Lifetime pension allowance to be boosted in budget

[Spet0789]

Labour saying today they’ll reverse the changes to the LTA. Which given (i) the changes aren’t coming in for a year and (ii) Labour will get elected as Sunak and Hunt don’t have long enough to turn the supertanker of incompetence the Tories have become since Cameron resigned, means that the whole point is moot.

[Dod101]

The reason that the LTA wasn't setup as a contribution limit was that HMRC didn't have the records of what everyone had been contributing over the last 40 odd years to all the different pensions with different employers that they might have been contributing to.

The other problem is that many defined benefit schemes do not involve a 'contribution' and there isn't a 'pot' for each individual. Instead there is a liability of the employer to provide certain benefits at certain future dates and the present actuarial value of that liability (or asset for the employee) can change massively depending on interest rates, expected inflation rates and estimates of what the future holds.

Off topic because I do not have any interest at least on a personal basis. I have only ever been involved in the UK pension rules for a couple of personal pensions at the end of my career whilst I briefly worked in London. I converted these insurance policies to what was the basis of my now modest SIPP

So there was an attempt to evaluate both DB and DC schemes under the same rules?. Considering that they approach the problem from diametrically opposite directions that could surely never work satisfactorily. It is no wonder that highly paid individuals in DB schemes felt aggrieved and no wonder ditto in DC Schemes felt the same. To severely penalise those whose benefits were too high was akin to confiscation, particularly if these arose merely through successful investing.

Surely the HMRC interest in all of this is simply the tax relief cost on contributions made?

Talk about the law of unintended consequences. When we think of the ability to pass on SIPPs on death and not only that but IHT free and in some instances entirely free of tax in the hands of the happy donees the whole thing is an absolute mess. As I said elsewhere, in the days of DB company schemes, any excess contributions remaining in the scheme on the death of a member, stayed with the Pension Trustees to help fund those remaining in the scheme and thus within the pension system. Now these are going to fund second homes, new cars etc. No doubt some may be saved but I wonder how much.

If you think about what might be called the new disposition of one time pension assets it is no wonder that we are not getting the investment in our stock market that we should be.

And of course we now have the incredibly generous final salary schemes of many public sector workers, eg junior doctors (they are not so junior they are up to and include Registrars) compared to the DC pensions which most mere mortals can aspire to.

Dod

[scrumpyjack]

....Surely the HMRC interest in all of this is simply the tax relief cost on contributions made?

The problem here is that whilst in a DC pension the tax relief on the contribution made is clear, the tax relief on a DB pension is far more opaque but nevertheless very real. In the DB scheme the employer periodically makes payments into the scheme directly, rather than paying amounts to the employee who then gets relief when he/she pays in to their PP. Those (often huge) payments by the employer get full tax relief (not being subject to corporation tax or income tax), perhaps even more as it bypasses national insurance. So there is just as big a 'cost' to HMRC in tax relief on DB schemes, it just isn't as directly measurable.

[BigTim]

....Surely the HMRC interest in all of this is simply the tax relief cost on contributions made?

EDIT: correct my confusion between "relief at source" and "net pay"

The problem here is that whilst in a DC pension the tax relief on the contribution made is clear, the tax relief on a DB pension is far more opaque but nevertheless very real. In the DB scheme the employer periodically makes payments into the scheme directly, rather than paying amounts to the employee who then gets relief when he/she pays in to their PP. Those (often huge) payments by the employer get full tax relief (not being subject to corporation tax or income tax), perhaps even more as it bypasses national insurance. So there is just as big a 'cost' to HMRC in tax relief on DB schemes, it just isn't as directly measurable.

Of course this is the same as most DC contributions as they are "net pay" when made by an employer: No NI, PAYE, Corporation tax. As differentiated from personal contribs that get grossed up for PAYE at BRT (with HRT reclaimable through tax return) but NI is not recovered.

Someone raised the 30% flate rate canard earlier... This is interesting and it'd certainly welcome it personally as I can contribute to my pension before HRT but if I contribute to my wife's (a lower earner) it's inly BRT I'd (we'd) reclaim. The upshot is a much larger pension pot for me and higher liability to tax in future as compared to 2 similarly sized pots producing income that uses both our allowances and BRT bands.

However the simplicity of the current system for most (employer paid) contribs is that "net pay" - the money just gets taken off the taxable income and paid directly to the pension provider.

