Raising the LTA to get the over 50's off the golf course

[scrumpyjack]

How about raising the LTA by 100k per annum for every year you work over the age of 50 or scrap the LTA but limit tax relief on contributions to basic rate

[JohnB]

£40k is not what it was with inflation rampant, and with the LTA frozen, inflation following capital gains will be taxed at 55% at 75

[pje16]

The spring budget is only weeks away and already the chancellor is busy conducting interviews and laying the groundwork for his announcements.

This weekend Jeremy Hunt spoke to The Times about trying to encourage us all to work for longer, rather than taking early retirement. He commented that older workers “can have an enormously rich life by continuing to make a contribution to the economy. It doesn’t have to be about going to the golf course.”
Speaking last week at the headquarters of Bloomberg, Mr Hunt said: “Total employment is nearly 300,000 people lower than pre-pandemic, with around one-fifth of working-age adults economically inactive.

“So, it is time for a fundamental programme of reforms to support people with long-term conditions or mental illness to overcome the barriers and prejudices that prevent them from working.

“So to those who retired early after the pandemic or haven't found the right role after furlough, I say Britain needs you and we will look at the conditions necessary to make work worth your while.”

Lifetime allowance

Jeremy Hunt is considering increasing the hugely unpopular lifetime pension allowance in his spring budget, reducing the number of people that are hit with a 55% tax charge.

The lifetime allowance, which applies to defined benefit and defined contribution pensions, means you’re only allowed to invest a maximum of £1,073,100 in a pension fund before being hit with a 55% tax charge on the excess. The allowance is due to be frozen at the current rate until at least 2026, pulling thousands more into the tax charge.

The lifetime allowance has more than halved in real terms since it was introduced in 2006.

£1 million sounds like a huge amount to save but, because of the way it’s calculated, people with generous defined benefit pensions could trigger the charge more easily. The frozen charge is contributing to doctors retiring early, because the only way they can avoid a huge tax charge is to reduce their hours or quit their job.

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[BigTim]

Whilst I squirrel away all I can each year with that £1.073m "finish line" as a goal (I'm 49), I hear the medical practitioners who use the same gym as me lamenting in the locker room about the iniquity of the LTA that makes it barely worth their while to continue working.

Those in such, well endowed, DB schemes (calc'd at only 20x final salary don't forget). Are very likely to be incentivised to return/continue by an improvement (or perhaps another "tweaked" calculation) to the LTA I would think.

For me, one thing that would keep me in work (if they'd have me) past that "finish line" would not, necessarily be moving it (as has already been pointed out you might avoid an LTA charge but increase your 40% tax in retirement) but allowing or nudging me to contribute at a more tax advantageous rate to Mrs BT's pension. E.g. allowing me to contribute to her pension with full 40% relief or harmonising tax relief at 30% to all contributions. As it stands her LTA will be untroubled though we are making contributions to make up for her more meagre provision.

I think that situation may also apply to many earners leaving the workforce (the aforementioned GPs and Surgeons as examples).

[vand]

A good start would be to unfreeze it - it's absurd that it has been cut so much in just the time it has been introduced - yet it is one of those taxes that very few will complain about because it is so far in the future for most people. If things don't change then just the 7 year freeze since 2021 will effectively cut it by 1/3rd in real terms.

I personally think it more sensible for them to increase the LTA but reduce the annual £40k limit.

Also, removing the 3 years' unused allowance is probably sensible too, as that is an obvious tax break that only the highest earners are able to take advantage of.

Edit: worth adding something which most people still do not realise - that you do not actually want to be anywhere near the LTA by the time you start drawing on your pension, you will want to leave enough headway to allow the uncrystallized pot to continue to grow without hitting the LTA while you only crystallize a small amount of it each year. Most people do not want to crystallize everything at once and be left with the headache of a quarter million quid looking to be redeployed as efficiently as possible.

[pje16]

I personally think it more sensible for them to increase the LTA but reduce the annual £40k limit.

That will make it much harder to reach

[JohnB]

Its worse than that. If you crystalise at 95%, then when 75 any growth in the crystalised pot is assessed. You only have 5% of the LTA to use, and you could have had 20 years of inflation boosting the value of the pot, even though you'd been withdrawing the natural yield as a pension. With inflation at 3% you could be forced to halve the value of your pot in real terms

[vand]

I haven't thought this through really (professional failure - poor) but a million for the LTA seems right.
A mill at 4% is 40 grand, plus the state pension gets you to the high rate tax, which very few are going to volunteer for in retirement with the mortgage paid, Merc on the drive etc.

