pension tax relief plans reversed

prixon

bendix wrote: »

I'm amazed noone else has picked up on this yet,but Darling's plans to limit tax relief on pensions contributions for high income earners was reversed in yesterday's Emergency Budget. It was due to come into effect from April 2011 but it's been scrapped.

Instead, Osborne has pledged to start a consultation process with a view to getting the same about of revenue (£3bn) by limiting the annual allowance at which people get the highest rate tax relief to anywhere between £39-£45,000.

Fantastic news for pension savers, although personally I'd prefer it if the tax-free allowance for contributions was slightly higher. On the other hand, limiting it will encourage those who are serious about saving for their pension to rely not only on their pension fund, and build up a balancing cash sum also, ideally through ISAs.

I am very very very pleased. Well done George.

But, it could also be terrible news for thousands of people who would not otherwise have been affected. Because of the way that Defined Benefit (e.g. final salary) schemes are assessed against the annual allowance, it could mean that people in such schemes and who are on salaries of around £70k and above could now face a significant tax charge on their pension contributions 'value', depending on their years of service. Before, only very high earners would have been affected.

More info here:

http://www.professionalpensions.com/professional-pensions/news/1687272/annual-allowance-reduction-hit-thousands-savers

P

goRt

prixon wrote: »

But, it could also be terrible news for thousands of people who would not otherwise have been affected. Because of the way that Defined Benefit (e.g. final salary) schemes are assessed against the annual allowance, it could mean that people in such schemes and who are on salaries of around £70k and above could now face a significant tax charge on their pension contributions 'value', depending on their years of service. Before, only very high earners would have been affected.

More info here:

http://www.professionalpensions.com/professional-pensions/news/1687272/annual-allowance-reduction-hit-thousands-savers

P

The important part you missed from the article relates to salary increases and DB scheme i.e. one has 30 years in the scheme and gets a 5% pay rise.
Anyway this is open for consultation.

prixon

goRt wrote: »

The important part you missed from the article relates to salary increases and DB scheme i.e. one has 30 years in the scheme and gets a 5% pay rise.
Anyway this is open for consultation.

I wouldn't say I "missed" it, the point remains that getting a small pay rise is hardly an exceptional event and many people could be affected, e.g. the table shows an example of someone with 15 years in a scheme and on £80k salary facing a charge of £400 (and that's assuming they don't also contribute to a SIPP or AVCs which would be taxed over and above this) after a 5% pay rise.

So it would hardly be "fantastic news" for them (dependant on the outcome of 'consultation', obviously)

P

Andy_Davies

goRt wrote: »

I think "salary sacrifice" avoids that and makes things more attractive for 'lower' earners where NI is more than 1%

It does but you need your employer to play ball and mine won't unfortunately.

Debt_Free_Chick

Labour's proposals were not - as is disingenuously reported - a limit on tax relief, but a tax charge on pension contributions. Their proposals were to tax pension contributions - including those made by the employer - like a car or any other benefit in kind.

Under the current system, there is no tax relief. Instead of paying tax when the contributions go in, pension savers pay tax on the pensions when they're paid out. Yes there are anomalies - the lump sum is tax free and some higher rate savers could be basic rate pensioners, but overall the current system is broadly "tax equal".

Labour's proposals were grossly unfair in one important respect ... they were not aimed at taxing those who could afford to pay. Those who can afford to pay are not those who currently earn a lot of money, but those who currently have sufficient pension savings to provide an adequate income in retirement. So if you already have pension savings of £1.8m, that equates to a pension income of approx £70k pa. Clearly, such people do not need to continue to save for retirement in a tax protected environment and should not be given the opportunity to do so.

Those who have no or modest pension savings, but happen to earn a lot of money, will be penalised for doing the prudent thing and saving in a pension. That sends the wrong message. Effectively, Labour's message was "don't save for retirement" as we'll tax you for it. Those people could go on earning lots of money, save nothing for retirement and then go on to qualify for Pension Credit and other means tested benefits. That's bizarre as "we" shall end up collecting no additional tax (in retirement) from them!

