The Lemon Fool

There are rumblings (https://www.msn.com/en-gb/money/other/t ... r-AA16ORVx) that the LTA could be raised to get skilled 50+ FIREs back into work.

As someone who is going to a golf course on Monday to do conservation work rather than program supercomputers, I guess the measure is aimed at me. But if I returned to contract work at say £110k with much higher pension limits , I'd arrange to be paid £15k minimum wage, and put £105k into my SIPP using salary sacrifice. Clearly the economy would benefit with more computers programmed, and nature would suffer as I stopped volunteering, but what about tax.

With other income already that £15k would all attract tax, but mostly at 20%. And when finally withdrawn, 15% tax might be paid. Very little employer or employee NI would be paid, and the only tax the government would get is the 20% VAT when I finally spend it.

That's a lot less tax than having a bright young 30yo contractor doing the same job who needs the money, so gets it all in their pay packet, and pays HRT, NI, student loan repayments. Is this what the government wants? And how many years before I hit the new limits and stop again.

> And when finally withdrawn, 15% tax might be paid.
Sorry, could you explain this for me please?
Edit: cancel that, it's the action of the 25% tax free part isn't it.

Well it's better for both you and the 30yr old to be working and generating economic output. It isn't just a question of how much tax you will pay and it isn't a zero sum game.

Still this is such a sensible proposal that it is most unlikely to be implemented.

Would you rather live on a island (British Isles) where 1% of the population paid a third of the total income tax take and passed on sufficient wealth to their heirs such that they also were in the 1%, that self funded education, housing, care, retirement; Or strive to confiscate and redistribute that wealth - that more often just leads to the flight of the capital, leaving a population 1% smaller but everyone else having to contribute 50% more in taxation to fill that hole. Even if £1Bn is confiscated from one to redistribute across a 65 million population that's just a one-off £15 each benefit. In contrast if over generations the 1% were increased to 3% such that all of the public spending on education, housing, care, retirement were affordably funded by them alone, leaving the rest having to pay no income tax, then even if that 3% were totally idle the uplift/benefit to the whole is considerable.

Capping wealth should be set to much higher levels, in the US Estate Tax (death duties/inheritance tax) has more than the first $10M exempted such that a average 2.5 offspring might each inherit $4M.

It's not an either or situation what the Gov is after is both (you and the young Turk programming away like good 'uns, though they just want the tax what you actually do they care not one jot about). The original game plan was you were supposed to carry on being a wage slave and pay the punitive tax, you are a great disappointment to the treasury modelers and now they are having to re-think things.

The irony is the finishing line problem was easily side stepped.

The LTA limits were introduced, I think anyway, to deal with very large pension that had been built up. The one that springs to my mind being the 5-6 million pension Mervin King left the Treasury with, mostly because it's huge, publicly underwritten and he was the Governor of the bank of England. Plus the issue of pension being used to pass on wealth through estate planning, Financial advisors are recommending pensions are used last when income is consumed in retirement, because it falls outside of the estate on death. Maybe the tax implications aren't too bad, but equally it is pretty mad that the Treasury incentivises people to not use their pension to... you know provide a pension.

To my mind objective one is met and that reason no longer exists and the second one is a misuse of the instrument that should be stopped.

So :-

Scrap the LTA limit, it drives sub-optimal behaviours. Maybe reduce the input amount, or perhaps have a lifetime amount limit that can be contributed, 40K is probably more generous than it needs to be.
Make pensions part of the estate, so they are used as intended

The money makeover also makes me laugh. If a person doesn't have enough to actually retire well they are not tax golden geese. If however they do, then they were and how exactly are they going to tell a very large tax payer who they really want to carry on working when the makeover is going to say, yes you're fine, get on that golf course.

I can't see how they get a high percentage of people who retired and have the means to do being encouraged back, spilt milk, fixing it going forward is the best that can be done. Personally I was retired by the LTA, just before Russia invaded I crossed over and I had to decide what to do, I "retired". It fell back a bit over the few months it took to actually implement, but once I decided to go the idea looked better and better.

If SIPP's are capped at £1M or thereabouts, then sooner or later so might ISA's also be capped to the same/similar levels. if furthermore the intent is to deflate such allowances away towards insignificant then that's a push towards rather than away from greater state (taxpayers) dependence.

