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

[will_]

sidicks said:

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.

The Lifetime Allowance will be increasing with inflation at some stage though, won't it? Taking that into account, how does that change the monthly contribution to still hit the LA?

[will_]

JulianPH said:

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

The whole thing is far too complex. I have a reasonable understanding of basic financial principles and terms, but it is not straightforward to understand pensions. No wonder so many people just bury their head and avoid them.

We should be making saving for retirement (I) cheap (ii) straightforward (iii) strongly incentivised.

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.

[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!

[will_]

JulianPH said:

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!

Well yes, but all the tinkering at the periphery has made it much more complex than it should be - tapering contributions, annual caps, lifetime allowances which include returns and not just contributions etc, restrictions on withdrawals and so on.

Make it simple, please!

[gareth_r]

I cannot make any meaningful contribution to this thread, but what I can say is that, on my recent retirement, I was surprised to find that a defined benefits/final salary (or whatever the term is) pension, from a company that I left over 20 years ago (after 13 years), represents 41% of my lifetime allowance.

I'm not sure whether that demonstrates how great/unsustainable final salary pensions are (were?), or how evil the lifetime allowance is.

[sidicks]

gareth_r said:

I cannot make any meaningful contribution to this thread, but what I can say is that, on my recent retirement, I was surprised to find that a defined benefits/final salary (or whatever the term is) pension, from a company that I left over 20 years ago (after 13 years), represents 41% of my lifetime allowance.

I'm not sure whether that demonstrates how great/unsustainable final salary pensions are (were?), or how evil the lifetime allowance is.

You would probably find that [b]if the factors used to convert a DB pension into a fund were genuine market-based factors, your final salary scheme might actually represent more like 82% of your lifetime allowance!

[oyster]

For those posting about tax relief rates for lower earners, don't forget that anyone claiming tax credits will get pension tax relief at a whopping 73%.

[Ginge R]

sidicks said:

You would probably find that [b]if the factors used to convert a DB pension into a fund were genuine market-based factors, your final salary scheme might actually represent more like 82% of your lifetime allowance!

I had a discussion with someone last week, who was getting divorced, and who had a DB pension. The other party's solicitor had valued the DB pension that my client had, at the face value of the CETV. The person who I was speaking with wanted to spend a fortune arguing about knocking 5% off the value of the pension sharing order. I suggested that if they rocked the boat to the extent that the other party then got the DB pension valued 'properly', they might live to regret it.

[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.

[drainbrain]

rockin said:

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.

That'll be the Lord Sugar who said "You make money from property - and do business for fun"! No wonder. It's certainly how he makes HIS crust

The tough bit to swallow in 'long run' comparisons of property investment versus stock market/pension investment is that many 'longterm' property portfolios which have been assembled - like chunky pension funds - over many years, actually cost their owners nothing or next to nothing. "How is that possible" you may say, and I would answer "many ways, but they're all a secret". One you're bound to know though which is how Mr Inflation and Mr Capital Gain can turn a property bought 4 decades ago into 10 or even 20 currently owned.

So I tend to think that all the other forms of investment, apart from property, could be useful ingredients in a diversified portfolio ( if any diversification was needed) - but strictly on the proviso that they were - as Sugar says - 'fun'. I'm currently "investing" in an ISA. Paltry returns compared to property and ....well....let's just say if there's any fun involved in ISA investment then it's jolly hard to find!

[mjb1]

JulianPH said:

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..!

The thing is, all those suggestions really only benefit the wealthy (moderately so, and above). People hitting the LA are not a problem for the govt/society, they've got a nice juicy pot and will have a healthy retirement income. If you removed the LA, wealthy people would gain an awful lot of tax advantage from it - including a huge inheritance tax loophole (whether or not you agree with IHT is another subject).

