Threat of Tax and NI integration - a case for taking pensions early?

ermine

There seems to be an increasing rumble afoot to jack up taxation on pensions by integrating the tax and NI systems. Since taxation applies over a certain threshold, trending towards 10k p.a. the change from 20% tax to 32% tax on pension income over 10k means there is an argument for lowering one's pension income by retiring early.

I have retired early and am using a combination of ISA investment income and cash savings to bridge the gap to drawing my pension, I'd planned to do that at 55 and then use the investment income to boost my income or more likely boost my savings.

I have the 25% PCLS saved as AVC contributions, currently in a cash fund, which I will use to fund my ISA allowance or a few years post retirement.

The tax and NI integration disturbs me as it means I will lose more, over time, to the Government. Although my pension income increases at 5-6% p.a. for every year I don't draw it (to a first approximation over the period I am thinking of doing that), drawing it earlier means I can increase the amount of ISA investment. At the moment the increase of 6%p.a is reduced by a fifth to 5% by 20% taxation, but at 32% taxation that will be reduced to 4% that I will actually get a hold of.

I don't think this is given enough credit in the 'if you don't need it don't draw it' argument on pensions. I stared late saving for early retirement (as opposed to regular retirement, I was okay on that) but hit the AVCs really hard and ISAs as hard as I could. Things like NI intergation make me nervous about the rapacity of Government action in future, and I feel that pensions are becoming an attractive target for the State in the troubled times ahead.

opinions4u

I think you're trying to second guess changes that will take a few years to implement and will probably never happen.

zagfles

The govt is considering merging the operation of tax and NI, eg for earners make NI work on an annual basis rather than a pay period basis. They are not suggesting merging tax and NI and they specifically ruled out charging NI on pensions.

Nobody credible in any political party is suggesting charging NI on pensions. It would be politically virtually impossible, certainly for people nearing retirement, without some compensation such as a very large rise in the tax threshold.