Osbourne's tax relief changes in the March budget

EdSwippet

zagfles wrote: »

Why should the govt care if they 'disengage'?

Because their continued engagement is what is expected to pay for the uplift for BRT payers, from 20% to 30% or whatever flat rate deferral (excluding salary sacrifice muddying).

The Pensions Policy Institute report cites 30% as cost neutral assuming no behaviour change (their exact words). I suggest that some behaviour change is certain. The question is, how much, in what direction, and could it have the end result of making the 30% flat rate no longer cost neutral?

Snakey

Why should the Government care? Because in order for this to be profitable (or even tax-neutral), winners and losers alike have to keep playing the game.

Life in factories and shops may still be "physically present for 40 hours a week or you're no use to us", but those workers aren't the ones putting forty grand a year into their pensions.

There may not be the widespread rush for the exits that people always predict whenever a tax change impacts HNW individuals (it's never happened so far, unless you count some corporate migrations), but in the era of flexible working, home working, part time working, job-sharing, temporary contracts and portfolio careers, a lot of highly-skilled people could tear up their plans for early retirement and instead say "OK, four-day week it is, then" or "easy freelance portfolio, here I come" or "fine - I'll work for nine months of the year and then go to Thailand for the winter".

And with those type of changes, it's not necessarily the case that this will create more jobs for the rest of us - I know my boss wouldn't recruit somebody else for one day a week if I dropped from five days to four.

I know it's more complicated than that, and I'm sure the people working on it understand it much better than I do (and have better information available to them). So I look forward to reading what they come up with.

[ETA: OK, so I can't type as fast as other people. ]

gadgetmind

Snakey wrote: »

There may not be the widespread rush for the exits that people always predict whenever a tax change impacts

It's a steady "drip drip drip" and the drips are getting faster. Over time, it all adds up.

HNW individuals

Not the focus of my concerns. These changes are hitting a lot of skilled people who are in no way pin-striped fat cats.

"OK, four-day week it is, then"

That's me. Tax bill down from £50kpa to £30kpa by dropping one day plus still get £40kpa into pension. Why work more if HMRC get all the extra income?

I know my boss wouldn't recruit somebody else for one day a week if I dropped from five days to four.

I know my boss *couldn't* and my switch to 4 days has caused widespread consternation and panic.

tinter

Clearly many people are concerned about brain drain and/or inadequate skills in the economy, but I don't think anyone would suggest national level pension policy as an especially good tool to solve this in any case, being as how this would be untargeted, expensive and of very limited impact, so its probably a policy debate for another thread & forum.

The costings is more relevant. With an effective rate of 32.5% as opposed to 42%, 45%, ect, it would still appear to be an efficient mechanism even for the top 1-2%. If the suggestion is we urgently need to give them a further 10% tax break, its not clear to me this has anything to do with pension policy at all.

For the remaining 98%, including 7/8 HRT payers, who pay 20% tax in retirement it will remain either an excellent or be a greatly improved mechanism for saving.

I suspect its right that there will be some behaviour change away from pensions by those on higher rate taxes (although considerably less than asserted); however, unless they achieve an effective tax rate of less than ~23% by whatever mechanisms they choose its not a loss to the government at all so why would it worry?

In any case, the gains from scrapping salary sacrifice will almost certainly be more than loses from whatever the richest proportion change to.

saver861

gadgetmind wrote: »

Myself and others do speeches at local schools, where we try to encourage people to keep up the difficult subjects (maths and sciences), and guest lectures at universities where we explain what electronic/computer engineering is about in the real world.

Well, I think it would be digressing a bit on the thread, but the education system from the ground up is failing. Too many governments trying to look good with good results, when in fact, the subjects were getting softer and softer.

This then means we don't have enough specialist expertise, so while those gone through the education system are only qualified up to manual or unskilled status, we need to pay extra to bring in the ones that have been properly educated.

hmmm ....

kidmugsy

gadgetmind wrote: »

try describing our zany tax bands, income tax versus NI split, personal allowance claw back, etc. to an American.

Is NI any more complicated than Social Security? Is the clawback any more complicated than Federal Income Tax, State Income Tax and Local Income Tax?

EdSwippet

tinter wrote: »

... With an effective rate of 32.5% as opposed to 42%, 45%, ect,...

This is the second time you've quoted 32.5%, but I can't follow your maths. Can you expand on it.

Here is my example. It assumes no salary sacrifice, just plain pension contributions into a SIPP.

Earn £100, pay HRT and receive £60. Send it to SIPP provider. Receiving, somehow, 30% flat rate relief on the original £100 produces a £90 SIPP pension 'pot'. Later, crystallize. Take 25% PCLS of this £90, so £22.50. Take the remaining £67.50 at HRT, giving £40.50. Total net return £63, effective tax 37% on the initial £100. Compare with £60 after 40% HRT from simply taking salary.

There is a relentless tyranny of arithmetic to flat rate tax relief if it is to be 'cost neutral'. For a larger number of people to receive an uplift in benefit, the smaller number of people must take a greater per head reduction in benefit. +50% for one group might have to be balanced by -70% or more from each of the other group.

Will all the -70%+ group stump up? What if they do not? As far as I can tell it does not require most or even many of them to unbalance this equation, just some. Even a few might be enough, if at the highest end. Which is of course where the largest pain is felt, making them the most motivated to find alternatives.

Personally, I think a 30% flat rate may be a dangerous idea. Not because it is intrinsically bad so much as because it relies on no behaviour change for its cost neutrality. In one single act it both incentivises BRT payers into pensions and disincentivises HRT and higher ones out of them. To me that looks a lot like a recipe for an increase, rather than decrease, in the 'cost' of pension savings to the government.

So no we're down to horse-trading on what flat rate would be cost-neutral. I doubt anyone can call that one, since the answer lies solidly in the realm of behavioural economics. It seems a safe bet that the government will get it wrong, though. And in the process entirely break the trust of yet another generation of retirement savers.

EdSwippet

kidmugsy wrote: »

Is NI any come complicated than Social Security? Is the clawback any more complicated than Federal Income Tax, State Income Tax and Local Income Tax?

I'll offer the Alternative Minimum Tax as the poster child for US tax complexity. Why do everything once when twice is enough?

Linton

EdSwippet wrote: »

....

Personally, I think a 30% flat rate may be a dangerous idea. Not because it is intrinsically bad so much as because it relies on no behaviour change for its cost neutrality. In one single act it both incentivises BRT payers into pensions and disincentivises HRT and higher ones out of them. To me that looks a lot like a recipe for an increase, rather than decrease, in the 'cost' of pension savings to the government.
....

Flat rate relief doesnt disincentivise HRT/ART people from paying into a pension. After all 30% tax relief is still worth having. It's just that it's not so wildly and unnecessarily generous as the current scheme.

EdSwippet

Linton wrote: »

After all 30% tax relief is still worth having.

Is it really? As demonstrated by figures above, certainly not for everyone. Bad enough for HRT, but a lot worse still for ART and 60%'ers. Remember that the takings from these few have to overcome the supposed deluge of new pension savers paying basic rate tax and who, is it proposed, will now be offered a [STRIKE]bribe[/STRIKE] incentive by the government.