Crystal Ball: What is going to happen to pensions legislation?

[TUK020]

A lot of us here on this site are trying to plan for the long term, but pensions legislation seems to be in turmoil at the moment. This thread is an attempt to get some "wisdom of the crowds" on what is likely to happen around pensions legislation. This is not about what is the current (overcomplicated) legislation, but about what is likely to happen. I lay out some thoughts on what might happen, and ask those with more knowledge and insight to contribute and improve things:

Perspective
The while concept of LTA is flawed, and at its most recent level (in combination with the personal income tax allowance clawback threshold starting at 100k) created a significant work disincentive. This shows up in the media as legions of doctors working part time and retiring early, but is effective across the board with many high earning professionals with good pension provision.
The LTA also introduces significant complexity in pension planning/provision and taxation.
One of the major considerations in pension planning now is the exemptions of SIPPs from IHT. While my offspring would benefit from this, I cannot really fathom the rationale behind this.

Thoughts on likely outcomes
I think the abolition of the LTA is a neat trap the Tories have laid for Labour, who have promptly walked into it. When it becomes clearer on the implications of reintroducing this, I think the Labour might back off, or more likely fudge with further complications.
I do think this is the likely death knell of the IHT exemption of SIPPs.
I also think that the cap on tax relief on contributions will be tightened, possibly in the form of limiting the rate of relief to a flat rate.

Thoughts on desirable but unlikely outcomes
As pensions are very long term planning for people, it would be great if there were some cross party agreement on topics of a) principles that won't change, b) thresholds that will be subject to gradual adjustment, and c) thresholds that are up to the government of the day.
a) It would be great to see agreement that money put into pension pots is not subject to any taxation while in the pension pot, or any extra taxation on withdrawal.
b) Age limit on access to pensions might rise, but possibly this should be on a State Pension Age -10 basis?
c) Tax relief on contributions etc

[DrFfybes]

As you say, pensions are a long term thing, sadly politicians' motives aren't.

Whilst everyone is being encouraged to save for old age, the ones that need to save the most are not the ones doing it, and tinkering with annual limits, LTAs, and possibly similar moves on ISAs is of no benefit to the majority of the population.

Tax/IHT on pension pots also has a minimal impact on total tax take, so really it is down to Political optics.

One of the major considerations in pension planning now is the exemptions of SIPPs from IHT. While my offspring would benefit from this, I cannot really fathom the rationale behind this.
[..]
I do think this is the likely death knell of the IHT exemption of SIPPs.

Agreed. Although the benefits of this are also not as clear as Mr Omnibus would see, the optics are pretty clear. On the surface it is a way for a couple to leave another few million IHT exempt. I'm not up to speed on all the details as it won't really affect us, however that only happens if they die young, otherwise the recipient has a tax liability on any withdrawal and I suspect many recipients (children of people with that kind of money tend also to do well) will be 40% taxpayers anyway. What I don't know about is if the gift counts towards the recipient's LTA.

I also think that the cap on tax relief on contributions will be tightened, possibly in the form of limiting the rate of relief to a flat rate.

Agreed. The previous limits were rather generous, most people don't earn £40k, let alone have £40k spare each year. Increasing this really does not help the masses, and keeping the few high earners working long enough to fix the NHS is a kneejerk bodge. Add in the £20k ISA alowance, and very very few gained from the recent changes, but the political optics were poor.

Personally I expect some tightening back of annual contributions from a Labour Govt, but I can't see a reduction in the LTA, however I could see a cap on the IHT exempt amount as an initial move. Great optics, minimal impact on those affected.

As a sidenote, I also don't see an LTA appearing on ISAs, especially as 60ish year olds on moderate incomes who have saved hard all their life and used their allowances, perhaps had a small inheritance, could easily have £500k+ each in ISAs. If one passes to a spouse then pulling a £1m cap out of thin air would equate to a tax on assets passing to a spouse on death. Again, trimming the annual contributions sounds good for political optics, but making me pay a tenner of tax on the £150 or so dividends on an extra £10k of unsheltered VEVE I'd have each year isn't going to solve the deficit.

Paul

Paul

[ursaminortaur]

A lot of us here on this site are trying to plan for the long term, but pensions legislation seems to be in turmoil at the moment. This thread is an attempt to get some "wisdom of the crowds" on what is likely to happen around pensions legislation. This is not about what is the current (overcomplicated) legislation, but about what is likely to happen. I lay out some thoughts on what might happen, and ask those with more knowledge and insight to contribute and improve things:

Perspective
The while concept of LTA is flawed, and at its most recent level (in combination with the personal income tax allowance clawback threshold starting at 100k) created a significant work disincentive. This shows up in the media as legions of doctors working part time and retiring early, but is effective across the board with many high earning professionals with good pension provision.
The LTA also introduces significant complexity in pension planning/provision and taxation.
One of the major considerations in pension planning now is the exemptions of SIPPs from IHT. While my offspring would benefit from this, I cannot really fathom the rationale behind this.