So, the Coalition Govt is right to look at how the tax can be collected in a different way. And anyone who's looked at the overly complex rules for Labour's proposals will breathe a sigh of relief!

margaretclare

Debt_Free_Chick wrote: »

Labour's proposals were not - as is disingenuously reported - a limit on tax relief, but a tax charge on pension contributions. Their proposals were to tax pension contributions - including those made by the employer - like a car or any other benefit in kind.

Under the current system, there is no tax relief. Instead of paying tax when the contributions go in, pension savers pay tax on the pensions when they're paid out. Yes there are anomalies - the lump sum is tax free and some higher rate savers could be basic rate pensioners, but overall the current system is broadly "tax equal".

Labour's proposals were grossly unfair in one important respect ... they were not aimed at taxing those who could afford to pay. Those who can afford to pay are not those who currently earn a lot of money, but those who currently have sufficient pension savings to provide an adequate income in retirement. So if you already have pension savings of £1.8m, that equates to a pension income of approx £70k pa. Clearly, such people do not need to continue to save for retirement in a tax protected environment and should not be given the opportunity to do so.

Those who have no or modest pension savings, but happen to earn a lot of money, will be penalised for doing the prudent thing and saving in a pension. That sends the wrong message. Effectively, Labour's message was "don't save for retirement" as we'll tax you for it. Those people could go on earning lots of money, save nothing for retirement and then go on to qualify for Pension Credit and other means tested benefits. That's bizarre as "we" shall end up collecting no additional tax (in retirement) from them!

So, the Coalition Govt is right to look at how the tax can be collected in a different way. And anyone who's looked at the overly complex rules for Labour's proposals will breathe a sigh of relief!

Thanks for this clear explanation and analysis. It won't affect me, but I feel very strongly that anything at all that sends out a message 'don't save' is iniquitous and totally wrong. The pension funds have already suffered from Gordon Brown's changes early in his Chancellorship. The whole ethos over the last decade has been to discourage saving and promote the idea 'pick it up, it's yours' in other words, dependence on state benefits. The creation of the tax-credit system, Byzantine in its complexity, has been part of that. OK, people may have less money to save from, but the idea of savings rather than reliance on 'entitlement' should really be encouraged, not discouraged.

exil

margaretclare wrote: »

Thanks for this clear explanation and analysis. It won't affect me, but I feel very strongly that anything at all that sends out a message 'don't save' is iniquitous and totally wrong. The pension funds have already suffered from Gordon Brown's changes early in his Chancellorship. The whole ethos over the last decade has been to discourage saving and promote the idea 'pick it up, it's yours' in other words, dependence on state benefits. The creation of the tax-credit system, Byzantine in its complexity, has been part of that. OK, people may have less money to save from, but the idea of savings rather than reliance on 'entitlement' should really be encouraged, not discouraged.

People on the telephone number salaries affected by these measures are unlikely to be in any danger of having to survive on Pension Credit. I support both Darling and Osborne in trying to limit the tax relief available to people who are already extremely well paid.

feesarefare

margaretclare wrote: »

Thanks for this clear explanation and analysis. It won't affect me, but I feel very strongly that anything at all that sends out a message 'don't save' is iniquitous and totally wrong

I suppose its easy to ignore the introduction of ISA's and Child Trust Funds.

margaretclare

feesarefare wrote: »

I suppose its easy to ignore the introduction of ISA's and Child Trust Funds.

The idea of ISAs was not new. They - or something very like them - existed under the guise of PEPs and TESSAs 20 or so years ago.

As for Child Trust Funds, it has always been possible to put money into savings 'in trust' for one's children/grandchildren. I had some in a Friendly Society which matured some years ago. Can't remember the details, but there was some kind of tax break there.

margaretclare

exil wrote: »

People on the telephone number salaries affected by these measures are unlikely to be in any danger of having to survive on Pension Credit. I support both Darling and Osborne in trying to limit the tax relief available to people who are already extremely well paid.

What has happened is that the whole idea of saving or of having money of your own, to use as you wish - an idea that existed for countless generations before us - now seems to be derided and discounted. I can't count the number of threads that have started on these boards with the heading 'How can I hide inherited money from the benefits agency?' and 'How to get rid of savings so that I can claim benefits?' Variations on a theme. And people can always trot out the 'next-door neighbour who never saved and now gets everything' as against the parent who always saved and now gets no benefits.

I would really like the idea of saving to come back into its own, and that was why I wrote what I did.