MSE News: High earners given greater retirement options

Milarky

hugheskevi wrote: »

At the moment, a higher-rate tax payer (but under £130,000) with access to salary sacrifice can get income tax relief of 40%, employer NICs relief of 12.8% and (from next year) employee NICs relief of 2%. That is 54.8% relief. So you could view the charge as the taxman taking back what he has put into a pension that doesn't seem to have been intended to be used to provide an income in retirement.

Thanks for the heads up.

..except the charge is 'flat rate' - as though everyone is able to hog relief at this top hypothetical rate. Most people will be on 20% throughout their lives (certainly a majority of individual contributors concerned) My objection to a 'precipice' is it shouldn't be in any proposals intended to 'simplify' and 'make flexible' the system. I can see however that 'fairness' (like having an age-related taper for this one) simply adds complexity and is one reason (for a minister who won't be there in two year's time to make a mark) for not conceding it. What simplification overall these proposals do represent is clearly 'marginal' at best (a mere 8 weeks* to 'consult' the usual interest-groups etc)

However, let's not be churlish - the annuity 'rule' (as such) is going - that's something to celebrate!

*About the consultation process
This consultation is being run in accordance with the Code of Practice on Consultation, although it has been necessary for it to run for 8 weeks instead of the normal 12 weeks. The start date has been largely determined by the timing of the June Emergency Budget and the closing date has been set to allow time to take full account of the responses in drafting legislation. Draft legislation will be published ahead of Budget 2011.

jamesd

Milarky, I don't think the annuity rule is really going. It already went under Labour a couple of years ago.

It seems, so far, based on the eligible assets for the test, that it's being extended to younger ages for those who aren't well above the minimum income target or who are well above it but with non-pension assets. Also seems to be opening the door for more use of pensions for inheritance planning rather than producing an income while alive.

There is a kernel of good thinking there, though. If it could use all potential income sources it would be a very good thing that could usefully increase flexibility of the pension portion of retirement planning. It's only the lack of that that makes it problematic.

One of the bigger flaws seems to be excluding S&S ISAs, which are already marginalising pensions for those who aren't higher rate tax payers, for the portion of retirement income above the age-related income tax personal allowance. The optimal choice even today is pension up to about £10k total income and ISA for the rest. Not sure how they can hope to put in place a test that excludes the optimal choice and think that it's a good idea.

Optimal except to the extent that employers subsidise pensions and not ISAs, and for higher rate tax payers. Even that's changing, with providers like Hargreaves Lansdown having a workplace pension scheme that can put employer contributions in the pension and employee in the ISA. That product is in part a response to the introduction of caps on pension contributions.

dunstonh

Even that's changing, with providers like Hargreaves Lansdown having a workplace pension scheme that can put employer contributions in the pension and employee in the ISA. That product is in part a response to the introduction of caps on pension contributions.

That is such a gimmick though. It's just two products on the same platform. Something that has been possible for years.

One of the bigger flaws seems to be excluding S&S ISAs, which are already marginalising pensions for those who aren't higher rate tax payers, for the portion of retirement income above the age-related income tax personal allowance. The optimal choice even today is pension up to about £10k total income and ISA for the rest. Not sure how they can hope to put in place a test that excludes the optimal choice and think that it's a good idea.

On the one hand I agree but on the other I don't. Sensible people who can control their finances would agree with you. Those that cant control their finances or give in to temptation to spend or, those that would abuse the system to remove as much as they can mean that there has to be restrictions.

peterg1965

As some one who is heavily investing in a SIPP, with the aim of going into Income Drawdown at 55, I am alarmed by the content of this thread, particularly if, as jamesd seems to be interpreting, that this option may be under threat. To compel people to purchase an annuity from a crystalised pension at 55 is a huge step backwards and would cause me to completely re-evaluate my plans for the future. My projected retirement income would be markedly reduced as annuity are terrible value at such a young age. My (simple) understanding was to the contrarary whereby the compulsion to annuitise at 75 is being reviewed, therefore it would be possible never have to have an annuity if you live past 75, have I missed something?

hugheskevi

On the one hand I agree but on the other I don't. Sensible people who can control their finances would agree with you. Those that cant control their finances or give in to temptation to spend or, those that would abuse the system to remove as much as they can mean that there has to be restrictions.