Thoughts on likely outcomes
I think the abolition of the LTA is a neat trap the Tories have laid for Labour, who have promptly walked into it. When it becomes clearer on the implications of reintroducing this, I think the Labour might back off, or more likely fudge with further complications.
I do think this is the likely death knell of the IHT exemption of SIPPs.
I also think that the cap on tax relief on contributions will be tightened, possibly in the form of limiting the rate of relief to a flat rate.

Thoughts on desirable but unlikely outcomes
As pensions are very long term planning for people, it would be great if there were some cross party agreement on topics of a) principles that won't change, b) thresholds that will be subject to gradual adjustment, and c) thresholds that are up to the government of the day.
a) It would be great to see agreement that money put into pension pots is not subject to any taxation while in the pension pot, or any extra taxation on withdrawal.
b) Age limit on access to pensions might rise, but possibly this should be on a State Pension Age -10 basis?
c) Tax relief on contributions etc

My personal opinion is that Labour will probably reintroduce the LTA but they will do so at £1.8 million (or possibly even slightly higher) - £1.8 million is what it was set to when they left office in 2010. This will get rid of all the complications of the protections introduced as the Coalition and Tory governments cut the LTA limit, with the £60,000 annual allwance the new £1.8 million LTA will affect few people and even fewer if it were then to increase by inflation each year but would still catch the really rich who had put gigantic amounts in when the annual allowance was £215,000 or more - which was what the LTA was designed for in the first place.

[ursaminortaur]

As you say, pensions are a long term thing, sadly politicians' motives aren't.

Whilst everyone is being encouraged to save for old age, the ones that need to save the most are not the ones doing it, and tinkering with annual limits, LTAs, and possibly similar moves on ISAs is of no benefit to the majority of the population.

Tax/IHT on pension pots also has a minimal impact on total tax take, so really it is down to Political optics.

One of the major considerations in pension planning now is the exemptions of SIPPs from IHT. While my offspring would benefit from this, I cannot really fathom the rationale behind this.
[..]
I do think this is the likely death knell of the IHT exemption of SIPPs.

Agreed. Although the benefits of this are also not as clear as Mr Omnibus would see, the optics are pretty clear. On the surface it is a way for a couple to leave another few million IHT exempt. I'm not up to speed on all the details as it won't really affect us, however that only happens if they die young, otherwise the recipient has a tax liability on any withdrawal and I suspect many recipients (children of people with that kind of money tend also to do well) will be 40% taxpayers anyway. What I don't know about is if the gift counts towards the recipient's LTA.

Inherited pensions didn't/don't count towards the beneficiary's LTA.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-problems/pensions-after-death

However, any pension that a beneficiary inherits won’t count towards their own lifetime allowance.

[Urbandreamer]

I also think that the cap on tax relief on contributions will be tightened, possibly in the form of limiting the rate of relief to a flat rate.

Agreed. The previous limits were rather generous, most people don't earn £40k, let alone have £40k spare each year. Increasing this really does not help the masses, and keeping the few high earners working long enough to fix the NHS is a kneejerk bodge. Add in the £20k ISA alowance, and very very few gained from the recent changes, but the political optics were poor.

Paul

Again it's optics.

Pension savings were "tax free". Achieved by rebating the tax.
The optics now see that mechanism as a "gift" to the "rich", rather than a decision not to tax pension saving.

Not too sure that "very very few" gained from the recent changes.
Only 56% of people pay income tax.
Using the government's numbers, 80% are standard rate, so also probably didn't gain from the increase in the annual contributions limit.

If we talk of the number of people who could have gained. According to the published numbers, it's over 6 million.
https://www.gov.uk/government/statistic ... er-and-age

But is honesty important to the optics?

[DrFfybes]

Not too sure that "very very few" gained from the recent changes.
Only 56% of people pay income tax.
Using the government's numbers, 80% are standard rate, so also probably didn't gain from the increase in the annual contributions limit.

If we talk of the number of people who could have gained. According to the published numbers, it's over 6 million.
https://www.gov.uk/government/statistic ... er-and-age

But is honesty important to the optics?

Those figures are not what I was getting at. The ONLY people who WILL HAVE (not could have) gained from the recent changes are the ones who were bouncing off the LTA, or had in excess of £40k pa spare to put into a pension and had filled their £20k ISA allowance.

And I suspect that is a lot less than 6 million.

Paul

[Urbandreamer]

Those figures are not what I was getting at. The ONLY people who WILL HAVE (not could have) gained from the recent changes are the ones who were bouncing off the LTA, or had in excess of £40k pa spare to put into a pension and had filled their £20k ISA allowance.