People "work" because they have to. The financially independent have "occupations".

Raising the LTA is a sensible idea and it should result in more potential early retirees staying in employment a few years longer. But it's going to have minimal impact on those who have already retired so is a dumb "solution" to the stated problem. When are these supposedly intelligent policy makers going to understand that people who have retired early have done so both because they want to and because they have done the sums and don't need to work any longer?

Politician: "Why have you retired early?"
Early retiree: "I didn't like my work and have enough to fund my desired life style."
Politician: "If we increase the LTA / reduce income tax, etc will you return to work?"
Early retiree: "Did you not even bother listening to my first answer?!?"

I wonder what ratio of these target retirees would be from the Private Sector versus the Public Sector.

ayshfm1 wrote:Scrap the LTA limit, it drives sub-optimal behaviours. Maybe reduce the input amount, or perhaps have a lifetime amount limit that can be contributed, 40K is probably more generous than it needs to be.
Make pensions part of the estate, so they are used as intended

I wonder how much the current LTA actually raises? I suspect it's not much in the overall scheme of things. And it does present a clear "finishing line" for wannabe early retirees. So, yes, why not just scrap it? If you build up a pot much more than £1m, you're going to end up paying 40% income tax on the income anyway.

I also agree with including it in the estate for IHT. Along with income tax on withdrawals, knowing that it will ultimately be taxed at 40% removes any incentive for building up a really large pot just because you can, so there's no strong argument for the LTA.

The other aspect I would add is to limit the amount that can be taken out tax free. eg still allow up to 25% but cap it at the current £268,275, increasing each year with inflation.

With the above sort of reforms, I suspect there wouldn't be a strong case for reducing contribution limits. Indeed, there might not need to be any cap other than pension contributions being only from earned income.

If they raised the LTA - say to around £1.4m, since mine's currently sitting at £1.13m and I'm still psychologically wedded to the delusion that it "should be" (and will therefore shortly shoot back up to) about £1.25m (any minute now. Any minute. Any minute... now! Hmm) since that's what it was year or two ago, plus I have four and a bit more years till I can crystallise - I would be the happiest person alive.

I would not, however, go back to work.

As others have said, it'd be more to stop others from following us, since surely they must have written us off already. There has been a lot of publicity which has framed it as the latest aspirational lifestyle trend - the pandemic making "increasing numbers of people like us" reappraise how their life matches with their values etc, all very positive stuff and very fashionable (non-consumerist, non-materialist, so many things more important than money...). This could leave other Generation X professionals thinking they might have missed a trick and looking more closely at whether they also could and would want to, when they would previously not have even thought of it.

If the solution is to incentivise them to stay in work via pension changes, trying to do it in a way that doesn't extend the same benefit to us might be too complex to be worth the extra tax gained. So I await further developments eagerly.

The other thing is that perhaps this is a final hurrah for those in power to get their own pension positions sorted while they still can, since presumably a Labour government would not be increasing the LTA. So we might also hope for an element of future-proofing to be built in!

Snakey wrote:If they raised the LTA - say to around £1.4m, since mine's currently sitting at £1.13m and I'm still psychologically wedded to the delusion that it "should be" (and will therefore shortly shoot back up to) about £1.25m (any minute now. Any minute. Any minute... now! Hmm) since that's what it was year or two ago, plus I have four and a bit more years till I can crystallise - I would be the happiest person alive.

I would not, however, go back to work.

As others have said, it'd be more to stop others from following us, since surely they must have written us off already. There has been a lot of publicity which has framed it as the latest aspirational lifestyle trend - the pandemic making "increasing numbers of people like us" reappraise how their life matches with their values etc, all very positive stuff and very fashionable (non-consumerist, non-materialist, so many things more important than money...). This could leave other Generation X professionals thinking they might have missed a trick and looking more closely at whether they also could and would want to, when they would previously not have even thought of it.

If the solution is to incentivise them to stay in work via pension changes, trying to do it in a way that doesn't extend the same benefit to us might be too complex to be worth the extra tax gained. So I await further developments eagerly.

The other thing is that perhaps this is a final hurrah for those in power to get their own pension positions sorted while they still can, since presumably a Labour government would not be increasing the LTA. So we might also hope for an element of future-proofing to be built in!

