New flat rate for pension tax relief?

[Ginge R]

If ever there was a sign that the big fund sellers are worried about fund inflows dropping, is this it? Hargreaves Lansdown 'advising' against Buy to Let. In the hope that higher rate tax payers put more money in their Vantage SIPP possibly? The shareholders won't be happy if the additional uplift goes.

http://www.ftadviser.com/2016/01/18/investments/pr...

[LeoSayer]

I think that's a stretch....the flat rate design could lead to basic rate taxpayers getting more relief which could more than offset any drop in investment from higher rate taxpayers.

It's all academic until the announcement in the budget, but things are currently very uncertain when it comes to pensions.....has there ever been a year when we couldn't say that!?

[Welshbeef]

LeoSayer said:

I think that's a stretch....the flat rate design could lead to basic rate taxpayers getting more relief which could more than offset any drop in investment from higher rate taxpayers.

It's all academic until the announcement in the budget, but things are currently very uncertain when it comes to pensions.....has there ever been a year when we couldn't say that!?

But surely a big issue is it will then deter even more from saving for the future which will add more strain onto the govt. in addition in time to come those individuals will have less wedge to spend so GDP/consumer spending will fall & what will replace it?

[Ginge R]

LeoSayer said:

I think that's a stretch....the flat rate design could lead to basic rate taxpayers getting more relief which could more than offset any drop in investment from higher rate taxpayers.

It's all academic until the announcement in the budget, but things are currently very uncertain when it comes to pensions.....has there ever been a year when we couldn't say that!?

We're entering a phase where consumer sentiment is really important, markets are chaotic. Hargreaves knows that higher rate tax payers are more (typically) able to withstand bouts of UN confidence and uncertainty, and continue to allocate higher levels of disposable income to keeping their retirement plans on track. Added to that, typically, not many basic rate taxpayers may gravitate to the Vantage SIPP anyway. There are lots of cheaper (not always best, I concede) options out there now, with great functionality.

[Ozzie Osmond]

It's always worth remembering how pension tax relief actually pans out over time, because the pension paid will sit on top of the state pension which roughly uses up the person's annual 0% income tax band,

• 20% taxpayer gets tax relief at 20% and may well pay 20% tax on his pension - so the tax is simply deferred.

• 40% taxpayer at a modest level gets 40% tax relief on contributions but will probably only pay 20% tax on his pension. This is a great benefit which should encourage him to save and not be so much of a burden on the state in old age. So although it costs the government money in tax relief there is probably an unquantifiable benefit which comes back to the state later on.

• 40% big earner will get tax relief at 40% on his contributions which seems a huge benefit, but he may well pay 40% tax on his pension - so like the first example the tax is simply deferred.

Yes, there's the tax free lump sum as well but government eventually gets a nice slice of tax out of that if it's spent or invested.

Nonetheless, it has always seemed slightly perverse that the people with the most money get the most tax relief.

PS Anyone who is in the middle band above really should be buying a pension if they can! It's the dream ticket.

[LeoSayer]

The golden ticket for the government would be to get far more basic rate taxpayers to save into a pension whilst also reducing the amount lost through tax relief / salary sacrifice.

Firms like HL will have to decide how they are going to target the basic rate taxpayer to get a larger slice of the shrinking pie in the face of the general non-interest that the vast majority of the public has to pensions, until it's too late.

I think the only way to generate any meaningful interest is by the 'Buy 2 get 1 free' strapline that you will get with a flat 33% relief. That might go some way to repairing the damage done to the reputation of pensions by successive tinkering over the past 10 years.

[Ginge R]

Agree.

The problem that many of the so called wealth providers face is that they'll see a drop in income via the pension wrapper side of things, by c.10% or so.

I imagine that many basic rate taxpayers won't gravitate towards Vantage and/or other traditional SIPP proposition in the same way that many wealthier, more traditional investors have. Hence HL circling the wagons, suggesting there were better things to invest in than B2L.

Many basic rate savers will find themselves in NEST, the issue that is faced by most is that of the middle ranking saver on, say £40k who has two, three of four disparate pots already in his/her ten years of working life, and who hasn't got a clue what to do with them.

Edited by Ginge R on Tuesday 19th January 09:36

[PurpleMoonlight]

You have to question the logic of this Government sometimes.

They force people to make pension contributions via workplace pensions, then look to restrict the tax relief for doing so.

All that will happen is more people opt out and do nothing.

[Welshbeef]

PurpleMoonlight said:

You have to question the logic of this Government sometimes.

They force people to make pension contributions via workplace pensions, then look to restrict the tax relief for doing so.

All that will happen is more people opt out and do nothing.

It's why pensions should not be politicised and not in 5 year cycles.

[Ginge R]

Interestingly, over the past month or three, I think we're starting to see the passing of the focus on the Boomer grey vote to Millennials. In itself, the transferring of political bias. Good, and overdue, but just as insidious. Cynically, there's now enough interest out there for votes to be had in Millennials retirement emotions. Fear pays.

[K12beano]

Welshbeef said:

PurpleMoonlight said:

You have to question the logic of this Government sometimes.

They force people to make pension contributions via workplace pensions, then look to restrict the tax relief for doing so.

All that will happen is more people opt out and do nothing.

It's why pensions should not be politicised and not in 5 year cycles.

Well the current Pensions Minister has finally come to the conclusion that MPs don't understand pensions, and that the person in charge of communicating at the DWP has also - basically - failed to communicate.