What am I missing?

W.

The problem is that, like any tax, the LTA will act as a disincentive to work for those who are liable to pay it, which is usually middle income and nearly all higher earners. Is that what you really want as a government if you are trying to boost economic growth? If you are 30yrs old and earning, say, £100k and able to put away 40k/yr into your pension then you can only do this for about a decade before a typical growth trajectory will take the existing pot past the LTA by pension access age. It's a huge deterrent if you want to keep those sort of workers in the workforce for 25-30 years.

[vand]

On a related topic, this is also why I try to dissuade people putting money into a Junior SIPP for young children. It may sound cool to lock up money compounding away at 7% for 60 years.... but in so doing - with the way the rules are at the moment - all you will do is likely take away their chance to benefit from pension tax relief during their own working career.

[pje16]

may sound cool to lock up money compounding away at 7% for 60 years....

very optimistic rates, that would double every 10 years

[swill453]

may sound cool to lock up money compounding away at 7% for 60 years....

very optimistic rates, that would double every 10 years

Even more optimistic if it means 7% in real terms...

Scott.

[vand]

may sound cool to lock up money compounding away at 7% for 60 years....

very optimistic rates, that would double every 10 years

Even more optimistic if it means 7% in real terms...

Scott.

Not really.

Long term return of the S&P is 7% real over 100 years or so. Global cap weighted stocks come in at 6%.

[hiriskpaul]

I haven't thought this through really (professional failure - poor) but a million for the LTA seems right.
A mill at 4% is 40 grand, plus the state pension gets you to the high rate tax, which very few are going to volunteer for in retirement with the mortgage paid, Merc on the drive etc.

What am I missing?

W.

The problem is that, like any tax, the LTA will act as a disincentive to work for those who are liable to pay it, which is usually middle income and nearly all higher earners. Is that what you really want as a government if you are trying to boost economic growth? If you are 30yrs old and earning, say, £100k and able to put away 40k/yr into your pension then you can only do this for about a decade before a typical growth trajectory will take the existing pot past the LTA by pension access age. It's a huge deterrent if you want to keep those sort of workers in the workforce for 25-30 years.

It's only a huge deterrent for those who have not thought it through. Putting £40k into a pension with 40% tax relief cost you £24k net. Get hit for 25%LTA when you take it out plus 20% income tax and you get back £24k (excluding growth). Added to that you benefit from tax free income and gains, plus have money in a government approved vehicle that is free of IHT. The LTA eliminates the tax arbitrage opportunity provided by pensions, but is hardly a deterrent.

If you pay tax at higher rates on your pension withdrawals, then it is a deterrent, but that is entirely optional and I have no intention of doing that.

[Wuffle]

People stop work because they are rich enough to do so, they always will.
Granted, the LTA limit does establish a fairly obvious point at which to give this some thought but it doesn't really change anything, you are all going twenty minutes after this point anyway (even if the limit is moved) because you can.
OK, an exaggeration for effect, but the psychological draw is still there and people are weak, greed and idleness define us.

Behind this lies a range of other stuff that is less easily argued but nonetheless true.
Your well educated kids and even the occasional bright poor kid will drop straight in to all of these desirable positions anyway. But not until they get the chance. The economy will look the same.

We are short of doctors because rooting about in someone's chest cavity isn't a desirable way of earning a living whatever the backdrop We aren't short of well paid paper pushers and never will be.
You have all replaced somebody and will be replaced almost like for like and so it will continue.

W.

[JohnB]

Paying HRT on pension withdrawls is very common. If you have a £1m pot and a full state pension, 5% withdrawls will take you to the HRT threshold. Not an impossible total return for equity, and thats before you start returning capital, which is what you' expect from a pension. If you don't return the capital you are taxed heavily on its inflationary growth.

The lower tax rates for unsheltered dividends and capital gains means that you once you get a SP to cover your PA, you should drain any pension fast, up to HRT, pay 15% tax, then pay 10%ish tax (or none if ISA'd) outside the pension. Its a very odd setup for an investment designed to cover your life that its main advantage is avoiding death taxes

[Itsallaguess]

People stop work because they are rich enough to do so, they always will.