I?n addition the "relief" for BRT payers is going to be greater than the tax that would have been paid (so HMRC will be contributing to all employer run schemes). If the majority of contribs are made by BRT payers (an assumption) then this levelling up wealth redistribution would have a significant cost?

[SebsCat]

Labour saying today they’ll reverse the changes to the LTA. Which given (i) the changes aren’t coming in for a year and (ii) Labour will get elected as Sunak and Hunt don’t have long enough to turn the supertanker of incompetence the Tories have become since Cameron resigned, means that the whole point is moot.

Labour will oppose the abolition now but won't reintroduce the LTA when in power. Makes much more sense to them to address the other issues. More likely they would:
- reduce tax-free PCLS (possibly down to £100k although such a large change would require a lengthy implementation period to avoid backlash from those expecting to use it to pay off a mortgage)
- introduce flat rate pension tax relief, probably around 25% to 30% to provide a useful boost to saving for those on median salaries whilst making it less of a tax-break for the well off
- reform IHT treatment of SIPPs by bringing them within deceaseds' estates
- less likely, but possibly make pension contributions eligible for NI relief and charge NI on pension income (less likely since it would require a complicated & very lengthy implementation period to avoid charging many people NI both on contributions and payments)

With those sort of reforms, the LTA becomes a non-issue as there's no particular advantage to building ever larger pots.

[BigTim]

Labour saying today they’ll reverse the changes to the LTA. Which given (i) the changes aren’t coming in for a year and (ii) Labour will get elected as Sunak and Hunt don’t have long enough to turn the supertanker of incompetence the Tories have become since Cameron resigned, means that the whole point is moot.

Labour will oppose the abolition now but won't reintroduce the LTA when in power. Makes much more sense to them to address the other issues. More likely they would:
- reduce tax-free PCLS (possibly down to £100k although such a large change would require a lengthy implementation period to avoid backlash from those expecting to use it to pay off a mortgage)
- introduce flat rate pension tax relief, probably around 25% to 30% to provide a useful boost to saving for those on median salaries whilst making it less of a tax-break for the well off
- reform IHT treatment of SIPPs by bringing them within deceaseds' estates
- less likely, but possibly make pension contributions eligible for NI relief and charge NI on pension income (less likely since it would require a complicated & very lengthy implementation period to avoid charging many people NI both on contributions and payments)

With those sort of reforms, the LTA becomes a non-issue as there's no particular advantage to building ever larger pots.

I think the first is a racing certainty but, per my post, the second would come at significant cost to the exchequer. 3rd point probably in draft even for a future conservative administration. 4th they already are in most cases (net pay employer contribs). Putting NI on pension income seems perverse except for the fact that it's really another income tax and should have just become a % point on BRT and HRT years ago to simplify the tax system.

[AsleepInYorkshire]

An Article from The Times


AiY(D)

[Dod101]

....Surely the HMRC interest in all of this is simply the tax relief cost on contributions made?

The problem here is that whilst in a DC pension the tax relief on the contribution made is clear, the tax relief on a DB pension is far more opaque but nevertheless very real. In the DB scheme the employer periodically makes payments into the scheme directly, rather than paying amounts to the employee who then gets relief when he/she pays in to their PP. Those (often huge) payments by the employer get full tax relief (not being subject to corporation tax or income tax), perhaps even more as it bypasses national insurance. So there is just as big a 'cost' to HMRC in tax relief on DB schemes, it just isn't as directly measurable.

I have not seen this aspect of our pension system discussed very much but I think it should be. Yes I understand that clearly the tax relief for DB schemes would mainly arise in corporate taxes and for DC schemes, personal taxes. For HMRC though these are the main costs so why should they seek to limit the benefits otherwise? It is the tax relief that they should be limiting not the benefits.

Dod

[SebsCat]

I think the first is a racing certainty but, per my post, the second would come at significant cost to the exchequer. 3rd point probably in draft even for a future conservative administration. 4th they already are in most cases (net pay employer contribs). Putting NI on pension income seems perverse except for the fact that it's really another income tax and should have just become a % point on BRT and HRT years ago to simplify the tax system.

The IFS ran the figures a while ago. What they found was that whilst flat rate tax relief is expensive, the cost would be offset by the other reforms. Hence the overall package is roughly cost neutral.

[Urbandreamer]

Labour saying today they’ll reverse the changes to the LTA. Which given (i) the changes aren’t coming in for a year and (ii) Labour will get elected as Sunak and Hunt don’t have long enough to turn the supertanker of incompetence the Tories have become since Cameron resigned, means that the whole point is moot.