And I suspect that is a lot less than 6 million.

Paul

EVERY one of those 6.1 million earns more than £50kpa from employment.
Look, you don't need to "suspect", the figures are out there. I even linked to the government website that contains a spreadsheet.

On a personal basis, I've always been a standard rate tax payer. Pre-covid I calculated that I would have to worry about the old LTA, were I to work until state retirement age. Why was I contributing so much? Because working that long was never my intention.

A simple FV calculation will show that you don't need huge monthly contributions or high rates of return for the compound growth to exceed the LTA... over a working life of 48 years (20-68).
£400pcm net or £500pcm gross at 5% would do the job.

Ps, why are you talking about ISA's with respect to pension legislation?

[scotview]

EVERY one of those 6.1 million earns more than £50kpa from employment.

Interesting point, why are DB pensioners with pension incomes at, or over £50kpa, effectively treated as employment income with the potential higher marginal tax rate hit, whereas DC pensioners on drawdown can avoid such punitive taxes to a greater extent ?

There is maybe a levelling up/down argument there for a future government du jour.

[Alaric]

[
Interesting point, why are DB pensioners with pensionable incomes at, or over £50kpa, effectively treated as employment income with the potential higher marginal tax rate hit, whereas DC pensioners on drawdown can avoid such punitive taxes to a greater extent ?

Apart from greater flexibity regarding taking Pension Commencement Lump Sums, what do you think are the differences between receiving income as a DB annuity and receiving DC based income as a drawdown?

[scrumpyjack]

I would have thought the current position where if you die before 75, your pension fund is paid out tax free is unjustified.

Otherwise I think they should leave things as they are. They have effectively put a limit on the 25% TFLS (could lower than limit) and have limited pension contributions. I can't see the need to limit pension outcome as well as input.

It might be better to have a lifetime inflation adjusted cumulative contributions limit, rather than an annual one.

Sadly I suspect a Labour government will be much more draconian, without having thought through all the unintended consequences of their changes

[DrFfybes]

EVERY one of those 6.1 million earns more than £50kpa from employment.
Look, you don't need to "suspect", the figures are out there. I even linked to the government website that contains a spreadsheet.

Yes, but not all 6 million of them were already putting £40k a year into their pension and wondering what to do with the rest of their surplus income. Perhaps I phrased it badly, but when I said

very very few gained from the recent changes

I was referring to actual monetary gain to them as individuals, not people in a position where they might someday potentially gain.

There are a lot of estimates of how many people breach the limit, ranging from a few hundred to about 40,000 per year, but it isn't 6 million people. The highest estimate I saw was 1 million "potentially at risk" of breaching the old LTA, and that assumed things like people on high salaries in DB schemes would continue to work until 67, whereas in reality many would retire early or mitigate their pension contributions to avoid tax. Therefore, as I was trying to point out, in the real world, only a small proportion of the population will see a material benefit to their personal finances from the raising of the LTA or of the annual allowance.

Paul

[ursaminortaur]

Not too sure that "very very few" gained from the recent changes.
Only 56% of people pay income tax.
Using the government's numbers, 80% are standard rate, so also probably didn't gain from the increase in the annual contributions limit.

If we talk of the number of people who could have gained. According to the published numbers, it's over 6 million.
https://www.gov.uk/government/statistic ... er-and-age

But is honesty important to the optics?

Those figures are not what I was getting at. The ONLY people who WILL HAVE (not could have) gained from the recent changes are the ones who were bouncing off the LTA, or had in excess of £40k pa spare to put into a pension and had filled their £20k ISA allowance.

And I suspect that is a lot less than 6 million.

Paul

The £40k annual allowance hit a lot of people contributing to DB pensions when they had been in the scheme a long time and then got a modest rise.
A final salary DB scheme pays out based upon a rate * your final salary * number of years in scheme eg 1/60*final salary*number of years. The way the amount of annual allowance used up is calculated looks at what you would get if you left the DB scheme this year compared to what you would have got if you had left last year. Hence your modest rise turns into a significant "contribution" because it is multiplied by the number of years you have been in the scheme. Thus a promotion with a pay rise after a number of years in the scheme could see your pension "contribution" being deemed as being more than £40,000 though nothing else has changed. Some will still be hit by this even with the annual allowance at £60,000 but the number affected will be far smaller and the salary increase would have to be greater.

[Alaric]

Some will still be hit by this even with the annual allowance at £60,000 but the number affected will be far smaller and the salary increase would have to be greater.

Is that one of the issues with doctors? They can be reluctant to do extra hours or accept a promotion because the extra salary is pensionable and thus the imputed contribution to their retirtement funding exceeds the limit and they get a tax charge without even seeing the cash that could pay it.

