MSE News: Pensions tax relief slashed to save £4 billion a year

jem16

gillsfan wrote: »

You need to read the small print. As I see it, even a relatively low income earner in a DB scheme could be trapped by this, particularly if you leave work early with a pension enhancement. Someone on £35k in a 1/60th pension scheme given 6 years enhancement would exceed the £50k allowance.

Can you explain how please?

pawnbroker_2

Yet again this government shows that it knows absolutely nothing about the way people live. All this to save around £4 Billion ayear. No mention that our contribution to the EU is to rise by £3 Billion a year. How can they justify then ring fencing International Aid at £7 Billion a year and growing. I recently asked my MP how much of the £820,000,000 "gift" to World Bank this year was financed by borrowing, he of course couldn't or wouldn't answer, yet as an MP he must have waved this through parliament. Pensions were virtually destroyed by the last lot and this inept lot look like they are finishing the job.

I think some real questions should be asked about government expenditure before any attack is made on pensions and other aspects of OUR lives.

peterg1965

gillsfan wrote: »

You need to read the small print. As I see it, even a relatively low income earner in a DB scheme could be trapped by this, particularly if you leave work early with a pension enhancement. Someone on £35k in a 1/60th pension scheme given 6 years enhancement would exceed the £50k allowance.

You may exceed the allowance but in this case I believe the enhancement can be averaged out over 4 tax years, current and previous three, using up unused allowance, which will avoid people having a tax charge in those circumstances.

Loughton_Monkey

jem16 wrote: »

Can you explain how please?

I can understand the thinking. There you are on £90K, with a Final Salary scheme and nearing retirement. You just get a promotion/pay rise to £107K, and the extra money needing to be pumped into the fund would well exceed £100K, let alone the £50K.

However, large final salary pension schemes are simply not funded at the individual level. Calculations are made at the whole membership level and so no-one could identify any breakdown of this year's £3 million (say) Employer Funding to individual level.

So I don't know how all this is going to work. Maybe yet another "bonus" for those in FS schemes. In money purchase, you will get trapped if you put in more than your £50K.

jem16

BBC news on TV happily reporting that from April you will no longer be able to pay £1.8m into your pension all in one go and still gain tax relief if for example you sold a business just as you retired. From April you will be limited to only £50k for tax relief it reports.

No mention of the fact that you could never pay in £1.8m all in one go with tax relief unless of course you actually earned £1.8m in that last year.

jem16

Loughton_Monkey wrote: »

I can understand the thinking. There you are on £90K, with a Final Salary scheme and nearing retirement. You just get a promotion/pay rise to £107K, and the extra money needing to be pumped into the fund would well exceed £100K, let alone the £50K.

It's not that bit I have a problem with.

It was the person on £35k who gets a 6yr enhancement to retire early that I was looking for clarification on.

Reaper

jamesd wrote: »

Reaper, how does it do that? A pensioner with no employed income is already limited to £3600 gross pension contributions a year with tax relief and the proposed annual cap is far above that. Where's the benefit of a pension annuity compared to a non-pension annuity that would make an immediate vesting personal pension appropriate for someone who's already retired?

A prospective pension who's about to retire could presumably use the past years' allowance that was mentioned. Some in this group presumably will be affected by the cap.

You are quite right of course. I should have said those about to retire.

However since I posted I was reading up on the subject and a Sunday Times article says "there is no limit on contributions in the year before retirement". If that rule is not changing then Immediate Vesting Pensions would not be affected at all. Does anybody know if this exception will stay in place?

bendix

WestonDave wrote: »

I'm guessing that most people who can afford to put more than £50k a year into their pension plans probably don't spend a lot of time on a site called Moneysavingexpert. If you have that much left over, its a fair bet they are on salaries of over £250k a year.

Nonsense. I contribute nearly 50,000 a year to my pension scheme and spend a lot of time on this site. And my salary is nowhere near £250k a year.

FWIW, this is an excellent proposal and so far ahead of Labour's ludicrous alternative announced last year that it's not funny.

Very clever thinking on the part of the government.

Loughton_Monkey

jem16 wrote: »

It's not that bit I have a problem with.

It was the person on £35k who gets a 6yr enhancement to retire early that I was looking for clarification on.

Still the same grey area, I think. For a Defined Benefits scheme anyway. This is because I don't think it's the habit to make any specific additional company funding into the scheme as a direct result of Joe Bloggs having been given his enhancement. It will all be picked up at the next actuarial valuation.

There are other anomolies. Imagine you just retired, with a final salary pension pot of £1.79 million. Great.

At next valuation, the actuary tells the company that mortality assumptions have changed, and future interest rate assumptions were reduced. So as a result, another few million to pump in!

Instinctively, the amount put in simply for your own 'slice' would not only bring you over £1.8 million, but would exceed £50K as well. Except that such a calculation by individual would not be required, and nor would it be calculated.

Jacka87

To illustrate how someone in a defined-benefit (normally final-salary) scheme will be affected, the Treasury gave this example.
Take a woman who has been in her employer's pension scheme for 34 years, accruing pension at a rate of 1/60th of final salary every year.
In her 35th year, her pay goes up by 20%, from £60,000 to £72,000 a year.
To work out how much her pension pot has increased, her accrued pension entitlement would be calculated as at the end of her 34th year. This would be £34,000 (34/60 times £60,000).
Then this would be revalued in line with the rise in the consumer prices index. If that had risen by 2.5%, then her accrued pension would now be £34,850.
Next, calculate her pension entitlement at the end of her 35th year. That would be £42,000 (35/60 times £72,000) as a result of that year's pay rise.
The increase in pension entitlement, at £7,150, would be multiplied by 16 to give an increase in her pension pot of £114,400.
That would suggest paying tax on £64,400 - the surplus over the £50,000 annual allowance.
However, she might have unused pension tax allowance from the three previous tax years.
Let's assume she had enjoyed 5% pay rises in each of these years, then she would still have an unused allowance to carry over of £69,400.
Adding that to her current year's allowance of £50,000 would give a total available allowance of £119,400.
This would be more than enough to cover that year's increase in her pension pot of £114,400, so in the end she would have no pension tax to pay.

This is from the BBC website, it is aimed at explaining how this will affect people on a final salary scheme.