I really do feel sorry for people today. It may be old age and golden memories, but I'm sure that there was a time when you could have some faith that your pension planing could last more than a couple of years. It seems now that you must revisit it every budget, or at least every general election.

Don't get me wrong, I support the abolition of the LTA, but apparently those deciding what to contribute next year have nothing to base their decisions upon.
Will they be fined for saving too much for their old age or not?

PS someone remarked that you had to be rich to hit the previous LTA, I remarked that contributions needed to do so would be less than they thought. Can anyone help me with the formula needed to calculate reaching a round £1m over 40 years with X% growth?

[Tedx]

Can anyone help me with the formula needed to calculate reaching a round £1m over 40 years with X% growth?

https://www.thisismoney.co.uk/money/sav ... lator.html

£200pm over 40 years @9% = £ 936,264.05

[ursaminortaur]

I wonder how the Labour party will respond (I want them in power as while it would be bad for me financially, I want a competent government)

They could keep the lump sum under control, either inflation proofing or freezing it. They would struggle to reintroduce a new LTA, or a variant lifetime contribution limit.

The obvious thing would be to have flat rate tax relief. 20% sending the signal that £268k of tax free cash was the only perk, 30% would be more generous. Higher rate earners, standard rate retirees would get something, higher rate for both would not bother with pensions.

The higher paid might squeal, but you could pay doctors more with the money saved and there would be no gotchas.

And there is little people could do to game the system before its implemented, unlike LTAs

Reintroducing the LTA would be no more difficult than in 2006 when it was first introduced. Indeed if Labour were to get in at the next General election then provided they set the new LTA limit sufficiently above the current LTA to deal with the contributions made in the meantime they wouldn't need to introduce any new protections (the only problem would be what to do about anyone who had old protections which they had then given up in the meantime by making some contributions - but the government could probably find someway to re-instate those protections and ignore contributions made in the brief period when the LTA was removed).

[TUK020]

I wonder how the Labour party will respond (I want them in power as while it would be bad for me financially, I want a competent government)

They could keep the lump sum under control, either inflation proofing or freezing it. They would struggle to reintroduce a new LTA, or a variant lifetime contribution limit.

The obvious thing would be to have flat rate tax relief. 20% sending the signal that £268k of tax free cash was the only perk, 30% would be more generous. Higher rate earners, standard rate retirees would get something, higher rate for both would not bother with pensions.

The higher paid might squeal, but you could pay doctors more with the money saved and there would be no gotchas.

And there is little people could do to game the system before its implemented, unlike LTAs

Why do you think a flat rate relief is the obvious solution?
Would it not be simpler to cap the total amount of tax relief one can claim (from pensions, charitable giving, and all of the other wheezes).
Max tax relief at 24k (40% x 60k)?

PS I also want to see an end to a government that is mendacious, corrupt and incompetent. I have just joined the LibDems in the hope that they will be more economically literate.

[ursaminortaur]

The problem here is that whilst in a DC pension the tax relief on the contribution made is clear, the tax relief on a DB pension is far more opaque but nevertheless very real. In the DB scheme the employer periodically makes payments into the scheme directly, rather than paying amounts to the employee who then gets relief when he/she pays in to their PP. Those (often huge) payments by the employer get full tax relief (not being subject to corporation tax or income tax), perhaps even more as it bypasses national insurance. So there is just as big a 'cost' to HMRC in tax relief on DB schemes, it just isn't as directly measurable.

I have not seen this aspect of our pension system discussed very much but I think it should be. Yes I understand that clearly the tax relief for DB schemes would mainly arise in corporate taxes and for DC schemes, personal taxes. For HMRC though these are the main costs so why should they seek to limit the benefits otherwise? It is the tax relief that they should be limiting not the benefits.

Dod

In occupational DC schemes employers make contributions and most do it in the same way as employers make contributions to DB schemes - about the only difference is when employers are forced to make extra contributions into the DB scheme because the actuaries say the scheme is in deficit.

[scrumpyjack]

I have not seen this aspect of our pension system discussed very much but I think it should be. Yes I understand that clearly the tax relief for DB schemes would mainly arise in corporate taxes and for DC schemes, personal taxes. For HMRC though these are the main costs so why should they seek to limit the benefits otherwise? It is the tax relief that they should be limiting not the benefits.

Dod

In occupational DC schemes employers make contributions and most do it in the same way as employers make contributions to DB schemes - about the only difference is when employers are forced to make extra contributions into the DB scheme because the actuaries say the scheme is in deficit.

