Osbourne's tax relief changes in the March budget

OldBeanz

The aim of the exercise is to cut expenditure/take more tax. The benefits to HRT payers is enormous and now pensions can be handed down without inheritance tax their attraction is even greater.
From a government point of view it wants fewer people to be dependant on it as OAPs. It needs more basic rate tax payers to be incentivised and does not need to subsidise HRT payers.
While there are issues with DB pensions and how they are valued these issues are not insurmountable.

TheTracker

OldBeanz wrote: »

The aim of the exercise is to cut expenditure/take more tax. The benefits to HRT payers is enormous and now pensions can be handed down without inheritance tax their attraction is even greater.
From a government point of view it wants fewer people to be dependant on it as OAPs. It needs more basic rate tax payers to be incentivised and does not need to subsidise HRT payers.
While there are issues with DB pensions and how they are valued these issues are not insurmountable.

One of the catch 22's here is the potential for the government to reduce revenue by lowering tax relief. The benefits to HRT payers may be generous but startling few eligible tax payers take full advantage. A regime that replaces the current system with a scheme that is catchy enough to attract BRT payers, like "2 for 1 top up", could perversely see more HRT payers contributing and overall, if not average, contributions rise. There'd be some poetic justice in that for all but current HRT contributors. Am I alone in detecting some perverse condescension by the government where there is an assumption that those earning over £45k are seen to be manipulating the system to gain advantage whilst those under £45k are too simple to realise they are giving up a free lunch?

zagfles

gadgetmind wrote: »

That effectively eliminates employer contributions. How would this be implemented for DB pensions?

We've discussed it earlier in this thread!!

zagfles

MDMD wrote: »

Personally I would be in favour of just scrapping the 25% tax free lump sum, that would then go a fair way to cutting the 'bill' and be far far simpler than any other option.

Then there would no incentive for basic rate taxpayers to contribute to a pension, except to cover their PA in retirement (which the basic state pension would mostly do).

zagfles

TheTracker wrote: »

One of the catch 22's here is the potential for the government to reduce revenue by lowering tax relief. The benefits to HRT payers may be generous but startling few eligible tax payers take full advantage. A regime that replaces the current system with a scheme that is catchy enough to attract BRT payers, like "2 for 1 top up", could perversely see more HRT payers contributing and overall, if not average, contributions rise. There'd be some poetic justice in that for all but current HRT contributors. Am I alone in detecting some perverse condescension by the government where there is an assumption that those earning over £45k are seen to be manipulating the system to gain advantage whilst those under £45k are too simple to realise they are giving up a free lunch?

Probably. There's no "manipulation" of the system just by using the reliefs available, just by contributing to a pension so those earnings are taxed later instead of now. And I doubt the govt think that.

As for lower earners, it's far from a simple case of a "free lunch". Things are far more complicated. If they contribute to a pension, would they be denied housing benefit/council tax/pension credit in retirement? On the other hand, if they contribute now, could they increase their tax credits or other benefits now? It will depend on their individual situation.

But this isn't the govt on some social justice campaign. It's them trying to balance the books, and if at the same time they are seen to be on the side of the average person rather than "helping their rich mates" as their opponents always tediously claim, it's an added advantage to them.

gadgetmind

zagfles wrote: »

If they contribute to a pension, would they be denied housing benefit/council tax/pension credit in retirement?

The idea of the new state pension is that the sum people get for the full 35 years is enough to replace pension credit. I'd also hope it's enough to already disqualify people from all of those other benefits, but frankly know close to zero about benefits.

zagfles

gadgetmind wrote: »

The idea of the new state pension is that the sum people get for the full 35 years is enough to replace pension credit.

If they get the full 35 years. Some people won't.

I'd also hope it's enough to already disqualify people from all of those other benefits, but frankly know close to zero about benefits.

It wouldn't. The Applicable Amount for pensioners (this is basically like the personal allowance - the income you're allowed to have before HB etc gets tapered), is even higher than the PC/full new state pension amount. So someone on the full the new state pension as their only income, who rents, would get HB in full, untapered by income.

And for those who still have a mortage as pensioners, I think they can get mortgage interest support on a similar basis.

The AA for pensioners is massively higher than the AA for working age adults - over double - so this might be something the govt could look at if they really want to increase incentives for lower income people to save for their old age.

gadgetmind

zagfles wrote: »

So someone on the full the new state pension as their only income, who rents, would get HB in full, untapered by income.

Well, perhaps that's the next thing to fix.

The AA for pensioners is massively higher than the AA for working age adults - over double - so this might be something the govt could look at if they really want to increase incentives for lower income people to save for their old age.

AA?

neilvw

Applicable Amount.

zagfles wrote: »

If they get the full 35 years. Some people won't. It wouldn't. The Applicable Amount for pensioners (this is basically like the personal allowance - the income you're allowed to have before HB etc gets tapered), is even higher than the PC/full new state pension amount. So someone on the full the new state pension as their only income, who rents, would get HB in full, untapered by income.

And for those who still have a mortage as pensioners, I think they can get mortgage interest support on a similar basis.

The AA for pensioners is massively higher than the AA for working age adults - over double - so this might be something the govt could look at if they really want to increase incentives for lower income people to save for their old age.

Yes, a set level of mortgage interest (on a loan of up to £100,000) can be added as housing costs to to make a higher 'appropriate amount' in pension credit (yes, another AA) than the standard minimum guarantee of £155.60 (in 2016/17). Disability can also increase the figure.

I think 10% of pensioners will still be entitled to pension credit by mid-century on current projections. [edit: according to the linked report it's roughly 10% on the current system projected forwards, 5% under New State Pension.]

hugheskevi

The idea of the new state pension is that the sum people get for the full 35 years is enough to replace pension credit. I'd also hope it's enough to already disqualify people from all of those other benefits, but frankly know close to zero about benefits.

If the communication that not all people will get a single rate of pension under single-tier has been poor, then the message that single tier ends means-testing has been downright misleading.

DWP evidence (page 29) shows that there is almost no change in eligibility to housing and council tax benefit.

The chart on page 30 shows that entitlement to any means-tested benefit is only fractionally reduced under single-tier. Under the existing system, around 50% of pensioners are entitled to means-tested benefits, and this would fall to slightly under 30% in 2060. Under single tier it falls to about 26/27%, so very little difference.

So whilst the new system significantly reduces entitlement to Pension Credit, it does very little to solve any incentive to save problem caused by means-tested benefits.