I'm glad you've said that, because we seem to have a peculiar British way to see the bad in so many things nowadays, that might otherwise actually be celebrated in an alternative universe of less collective self-loathing, and it's really surprised me that I've yet to see one single UK media article actually celebrating the fact that beneficial financial circumstances for so many have allowed them to reduce their working time and enjoy the fruits of what is often very long-term and hard-fought personal financial diligence.

As a country we seem to have a very particular and quite frankly peculiar skill in eeking out the bad news in just about everything nowadays, and when it comes to this early-retirement aspect, I simply refuse to go along with it.

Let's celebrate the fact that we've got a UK society that's allowed people with what are often very long-term financial goals to actually see their plans take fruition, and stop collectively beating ourselves with sticks over what really should be seen as a positive thing to be happening for so many people...

Cheers,

Itsallaguess

[Urbandreamer]

Paying HRT on pension withdrawls is very common. If you have a £1m pot and a full state pension, 5% withdrawls will take you to the HRT threshold. Not an impossible total return for equity, and thats before you start returning capital, which is what you' expect from a pension. If you don't return the capital you are taxed heavily on its inflationary growth.

This sort of depends upon if you regard 1 in 10 as "very common".
https://www.yourmoney.com/retirement/hu ... es-of-tax/

However, as pointed out by others, you don't have to pay HRT. No, not even if you have a £1m pot. You certainly don't HAVE to withdraw £50kpa (5% of £1m) giving an income of about £60k. You could choose to draw £40kpa (4%), which after state pension just drops into the 20% band.

So what happens to the money you don't draw? Well if it's a DB scheme it ends, though how you can draw 5% of a DB escapes me.. If however it's a DC scheme you simply leave the money to who you like.

I do agree with you though about the state taxing the inflation that they demand that the BOE produce.

Of course, many can limit pension contributions to make it unlikely that they exceed the LTA. Saving some in ISA's or investing in VCT's.
Which of course would mean that were the state to just attack one form of investment for later life, it would be unlikely to force such people to return to work.

BTW, isn't this thread considering the concept of forced labour, otherwise known as slavery? Are we happy that this should be considered by our government?

[JohnB]

Of course common referred to those with LTA pots, its in the thread title.. And having a pension which you use as an IHT avoiding scheme rather than to provide an income for life seems a perverse idea.

The more general problem is the Government relying on a consumerist population. If £40k pa income makes you happy, then all those on less are unhappy, and all those over it, because of skill or luck, can either have their lifestyle creep upwards, or bank the difference to allow them to be happy and retired longer. The government have a problem persuading those who accept benefit level lifestyles from working. The next tranche can be persuaded to work. But for high skill/high pay/high stress jobs, which seem the goal for many economic policies, you need to get the workers hooked on spending it all.

Thank goodness most people are neither frugal or good with money.

[Urbandreamer]

Of course common referred to those with LTA pots, its in the thread title.. And having a pension which you use as an IHT avoiding scheme rather than to provide an income for life seems a perverse idea.

I'm not sure that I would disagree.

The issue is that the government and think tanks seek to "guide" the populace into acting in certain ways.

This thread is about a move to guide people into working longer. Hence, "pensions" must change. In this case, arguably by allowing people more benefit from saving into them. It neatly dovetails in idea with the concept of increasing the age at which pensions can be accessed. However, it would be a short term measure, as the age that pensions can be accessed is raising to 57 in the next five years.

Regarding IHT, it was once only paid by the wealthy. I find it interesting that you argue about inflationary gains with respect to the LTA, but fail to see inflationary losses with regard to the IHT threshold on everything else.

If people's actions seem "perverse" then it's worth considering what motivates them. I can't help but think that the fact that IHT receipts have doubled in the last 10 years and the fact that the government has fixed the threshold over that time and for the next 5 years might cause some impetus for such "perverse" actions.

We have seen 43% inflation since the IHT band was last changed, and no doubt will see a lot more by 2028. More and more of those with moderate assets will pay IHT.

[ursaminortaur]

I personally think it more sensible for them to increase the LTA but reduce the annual £40k limit.

That will make it much harder to reach

The £40k annual allowance hits a lot of those who have been contributing to DB pensions for a number of years when they get fairly small pay increases. This is still causing some doctors to cut their hours - though it isn't as bad as it was before they changed the taper rules which exacerbated the situation. Cutting the annual allowance further though would be the same as reintroducing the old taper rules for those high earning doctors and would also affect more people with DB pensions on lower salaries.