Yes as when Phil Green had to pay £500m or so into the BHS pension scheme. If that had been paid by way of salary payments to all the individuals and then them making contributions of the same amount to the scheme, one could measure the tax relief 'cost'. That is as much a cost to the exchequer and should not be ignored. It is difficult to change DB schemes as they tend to be part of people's contracts of employment. Imagine the kerfuffle if HMG curtailed civil service DB pensions because they breached whatever pension limit the chancellor had set!!

Maybe there should just be a surcharge on any pension income over a certain level? Might be an easier way to claw back tax relief.

[Dod101]

I have not seen this aspect of our pension system discussed very much but I think it should be. Yes I understand that clearly the tax relief for DB schemes would mainly arise in corporate taxes and for DC schemes, personal taxes. For HMRC though these are the main costs so why should they seek to limit the benefits otherwise? It is the tax relief that they should be limiting not the benefits.

Dod

In occupational DC schemes employers make contributions and most do it in the same way as employers make contributions to DB schemes - about the only difference is when employers are forced to make extra contributions into the DB scheme because the actuaries say the scheme is in deficit.

Yes I understand that in DC schemes, employers will make contributions and of course there will be tax relief arising there as well, but the huge difference is that there is no guarantee behind these corporate contributions and as far as I can see the basic contributions are a good bit less than under even a 'standard' (if there is such a thing) DB Scheme.

I am though amazed that there has been no huge outcry about the penal rate of tax for withdrawals if a high flyer has the temerity to find themselves with benefits over the LTA, at least I have detected none.

Dod

[ursaminortaur]

In occupational DC schemes employers make contributions and most do it in the same way as employers make contributions to DB schemes - about the only difference is when employers are forced to make extra contributions into the DB scheme because the actuaries say the scheme is in deficit.

Yes as when Phil Green had to pay £500m or so into the BHS pension scheme. If that had been paid by way of salary payments to all the individuals and then them making contributions of the same amount to the scheme, one could measure the tax relief 'cost'. That is as much a cost to the exchequer and should not be ignored. It is difficult to change DB schemes as they tend to be part of people's contracts of employment. Imagine the kerfuffle if HMG curtailed civil service DB pensions because they breached whatever pension limit the chancellor had set!!

Maybe there should just be a surcharge on any pension income over a certain level? Might be an easier way to claw back tax relief.

Did either Phil Green or BHS actually get any tax relief from the government when making that payment ?

(And we don't have to imagine the kerfuffle as that is precisely what happened with the Doctors in respect of both the LTA limit and the annual allowance taper).

[Alaric]

Maybe there should just be a surcharge on any pension income over a certain level? Might be an easier way to claw back tax relief.

Except there is already. Pension Income is taxed in the same way by PAYE as income from employment, so if the annual income is high enough, it runs into the 40% and 45% tax bands. The exception to this being the now restricted "25% tax free cash".

[BigTim]

I think the first is a racing certainty but, per my post, the second would come at significant cost to the exchequer. 3rd point probably in draft even for a future conservative administration. 4th they already are in most cases (net pay employer contribs). Putting NI on pension income seems perverse except for the fact that it's really another income tax and should have just become a % point on BRT and HRT years ago to simplify the tax system.

The IFS ran the figures a while ago. What they found was that whilst flat rate tax relief is expensive, the cost would be offset by the other reforms. Hence the overall package is roughly cost neutral.

This I find a fascinating proposition.

All pensions (post tax) contribs at the BRT level would get grossed up by 42.86% instead of the 25% they are now.
All pension (post tax) contribs at the HRT level would also grossed up by 42.86% instead of the 25% they are now with the extra 20% being reclaimed to make 40%.

That circa 14% difference in relief on only the HRT contribs of the the highest paid (their BRT contribs being relieved at a greater rate than before) is neutral against all BRT contribs being uplifted by an extra 17.86% of the contrib amount?

I mean, I'm all in favour because it would make me shift contribs to Mrs BT's pension, probably by paying 100% of her salary in per year and utilising carry forward. But I'd love to see how the IFS worked it out because it seems counter intuitive.

[y0rkiebar]

Labour saying today they’ll reverse the changes to the LTA. Which given (i) the changes aren’t coming in for a year and (ii) Labour will get elected as Sunak and Hunt don’t have long enough to turn the supertanker of incompetence the Tories have become since Cameron resigned, means that the whole point is moot.

The LTA change + boosted contribution limit takes effect in three weeks time.