) protect myself from changes - apparently in the past there has been a longer transition period for existing payment plans (I might be getting that wrong, I just do what I'm advised but it's something along those lines).

I've also done a dependants pension for Mrs K as she doesn't pay tax and so gets 20% tax relief up to £3.6k - £800 contribution form the Govt.

[SunsetZed]

Kendrik said:

As an aside, I've also been advised to set-up a monthly contribution by DD before the budget to (potentially) protect myself from changes - apparently in the past there has been a longer transition period for existing payment plans (I might be getting that wrong, I just do what I'm advised but it's something along those lines).

Interesting, this would alleviate some of the issues discussed earlier in the thread with pension plans having to change their software / member agreements etc. in such a short time-scale whilst preventing large amounts from being transferred on an ad-hoc basis.

[PurpleMoonlight]

http://www.dailymail.co.uk/news/article-3475761/Os...


Looks like Georgie boy may be doing a J turn (he can't do yet another U turn as he hadn't officially announced anything yet).

[emicen]

PurpleMoonlight said:

http://www.dailymail.co.uk/news/article-3475761/Os...


Looks like Georgie boy may be doing a J turn (he can't do yet another U turn as he hadn't officially announced anything yet).

Interesting the Mail article suggests the new ISA-esque pension plan may only affect young people entering work now, or do they mean starting a new pension. There was no mention of this in the BBC article on the same subject:

http://www.bbc.co.uk/news/business-35724588

[oop north]

I find it interesting that all the debate has been about money purchase / defined contribution pensions without much consideration of the effect on members of final / average salary / defined benefit scheme pensions.

The pensions ISA idea fails to address defined benefit schemes.

I suspect that it is the inevitable howls of fury that would come from senior teachers, medics, the police, civil servants etc that have caused any u/j turn by Osborne: imagine having to suffer higher rate tax on your employer's entire contribution (and I know it's calculated at the moment in the basis of increases in total benefits each year to see if annual limit of £40k is exceeded) he has already done quite a lot by restricting the lifetime allowance to £1m - quite a few NHS consultants and gp's are already leaving the nhs pension scheme

Actually, I did wonder if this was part of his master plan - get rid of/restrict tax relief on pension contributions for state employees and watch them leave the schemes. Would save a lot more than the saved taxed relief...

[PurpleMoonlight]

I can see how pension ISA's would be attractive to the Treasury, as presumably employer contributions to the would be net of corporation tax which the Treasury would get now.

It also neatly side steps the tax free cash issue.

[Ozzie Osmond]

Never forget that your MP has the most generous State pension of all!!

I'm sure this is why DB pensions are only counted towards the Lifetime Allowance on a basis which values them at about two-thirds of their "real" value.

Snouts in the trough....

[oop north]

Ozzie Osmond said:

Never forget that your MP has the most generous State pension of all!!

I'm sure this is why DB pensions are only counted towards the Lifetime Allowance on a basis which values them at about two-thirds of their "real" value.

Snouts in the trough....

I think you might be overestimating how much people actually understand pensions!

[Simpo Two]

Revisitph said:

26 years ago I thought the DB scheme was a Ponzi - it has never been funded apart from ongoing contributions from current workers - which, ironically, impending loss of the highest earning / 14% contributing and their employer's contributions will hit hard - so didn't buy added years but made other arrangements, plus, seeing the awful predations of old age on a daily basis, I hope / can choose not to go there.

One might suggest that the entire GB economy, indeed that of the Western world, is Ponzi. Trick is to get out before it goes kaboom. 'But Sir must think of it as a long term investment Sir'.

[Ginge R]

Ginge R said:

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.

Reading Jo Cumbo this morning, as it turned out, the party *didn't* let him - it seems any plans to change the tax relief dates are on hold. Word had it, George's recent days have been spent fielding calls from party echelon, grandees, activists and angry MPs so this wasn't a huge surprise. I wouldn't put it beyond the wildest dreams of imagination though, to introduce a pension ISA for those suitably young enough. This was probably the final chance for GO to deliver the third of the two great reforming/meddling pensions budget of the Millennium.

It seems like his plans are on hold - probably due to the fact Boris, by going head to head with Cameron, is clearly placed his flag in the sand for party leader and Osborne would have been finished before he started if he had done this. You have to wonder though, where is the money that GO was relying on, going to come from? Rumours abound of lots of more nastiness afoot, the government is still early into the administration and it needs to save money. And it can't afford to do that with the next election creeping onto the horizon.

[PurpleMoonlight]

The only way for significant additional income to the Treasury is to increase income tax, vat, NI & corporation tax.

Does he have the balls for it though?

[Behemoth]

Ginge R said:

It seems like his plans are on hold

Overall, this tactic is typical GO. He's got previous with water testing by flagging up radical change and then pulling back, making voters overjoyed that whatever the budget brings, it isn't so bad for them. Politics at its worst.

But hearing his plans are only "on hold" isn't great for long term pension planning confidence, is it? Maybe it'll have the positive effect of people upping their contributions in case he brings this measure in next time around. Or more likely, the populace will once again procrastinate about saving.

[Ginge R]

Behemoth,

Agree. Although this time, it was eying his control - by Tuesday, it was becoming clear he was in trouble. He needs to balance the books somehow though. And this us why, he has to offer the yoof something. Maybe the Retirement ISA, spot of help upfront, easy/ish on the wallet, on way out.

It'll allow his campaign flex and give him scope to dilute it later. Retirement planning should be a distinct macro. We'll look back and staggered at how we jeapordised later life planning and subordinated what should be happy years to grubby party politik.

Edit:

Purple,

Therein lies the question! I think if he could get away with it, he'd take the wind out of Corbyn's sails a little. It'll make planning more interesting/demanding but he may gave already legislated his wriggle room on those ones away already anyway.

Edited by Ginge R on Saturday 5th March 09:02