New Pension freedoms - Outcome of Consultation

jamesd

This bit from page 6 is... irritating:

"new tax rules will be put in place to ensure that individuals do not use the new flexibilities, which are intended to provide people with greater access to their retirement savings, to avoid tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free. Those who choose to draw down more than their tax-free lump sum from a defined contribution pension will be able to benefit from further tax-relieved pension saving, and make further tax-free contributions to a defined contribution pension of up to £10,000 per year. This covers 98% of pension savers over the age of 55"

That seems to be of pretty limited value of a measure since it's fairly easy to circumvent.

Trying to block an interesting bit of potential abuse but along the way it'll catches people like me who are already paying in more than £20,000 a year and anticipate increasing that to nearer £40,000 before age 55. Since I'm contemplating crystalising as soon as I reach 55 or a range of reasons that'll hurt if I'm still working then, forcing me to reduce my pension contributions.

Apparently this won't be triggered by the up to three small pot complete withdrawings of £10,000 from each so that's one possible workaround for some of those who are adversely affected, at least for a little while. Unless constraints of some sort are added to those.

My range of reasons includes diversification of tax wrappers and limiting the lifetime allowance effect by taking benefits as early in the compound growth as possible. Also, eventually, paying off a pension mortgage.

Haven't fully thought through it yet but I'll probably just look to deplete my non-pension money for as long as necessary so that I'm not affected too much. Maybe use some stoozing on credit cards. If I had equity of sufficient value in a property I'd perhaps take out a mortgage and use that for any spending, knowing that I could repay later from the pension.

So I assume that the measure will be of minimal value as an anti-circumvention measure because a high percentage of people who would be targets will have lots of equity in their home to use. A cap on the number of times that the 25% PCLS can be taken with tax relief would probably work well to deal with the problem that they have described.

gadgetmind

jamesd wrote: »

forcing me to reduce my pension contributions.

Not if you don't take more than 25% of your pension.

greenglide

To be honest, I do hope the new freedoms make people think about their options. If some still make bad choices, well boo hoo, stupid people do stupid things. That doesn't mean that we should shackle smarter people, does it?

A pension IQ test before the money can be accessed?

Seems fine by me!

jamesd

gadgetmind wrote: »

Not if you don't take more than 25% of your pension.

Thanks, I'd somehow missed or misread that part! However, that increases the puzzle since it makes it even easier to circumvent the restriction. I think they need to rethink this because I don't really see how it can achieve the objective given.

At least that means that it won't affect my planning, nor pension mortgages. If enacted as described.

kidmugsy

Given how radical Osborne's proposals in the budget were, they seem to have survived the consultation pretty well. How long the next couple of governments will leave them alone is a different matter. Seize the day!

wotsthat

jamesd wrote: »

Thanks, I'd somehow missed or misread that part! However, that increases the puzzle since it makes it even easier to circumvent the restriction. I think they need to rethink this because I don't really see how it can achieve the objective given

They're thinking about the unintended consequences.

The natural response without this restriction would be to get to age 55 and start taking cash whilst getting your employer to pay you directly into a pension thus allowing you 25% tax free on earnings and avoiding NI.

Yes there will be ways and means but instead of this practice being routine it'll be left to smaller numbers of people who are going to 'game' the system with or without this restriction.

jamesd

wotsthat, I don't think that it is in my interests or that of others here for me to continue to comment on that measure, which I think is spectacularly pointless as a way to achieve it's stated objective, compared to today's capped/flexible drawdown split, perhaps with higher drawdown limit than now so there's less reason to want to use the full flexibility.

gadgetmind

Currently, those under capped drawdown can still contribute £40k pa and they are being grandfathered until they exceed the drawdown cap.

In future, anyone who draws down anything beyond 25%, will have the £10k annual allowance imposed.

What new loophole do we think there will be?

jamesd

The written concern in the document is "new tax rules will be put in place to ensure that individuals do not use the new flexibilities ... to avoid tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free". That would make 25% of the ongoing earnings free of income tax until full retirement, capped at £40,000 worth of earnings.

The proposed fix is to discourage people from taking an income above that 25% lump sum by restricting contributions to pensions from £40,000 to £10,000. On the face of that it would seem to reduce the earnings for which this can be done to £40,000. But that ignores the reality that most who could benefit fro this would already start with large pension pots and other assets and could be expected to fund their spending for many years without being affected substantially by the new rule.

So I think that the new rule as described so far is almost entirely pointless. Instead I observe that the annual allowance for pension contributions has already been hugely reduced from over £200,000 to £40,000 so it already limits the rich and very high earners and relying on that plus a measure directed only at organised tax avoidance schemes would be a better approach. Organised schemes to stop certain types of "creative" employers such as banks from engaging in mass exploitation.

Mr_Proctalgia

Reading 2.3.1 bullet point four has me asking the question whether the GAD rate will stay at 150% or drop back to 120%? After all it was only stated to be available till April 2015, when we would all have the "opportunity" to move to capped accumulation?