I do think the lifetime allowance is a bit on the low side though, it should be at least £2m, maybe £3m. I also think there should be a cap on the 25% cash lump sum, perhaps £100k maximum? For the wealthy, who've been tipping in surplus income into their pension, 25% lump sum is a very nice tax free bonus, but less wealthy people might be relying on it to pay off their mortgage etc. Seems unfair to have to keep paying loan interest when you've got a healthy pension pot.

If you're lucky/clever/hard working enough to be a higher rate tax payer then chucking money into your pension to defer/lower your tax bill is a luxury. There is a huge amount of the working population that simply can't take advantage of the pension tax break due to not a having a nigh enough income.

The biggest problem we have in this country, with an ageing population, and an ageing welfare state, is that tax payers are subsidising the lower classes who either haven't worked or haven't been prudent enough to save for retirement. And they don't have much incentive - it feels like you're better off with no private pension than a modest one. Most people on low incomes are living hand to mouth, no concept of saving for the future, can't get on the housing ladder, and are used to the credit society (where they pay for everything monthly, PCP etc).

So the tax breaks for pensions should be aimed at those on low incomes, give them an incentive to save, and in turn reduce the burden on the higher tax payers. I think the lifetime ISA (for retirement purposes) is an attempt to do that. The problem with LISAs is that you don't get the income tax break that you do from a pension, so they should somehow introduce a similar bonus in pensions.

I'm generally in favour of simplifying taxation, we have a fantastically complicated system.

So that's my suggestion - give everyone a bonus on the first few thousand annual pension contributions, raise the LA significantly, but cap the 25% lump sum. Everyone's a winner, I think?

[sidicks]

drainbrain said:

That'll be the Lord Sugar who said "You make money from property - and do business for fun"! No wonder. It's certainly how he makes HIS crust

The tough bit to swallow in 'long run' comparisons of property investment versus stock market/pension investment is that many 'longterm' property portfolios which have been assembled - like chunky pension funds - over many years, actually cost their owners nothing or next to nothing. "How is that possible" you may say, and I would answer "many ways, but they're all a secret". One you're bound to know though which is how Mr Inflation and Mr Capital Gain can turn a property bought 4 decades ago into 10 or even 20 currently owned.

So I tend to think that all the other forms of investment, apart from property, could be useful ingredients in a diversified portfolio ( if any diversification was needed) - but strictly on the proviso that they were - as Sugar says - 'fun'.

I'm currently "investing" in an ISA. Paltry returns compared to property and ....well....let's just say if there's any fun involved in ISA investment then it's jolly hard to find!

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

[anonymous-user]

drainbrain said:

"investing" in an ISA. Paltry returns compared to property

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.

[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...

[mjb1]

sidicks said:

drainbrain said:

I'm currently "investing" in an ISA. Paltry returns compared to property and ....well....let's just say if there's any fun involved in ISA investment then it's jolly hard to find!

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

Oh God, don't encourage him. And whatever you do, don't mention the 'A' word!

Anyway, he probably invested in a residential property fund inside his ISA, stick to what you know etc.

[drainbrain]

mjb1 said:

Oh God, don't encourage him. And whatever you do, don't mention the 'A' word!

Anyway, he probably invested in a residential property fund inside his ISA, stick to what you know etc.

Funny you should say that. Apparently 13.31% of 'his' ISA is indeed invested in something termed "property". Over 15 months it has munched £3257.34p and could spit out £3345.37p which 'he' reckons means it's made £88.03p

Almost exactly 3 months ago 'he' used almost exactly 6 times that from 'his' paltry pensioner's hoard to buy a humble dungeon. So far it has produced £1128 and will continue to produce at the same rate into the foreseeable future.

Unfortunately elementary mathematics underpins 'his' investment opinions/decisions.

[V8 Fettler]

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

Criminalise the provision of flawed financial advice where provided by a professional.

[sidicks]

V8 Fettler said:

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

Criminalise the provision of flawed financial advice where provided by a professional.

Define ‘flawed’...