Labour would inherit the same problem and be looking for similar solutions. There is no reason to think that they would not look at increasing the LTA, at least as much as the Conservatives will look at it, after all it was much higher when Gordon Brown introduced it in 2006 (£1,500,000 rising to £1,800,000 in 2010) - it was the Coalition and Conservative governments which followed which drastically cut the Annual Allowance and the Lifetime Allowance.

I'd forgotten that! I suppose I'd just mentally written it off as having been pre-financial crisis when things were "different". Surely a modern-day Labour government would not want the optics of increasing an allowance that is already well above gross full-time NMW x a 50-year working life (and bearing in mind that the average person sees a £1m pension pot as "having £1m to spend") when there are people using food banks etc etc?

Have they published any sort of manifesto yet?

(I have to admit, I do make myself laugh with the way my hopes for politics have changed as a result of moving from "juggling act to stay below both the AA and the 62% tax bracket" to "barely troubling the personal allowance". No doubt they'll change back again when I'm trying to withdraw from my pension.)

The incentive to quit my business in my late 40’s was the hassle of employing people, the regulatory burden of running an industrial factory, employing around 5 to 7 people it was not feasible to effectively outsource/offload that ‘hassle’, I shrank the business to 2 employees to focus more on what I personally produced ( profits climbed significantly as concentrated on more profitable jobs), when you can quit, you do!

There is no financial incentive that would get me back to work.

https://www.paulasmith.com.au/the-greek-fisherman/

I know the feeling! At 50 as a full equity partner in a large firm of accountants I got really really fed up with work hassle, didn’t need the money and so handed in my resignation (I had to give a year’s notice). I had been a partner for 20 years. It was greeted with incredulity and horror by the managing partner and executive and I was surprised that they seemed willing to go to almost any lengths to get me to stay. They then offered that I could continue as a partner but work part time as much or as little as I wanted, keep my office (in central London), not have to do any admin or marketing but just service my one ultra large client. So I went for it and carried on gradually winding down. That went on for 13 years. It was a very civilized way to move to retirement. Many people I know went straight from 100% work commitment to zero. That can be a hard adjustment. But certainly no going back (too old now anyway)!

Snakey wrote:(I have to admit, I do make myself laugh with the way my hopes for politics have changed as a result of moving from "juggling act to stay below both the AA and the 62% tax bracket" to "barely troubling the personal allowance". No doubt they'll change back again when I'm trying to withdraw from my pension.)

Strange how having skin in the game affects your perceptions

Re the LTA, it seems unfair someone should be penalised for making better investment choices than someone else. I would expect a contribution limit or capping of tax reclaim to be more likely if they are going to tinker.

Paul

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.

I would be surprised if this will happen. £1m pension is already a ludicrous sum to the man in the street.

This is surely only top 1% would have this kind of money. Politically it would be seen as Tories helping their mates, a repeat of the Liz Truss saga.

Wuffle wrote:What am I missing?

That the motivation for raising it is not to prevent the strain on the world's smallest violins of seeing all these people trying to survive on only fifty grand a year pension income plus whatever they get from their ISAs etc, but to stop people doing key jobs like surgery* from deciding that since they're forecast to hit the LTA before they get to the age where they can crystallise their pensions they might as well retire now, or go part time, because the benefit of keeping on working has plummeted.

YMMV re whether that's the right way for the government to be looking at it, but it seems that's what's behind the proposal.

(Oh and also, the tax-free lump sum means that your £40k would only be £30k so there's still some space in the basic rate band!)

I've no idea how serious a proposal it is, so I'm waiting to see if there's anything in the Budget before I get actually interested.

*Along with a whole bunch of marginal wastes of oxygen who just happen to be well-paid for whatever-it-is they do all day, which nonetheless brings in more for the government in payroll taxes etc than them sitting at home would do.

Snakey wrote:
*Along with a whole bunch of marginal wastes of oxygen who just happen to be well-paid for whatever-it-is they do all day, which nonetheless brings in more for the government in payroll taxes etc than them sitting at home would do.

Yes, but it is the private sector that is ultimately coughing up for these wastes of oxygen and their tax payments. Far better to get rid of and hence put a bit more dosh into private sector pockets.

The conservatives are indistinguishable from labour now. >£1m in your public sector pension - one of us - we must make your life easier!

Pensioner with a small dividend income - rentier capitalist! we must raise your taxes!