I've given quite a lot of thought to this.

Ultimately, I decided that someone with big amounts in a S+S ISA (eg £100K+) is unlikely to be willing to reduce assets to £10,000 and income below about £130 per week to get means-tested benefits after the age of 65-68. So as long as the restrictions in means-tested benefits are applied, I'd be inclined to be more relaxed about this type of abuse.

With regard to these restrictions, my view is that limiting qualifying income to pension income is okay (that is why tax relief was awarded) but the restrictions about the type of pension income which qualifies needs relaxing.

I'd forget about restrictions causing flat-rate annuities not to count, and allow deferred entitlements to be brought to account. So for example, a 55 year old could bring to account whatever their current State Pension entitlement is (even though not in payment) and also any occupational pension income they may have, again at current payment value (assuming DB) and even if not in payment. If that is unacceptable, then fixed-term annuities (ie to cover up to State Pension age) must be made acceptable as a compromise measure.

If you only allow State Pension to be brought to account once in payment, then you are ignoring accrued pension "rights" worth (for most people) in excess of £100,000. So anyone below State Pension age effectively has to tie-up for life that £100,000+ more if they want to use this flexibility prior to State Pension age. I suspect that most people in a position to use this new flexibility will be planning to retire long before State Pension age.

For occupational pension income, what is the logic of forcing people to commence benefits prior to the scheme normal pension age in order for the income to qualify? A scheme may have prohibitve early-retirement adjustment factors (or might in the future) or perhaps not even allow early-retirement (unlikely, but it is normally at Trustee discretion and who knows what will happen in the future).

I do also wonder whether this could lead to a bit of a resurgence of pension mortgages - there are still lots of issues, but the way this is going, it would improve some of the major drawbacks.

hugheskevi

My (simple) understanding was to the contrarary whereby the compulsion to annuitise at 75 is being reviewed, therefore it would be possible never have to have an annuity if you live past 75, have I missed something?

There is a rather worrying paragraph in the consultation. I agree with jamesd that if any changes are to be made, they should relax restrictions, not increase them.

2.17 The annual USP limit (120% of the value of an equivalent annuity) was set in the context of the existing rules. The risk of running out of funds during drawdown increases with advancing age. The Government therefore intends to review whether the existing annual limit remains appropriate.
• The Government welcomes views on the level of an appropriate annual drawdown limit for capped drawdown

jamesd

Dunstonh, maybe a gimmick but still a potentially useful one if employers go for it. I agree that some controls are needed, but that's a different thing from possibly effectively forcing the use of annuity purchase from age 55.

peterg1965, that's the title of the document and the foreward talks about increasing flexibility. Unfortunately the details of the safeguards may contradict the foreward and may require very early annuitisation, even for those who have sufficient funds, if those funds don't all happen to be in pension investments. There's this:

"2.15 The Government will go further than capped drawdown by creating additional flexibility for individuals who wish to draw down more than the capped annual limit. Under this flexible drawdown model, individuals will be able to draw down unlimited amounts from their pension pot, provided that they can demonstrate that they have secured a sufficient minimum income to prevent them from exhausting their savings prematurely and falling back on the state. The requirement to demonstrate a minimum income will apply at the point at which an individual wants to exceed the annual capped drawdown limit."

Bold added by me, not applying the test until exceeding the capped drawdown limit might mean that it's no less good than today if the capped limit doesn't change. That's a sentence I'd missed in my initial reading and is potentially very significant. It might completely eliminate my concerns about it possibly being worse than today, but the limits are also being reviewed.

Once you're well over the possible minimum income target the plans seem likely to be substantially better, it's mainly at the lower end of incomes or early inability to work/unemployment contingency planning for those aiming for higher incomes that it's potentially worse. If you consider two of the examples:

"Mr A retires aged 65 with a DC pension. He decides to take 25% of his pot as a tax-free lump sum upon retirement and invests the remainder in a capped drawdown arrangement. At age 75, Mr A decides to draw down a lump sum in order to make urgent repairs to his house. This requires him to secure a minimum income."