I've gone most of my life believing that pensions are not rocket science, but it might just as well be, even for the people who make the "decisions".

PS "rocket science" is just putting oxygen and hydrogen in a big box with a hole on one side. How hard can it be?

[Ginge R]

I watched that session yesterday, Frank Field was noticeably cool towards her - she, to her credit, was measured and thoughtful. I'm no great fan of Altmann and she doesn't make things easy for herself, but the entire WASPI thing was a non starter from the off.

[LeoSayer]

Ozzie Osmond said:

Nonetheless, it has always seemed slightly perverse that the people with the most money get the most tax relief.

There’s nothing perverse about higher earners getting the most relief – it’s a direct result of progressive income tax bands which charge a higher rate of tax for higher earners.

If the flat rate of relief gets implemented then we could end up in the situation where higher rate taxpayers get taxed on pensions contributions and withdrawals.

[GT03ROB]

The whole thing is shaping up to get very cumbersome & confusing.... with a whole load of unintended consequences. It certainly won't help the pensions provisions for the vast majority.

[PurpleMoonlight]

LeoSayer said:

There’s nothing perverse about higher earners getting the most relief – it’s a direct result of progressive income tax bands which charge a higher rate of tax for higher earners.

If the flat rate of relief gets implemented then we could end up in the situation where higher rate taxpayers get taxed on pensions contributions and withdrawals.

From the Governments perspective most people enjoying 40% tax relief while working will only be paying 20% tax on their pension, and they see that as a loss in tax revenue.

While I accept the Government needs revenue for the country to function, it has more purpose in society than just collecting money to distribute as they see fit. They need to think longer term and encourage people to make pension provision so they have money to spend in the future and are unlikely to be a burden on the State and thus provide a more stable ecomomy.

[Ginge R]

Whilst there are pros and cons to hanging fire, if anyone is making contributions to a pension and only attracting 20% on some or all of their contributions, it may be worth considering the pros and cons of delaying (in the event the basic rate level rises). GAARS may or may not apply and if you're up there making one off end of tax year contributions, the special annual allowance only applies to contribution schedules already in place. Finally, if you're approaching retirement and want a pot that attracts triviality benefits, a (possible) extra 10% or so from the government just before you plunder it could be nice.

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm1510...

Mail chimp was tasked over the weekend.

Disclaimer in the event I'm wrong, only take authorised and regulated advice that's relevant to you, not a generic post from some bloke on a messageboard.

[LeoSayer]

PurpleMoonlight said:

From the Governments perspective most people enjoying 40% tax relief while working will only be paying 20% tax on their pension, and they see that as a loss in tax revenue.

While I accept the Government needs revenue for the country to function, it has more purpose in society than just collecting money to distribute as they see fit. They need to think longer term and encourage people to make pension provision so they have money to spend in the future and are unlikely to be a burden on the State and thus provide a more stable ecomomy.

Osbourne cares more about clearing the deficit and getting elected than the future loss of tax revenue that you describe.

The government ‘loses’ tens of billions of pounds per year via pension tax reliefs and 2/3 of it goes to higher rate taxpayers. Osbourne won’t flinch from this opportunity to help clear the deficit whilst also being able to describe his policy as ‘progressive’ and ‘redistribitive’ if, as expected, the flat rate will grant higher relief to standard rate taxpayers.

However it will be higher rate taxpayers who currently contribute to a pension being taxed much more, especially if it includes salary sacrifice arrangements. Inevitably that will make pensions much less attractive for higher rate taxpayers.

[Ginge R]

Osborne makes pensions great estate planning tools to help folk, and then inhibites those who stand to benefit most from that, from capitalising on it. It's a war which never ends..

[theboss]

PurpleMoonlight said:

LeoSayer said:

There’s nothing perverse about higher earners getting the most relief – it’s a direct result of progressive income tax bands which charge a higher rate of tax for higher earners.

If the flat rate of relief gets implemented then we could end up in the situation where higher rate taxpayers get taxed on pensions contributions and withdrawals.

From the Governments perspective most people enjoying 40% tax relief while working will only be paying 20% tax on their pension, and they see that as a loss in tax revenue.

While I accept the Government needs revenue for the country to function, it has more purpose in society than just collecting money to distribute as they see fit. They need to think longer term and encourage people to make pension provision so they have money to spend in the future and are unlikely to be a burden on the State and thus provide a more stable ecomomy.

Exactly - the point which seems lost on many whenever this subject arises, is that the 'deferred' tax collection on pension contributions provides a strong incentive for them to be made in the first place. I'm given the choice of taking 60p in the pound home now, or investing the gross amount on the condition I can't have it back for 25 years. If that incentive is reduced or eliminated then what's the point in tying the money up?

[Ozzie Osmond]

theboss said:

If that incentive is reduced or eliminated then what's the point in tying the money up?

Quite right.

I think the problems for Osborne are,

• Wealthier people who can save 40% tax are pocketing loads of tax relief, while
• The vast majority of workers find pension harder to afford and are only offered 20% tax relief in any event.

So logic dictates either cutting the higher rate tax relief or, as someone suggested earlier, actually offering 20% taxpayers a "bonus" of some kind for saving. You could argue that the "tax free lump sum" is that bonus, but again it's worth much more to a 40% taxpayer than a 20% taxpayer.