The death knell for pensions?

RenovationMan

http://www.bbc.co.uk/news/business-17041162

"In the first hint of possible change, the chief secretary to the Treasury, Danny Alexander, told the Daily Telegraph on 10 February he wanted the government to restrict pensions tax relief for higher-rate taxpayers.

That has been followed by more rumours, in various newspapers, suggesting that the ability of retirees to take 25% of their pension pots in the form of a tax-free lump sum may be abolished."

I'm a huge advocate for pension savings and always have been. However, if the government abolished Higher rate tax relief and abolished the 25% tax free lump sum I have to say that on the vary same day I would stop paying into a pension plan and start using ISAs for my retirement savings instead. I doubt I would be alone.

We all know that there are many restrictions on our pensions schemes, such as when you're allowed to take them (age 55) and how you can take them (Annuity or Drawdown). The benefits of pensions to higher rate tax payers outweigh these restrictions, but without the benefits, who will bother with a traditional pension?

JoeCrystal

I would since I would still get tax relief since I am only on low wages. Secondly, I have no intention of taking tax free lump sum either since I am already planning to have good amount of savings/investments by my retirement age and I just want income from pension instead.

I would also argue that another two potential benefits of saving into a pension scheme is that the fund value does not get counted as part of your capital and it is still safe from bankruptcy.

Cheers

Joe

dunstonh

That has been followed by more rumours, in various newspapers, suggesting that the ability of retirees to take 25% of their pension pots in the form of a tax-free lump sum may be abolished."

The 25% tax free cash payment has been "rumoured" to be abolished in the media for over 20 years.

There have also been rumours of a replacement to pension and ISAs in the form of a single tax wrapper. Nothing come of that yet either.

Shimrod

JoeCrystal wrote: »

I would also argue that another two potential benefits of saving into a pension scheme is that the fund value does not get counted as part of your capital and it is still safe from bankruptcy.

Not true on the bankruptcy - see here:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingDebt/Bankruptcy/DG_187413

jamesd

Perhaps the biggest question here is why you're resurrecting some of the pre-Budget speculation that proved ill-founded. Now the Budget is over and we know that it didn't happen.

Mr. Alexander is a Liberal Democrat MP and this was one of their manifesto items so it's hardly surprising that he's still advocating it.

The tax free lump sum is a key benefit for basic rate taxpayers. Without it they would in general be better off using S&S ISAs for any money beyond an employer match. The big negative is that it would count against benefit means tests, so it'd end up hurting the worse off most, costing them their retirement pots if they ever need means tested benefits.

For higher rate the tax relief difference is again necessary or they can switch to alternative investments that provide more tax relief than basic rate but less than higher rate, like VCTs, which are more flexible as well.

There's also the interesting complication of defined benefit pension schemes where the employees would presumably end up paying income tax on their employer's pension contributions. Going to be interesting to see how public sector workers like finding they have to pay 40% income tax on their employer's pension contributions. Also interesting to see how payments into a defined benefit pension to make up a shortfall end up being taxed, since it's an employer pension contribution for the employees that has to be taxed somehow. I suppose to each in proportion to their benefit value might work, though some may find that the cost is more than their net pay if there's a big shortfall and large lump sum payment.

JoeCrystal

Shimrod wrote: »

Not true on the bankruptcy - see here:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingDebt/Bankruptcy/DG_187413

Hmm... well, it did partly confirmed what I thought when I posted it.

If your bankruptcy petition was dated on or after 29 May 2000 and your pension is approved by HMRC, it is not an asset. This means your trustee can’t make a claim on your pension. However, your trustee can claim any benefits you are receiving or will receive, including a lump sum, before you are discharged (freed) from bankruptcy.

Thanks for the link. A interesting read.

Cheers

Joe

jamesd

JoeCrystal wrote: »

I would also argue that another two potential benefits of saving into a pension scheme is that the fund value does not get counted as part of your capital and it is still safe from bankruptcy.

Shimrod wrote: »

Not true on the bankruptcy - see here:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingDebt/Bankruptcy/DG_187413

JoeCrystal was correct for pensions that cannot be taken within the period covered by the bankruptcy.

Once a pension is paying income that income is available. It and the lump sum may also be if the pension can be taken in a time sufficiently close to bankruptcy or if pension contributions were used to try to evade having the money counted in the bankruptcy.

There's also a case likely to be appealed where there is an attempt to compel someone to take a pension that they could take but hadn't chosen to take. That case may make part of "If your bankruptcy petition was dated on or after 29 May 2000 and your pension is approved by HMRC, it is not an asset. This means your trustee can’t make a claim on your pension" untrue.

For almost all cases a pension pot remains protected from bankruptcy prior to age 55, with exceptions based on where that date falls within the income period considered for the bankruptcy.

ISA or other non-pension money is in general easily and immediately available and counted for bankruptcy, with no protection at all.

lisyloo

There is an important point here though that the rules and legislation can change.
I was told that recently the max drawdown rules changed.
For some people this meant a drop in income of 20%.
So this is very definitely a risk.

I personally have tried to put more aside than my husband because I am female.
I've done this for years.
Now gender discrimination has been made illegal (for insurance products).
Luckily I put away more, but these are exmaple of things that have changed that people thought they could reply upon.

dunstonh

Perhaps the biggest question here is why you're resurrecting some of the pre-Budget speculation that proved ill-founded. Now the Budget is over and we know that it didn't happen.

I was watching one of the political programmes after the budget and it showed one paper that got every single pre-budget "guess" wrong. It's headline was something like "10 things you will see in the budget".

jamesd

That's a fun story.