That one appears to envisage the tax free initial lump sum and an additional lump sum that's presumably not taxed at punitive rates.

"Mrs B decides to continue working until age 68, building up a DC pension fund. Upon retirement, she takes a 25% tax-free lump sum and invests the remainder of her fund in a capped drawdown arrangement, as she is able to meet her income needs from other sources."

While that one mentions meeting the income needs from other sources. Unfortunately for the Minimum Income Requirement, it contradicts the second example:

"3.6 The purpose of the MIR is to ensure that an individual with more flexible access to their pension saving does not fall back on the state after exhausting these savings prematurely. As this additional flexibility applies to pension savings only, only pension income will be considered for the purposes of the MIR."

And:

"3.7 To be ‘secure’, this pension income should:
• be currently in payment (i.e. not a deferred entitlement);
• be guaranteed for life; and
• take into account reasonable expectations of the future cost of living."

The currently in payment requirement is a very nasty one because it blocks planning higher rates of drawdown prior to state pension age when you need to replace the state pension income that you're not yet getting, but which you're certain to get if you live that long. The lifetime payment requirement seems to block deliberately taking a higher income before the state pensions start, when it's most needed, then reducing it when they do, because that's not for life. Even though it's perfect retirement planning.

Since annuities are apparently the required vehicle for guaranteeing the income for life that means that from a very young age you'll be required to use lifetime inflation-linked annuities if your income after state pension age will be in the minimum income to around £20,000 range (assumption is a very high £12,000 minimum income and £8,000 in state pensions. It could be less than £20,000, perhaps £16,000 on some of the lower numbers).

The saving part here might be setting the capped drawdown limit as it's currently set, so you don't need to qualify under these tests and may still be able to avoid an inefficient annuity purchase.

hugheskevi, agreed about those relaxations, at least as a starting point.

Not sure that it'd increase pension mortgages. I'm in the process of getting one and it's causing me to think about not using the pension as the repayment vehicle. For those with relatively high pension incomes (as distinct from relatively high retirement income) the ability to draw lump sums above the 25% limit might help, though. Potentially a bonus for some higher rate tax payers. Though it's still causing me to think more of switching some 40% money away from pensions, notably into VCTs (tax free income, still 30% tax relief, 100% of capital available, so potentially better than pensions if the risk tolerance is right).

peterg1965

jamesd - I like to think that I am not that stupid, but trying to follow the examples and logic in the document is extremely difficult. You talk about a 'minimum income' in order to exceed the annual capped limit.... (is that the GAD figure?)

In my case I have a Govt final salary (guaranteed(!)) pension which I will access from age 53, which will give me around a £36K pension at todays prices, this will be CPI linked. My SIPP is seperate, and should be around a £400K pot when I am 55, but I will aim to crystalise at age 55. From what you are saying the higher my 'guaranteed' pension the less likely that I will be restricted in my options for my SIPP, is that right?

jamesd

peterg1965, the minimum income number isn't specified, just some examples of high minimum income values given in the document. High meaning higher than I have chosen to spend over the last five years, while freely able to spend much more if I wanted to.

When it comes to income drawdown, the the GAD figure now specifies the limit on how much can be taken out - the current annual capped limit. What it is in the future is something that there is a request for feedback on, with a clear implication that it will be lower than the current GAD limit, particularly at younger ages.

When you have income from guaranteed sources that exceeds the minimum income then you can exceed the capped limit. All income taken will be subject to income tax (and allowances).

The government pension will put you well over any minimum income - it's about twice average pensioner income - so it appears that you may have much more freedom from age 53 than you do under current rules. Perhaps even the ability to take all £400k from your SIPP pot in the year that you reach 55, paying income tax on £400k plus the final salary pension if you did so.

It looks as though you'll be one of the clear gainers under the contemplated changes, due to that high guaranteed income starting at a young age.