Osbourne's tax relief changes in the March budget

EdSwippet

gadgetmind wrote: »

Why should they get special dispensation when those putting in their own money and taking market risk don't?

Now that I've fixed the link (oops!), perhaps you can see their logic. The salient part is this one: "Unions now want a similar strategy to apply more widely to well-paid public sector staff - but with cost-neutral "compensation" paid in the form of additional salary." (Emphasis here is mine.)

These are people bumping up against the new LTA. Once they hit it, their pension contributions are taxed, by design, more heavily than if they had taken income. Yet unlike (some of) the private sector, they cannot choose salary over pension. In effect the pension contributions part of their compensation package will now be less efficient than plain old salary. All the unions are asking for (apparently) is the option to transmute pension contributions into taxable salary. Salary after 40% tax is higher than pension after 55% tax.

We can of course argue about whether public sector pensions are much more generous than private sector ones (they probably are), and whether the holders of them take lower risks than those in defined contribution schemes (they probably do). But at core it seems that what we now have is a chunk of some folks' total 'compensation' being funneled forcibly down the likely least efficient channel for them, and where redirecting it to a different channel would cost employers (aka the taxpayer) nothing at all. And that seems wrong-headed.

The DT polemic is of course all over this as a 'pay rise' for civil servants. I'm pretty certain it is not that simple, and a bit of critical thinking suggests a deeper and perhaps real issue.

EdSwippet

PensionTech wrote: »

I don't, and here's why: the LTA is much more generous for those in DB schemes ...

Agreed entirely. I'm in DC and the LTA reduction sucks for me. Sufficiently, in fact, that I am retiring early over it, because my private sector employer has failed to do what the unions are asking for here, which is a cost-neutral change in the way existing compensation is paid.

Which is why I get what they are saying. The DT clouds the issue horribly. Here's Tim Worstall making broadly the same point. Again, no quarrel on the inequity between DB and DC. I see that first hand. Very first hand.

I know exactly what it is like to be handed a choice between a) taking FP16 and having one's salary reduced by tens of percent, or b) not taking FP16 and seeing £63k disappear in extra tax. The fact that I see it at half the level of those in DB is more than irritating, but that doesn't mean that it's right in principle at any level.

princeofpounds

I don't, and here's why: the LTA is much more generous for those in DB schemes than DC. Let's say you're 55 and retire early (with actuarial reduction of course) with an index-linked, joint-life DB pension of £50k per annum - the LTA used up is £1m. Now say you're 55 with a DC pot of £1m. You'll still use up the £1m LTA, but what annuity do you think you could purchase with that? Even at 60? Even at 65?

Absolutely agree with this. The fact that the LTA gets calculated at a 20:1 rate for DB pensions is already deeply unfair on everyone else, as that ratio of fund value:income is absolutely impossible for anyone else to achieve.


Now, I personally back them getting the same options to preserve their LTA allowances at higher levels just like everyone else who already has a pot caught up in the lowering threshold*


But then they should have their benefits assessed at the ~30:1 rate that everyone else has to deal with.


Otherwise, it is absolutely equivalent to saying certain 'special' people get a lower rate of tax in retirement than others.


And I do also back them getting the option of directing future contributions into salary rather than pension, and being taxed. We should tax them properly but also give them the same options to optimise their tax affairs as anyone else. That would probably show up just how £££ certain public sector positions are though!


(*I'll leave aside the ethics of preserving benefits for older people at the expense of younger people)

gadgetmind

EdSwippet wrote: »

But at core it seems that what we now have is a chunk of some folks' total 'compensation' being funneled forcibly down the likely least efficient channel for them

Excuse me while I find the world's tiniest violin. Unless the public sector, including our leaders and their mandarins, feel the same pain as we do, then they will remain blind to the problems being caused.

By messing with my pension they are forcing me (1) to take income that's taxed at 60% and even 80% in some cases, so they can suck it up and feel some of the pain for once.

(1) - or would be if I wasn't able to reduce my hours.

zagfles

EdSwippet wrote: »

These are people bumping up against the new LTA. Once they hit it, their pension contributions are taxed, by design, more heavily than if they had taken income. Yet unlike (some of) the private sector, they cannot choose salary over pension. In effect the pension contributions part of their compensation package will now be less efficient than plain old salary. All the unions are asking for (apparently) is the option to transmute pension contributions into taxable salary. Salary after 40% tax is higher than pension after 55% tax.

Not much though, as you obviously need to account for NI too, 2% employee NI, and 13.8% employer NI. I make it effectively 49% on salary, if in the 40% band, then tax on any unwrapped investment growth.

Plus any salary above £50k will reduce child ben, above £100k will reduce personal allowance, and above £150k will be charged at 45%. So even at 55% tax on the pension, it might be better than salary!

hugheskevi

Plus any salary above £50k will reduce child ben, above £100k will reduce personal allowance, and above £150k will be charged at 45%. So even at 55% tax on the pension, it might be better than salary!

A lot of the people affected would also be breaching the Annual Allowance, and also then be on the taper for having their Annual Allowance reduced from £40,000 to £10,000 (which starts much lower down the salary spectrum than the highlighted £150,000 due to the inclusion of pension input).

Once the pension contribution is taxed at 40% on the way in due to being above Annual Allowance, further increases the AA charge due to the tapered reduction, and then has income tax and a LTA charge payable on the way out, the pension contribution starts to look very expensive. Particularly for younger higher earners, for whom factor 16 is probably a significant over-valuation of the value of their pension.

EdSwippet

gadgetmind wrote: »

Excuse me while I find the world's tiniest violin. Unless the public sector, including our leaders and their mandarins, feel the same pain as we do, then they will remain blind to the problems being caused.

Well sure. I never said I sympathized, but I do empathize with the folk affected. By messing with my pension they(*) have catalyzed my early retirement. This hardly seems like a desirable outcome either, but there you go.

(*) By whom I mean senior civil servants, MPs and their ilk. But not, obviously, the innocent bystanders in all of this, such as police officers, head teachers, doctors and so on.

_CC_

What did the FT article say for the poor people like me who don't have a subscription? :cool:

hyubh

PensionTech wrote: »

The bigger problem for public sector workers, though, is the Annual Allowance - that really does hit DB savers hard, as all you need is a modest payrise after a couple of decades in the job (think senior nurse) to suddenly be faced with a tax bill that would usually be the preserve of someone regularly earning six figures and using their pension as a tax avoidance vehicle.

Surely easily fixed by allowing scheme members to defer and start a new pension record afresh at a point of their choosing, or alternatively, by just removing the final salary link for pre-CARE membership at a given point in time unilaterally.

zagfles

hugheskevi wrote: »

A lot of the people affected would also be breaching the Annual Allowance, and also then be on the taper for having their Annual Allowance reduced from £40,000 to £10,000 (which starts much lower down the salary spectrum than the highlighted £150,000 due to the inclusion of pension input).

Once the pension contribution is taxed at 40% on the way in due to being above Annual Allowance, further increases the AA charge due to the tapered reduction, and then has income tax and a LTA charge payable on the way out, the pension contribution starts to look very expensive. Particularly for younger higher earners, for whom factor 16 is probably a significant over-valuation of the value of their pension.

OK this might be a fair point for those on £120k+ incomes, but I though we we talking about the likes of head teachers, MPs, police officers etc who AFAIK mostly don't earn over £100k. On £100k even the most generous CARE scheme wouldn't result in the AA being breached (even a 43rd scheme would be about £37k), a FS pension might occasionally when there's a significant payrise.