[SebsCat]

The £40k annual allowance hit a lot of people contributing to DB pensions when they had been in the scheme a long time and then got a modest rise.
A final salary DB scheme pays out based upon a rate * your final salary * number of years in scheme eg 1/60*final salary*number of years. The way the amount of annual allowance used up is calculated looks at what you would get if you left the DB scheme this year compared to what you would have got if you had left last year. Hence your modest rise turns into a significant "contribution" because it is multiplied by the number of years you have been in the scheme. Thus a promotion with a pay rise after a number of years in the scheme could see your pension "contribution" being deemed as being more than £40,000 though nothing else has changed. Some will still be hit by this even with the annual allowance at £60,000 but the number affected will be far smaller and the salary increase would have to be greater.

That was & potentially still is an issue, but it doesn't affect "a lot of people" in the wider scheme of things. It only affected high earners in the small number of remaining attractive final salary schemes. The number is tiny compared to the 6.1 million higher rate+ income tax payers (not all of whom have £50K+ earnings anyway). If it wasn't because of the specific impact on the NHS it wouldn't get anywhere on the political radar. It is also an issue that could have been easily solved without any changes to the annual allowance by simply changing the rules for specific pension schemes (as I believe was already the case for judges).

[Urbandreamer]

... The number is tiny compared to the 6.1 million higher rate+ income tax payers (not all of whom have £50K+ earnings anyway).

Yes. I got it wrong. The 6.1 mill higher rate+ income tax payers may indeed contain some who pay income tax upon their pension and don't work.
Sorry.

[ursaminortaur]

The £40k annual allowance hit a lot of people contributing to DB pensions when they had been in the scheme a long time and then got a modest rise.
A final salary DB scheme pays out based upon a rate * your final salary * number of years in scheme eg 1/60*final salary*number of years. The way the amount of annual allowance used up is calculated looks at what you would get if you left the DB scheme this year compared to what you would have got if you had left last year. Hence your modest rise turns into a significant "contribution" because it is multiplied by the number of years you have been in the scheme. Thus a promotion with a pay rise after a number of years in the scheme could see your pension "contribution" being deemed as being more than £40,000 though nothing else has changed. Some will still be hit by this even with the annual allowance at £60,000 but the number affected will be far smaller and the salary increase would have to be greater.

That was & potentially still is an issue, but it doesn't affect "a lot of people" in the wider scheme of things. It only affected high earners in the small number of remaining attractive final salary schemes. The number is tiny compared to the 6.1 million higher rate+ income tax payers (not all of whom have £50K+ earnings anyway). If it wasn't because of the specific impact on the NHS it wouldn't get anywhere on the political radar. It is also an issue that could have been easily solved without any changes to the annual allowance by simply changing the rules for specific pension schemes (as I believe was already the case for judges).

Although most DB schemes have changed to being career average that has only happened recently and most members of DB schemes will have built up final salary pensions over decades which they still have (the switch to career average is only for contributions since that switch) and hence most who are in such schemes could potentially be hit by this if they receive a larger than normal pay rise because of a promotion.

[ursaminortaur]

Some will still be hit by this even with the annual allowance at £60,000 but the number affected will be far smaller and the salary increase would have to be greater.

Is that one of the issues with doctors? They can be reluctant to do extra hours or accept a promotion because the extra salary is pensionable and thus the imputed contribution to their retirtement funding exceeds the limit and they get a tax charge without even seeing the cash that could pay it.

Although it affected doctors it was made worse for the highly paid Consultants by the introduction of the annual allowance taper which gradually reduced their annual allowance from £40,000 down towards £10,000. This was solved for most by the increase to the salary at which the taper started to bite.

[Wuffle]

How about one for the poor people?
Are we going to get any sort of window reinstated before we hit a threshold?
SP at 10600 and 20% tax at 12,500 isn't inspirational is it.

W.

[Urbandreamer]

How about one for the poor people?
Are we going to get any sort of window reinstated before we hit a threshold?
SP at 10600 and 20% tax at 12,500 isn't inspirational is it.

W.

Presumably you MUST mean those who work for 35 years with a salary between £6k and £10k as you assume full state pension.
Less than 10 qualifying NI years, no state pension.
Earn less than about £6kpa and you don't qualify as you don't pay NI.
Earn more than 10K and you will be enrolled in a pension scheme.

Is that the group you mean by "the poor people"?

[Wuffle]

'Poor people' is me, earning average salary up north. Think 30 grand.
The opprtunity to arbitrage tax at a decent rate to encourage pension saving has been curtailed by the increase in SP. We don't retire early (see 30 grand) so the gap between the SP and the personal allowance multipied up by 20 years (by which time I am 87 don't forget) gives us a threshold where the arbitrage goes from 20% to a quarter of that.

And if you think I am out of place here on TLF. you should try using words like 'arbitrage' where I work.

W.