Osbourne's tax relief changes in the March budget

EdSwippet

_CC_ wrote: »

Do we know how much the Treasury spends when it comes to the various tax relief brackets for contributions?

With the general objection that it is neither 'spending' nor 'relief'... the usual number given by the government is £34bn. For political purposes the published figure usually fails to recognize the £13bn or so in tax taken in from yesterday's pension savers, now today's retirees.

_CC_ wrote: »

If it's possible to stay around cost neutral by introducing a single tier relief which is higher than 20% then I can see that be very tempting politically, and personally I think it's a decent idea.

The Pensions Policy Institute -- with 'help' from the TUC, so may not be unbiased -- suggests a flat 30% rate would be 'cost' neutral. It is an open question as to whether we have a chancellor who would stop at 'cost' neutral rather than prefer instead to drain yet more out of the UK retirement savings in order to further his own political ambitions.

MDMD

_CC_ wrote: »

Do we know how much the Treasury spends when it comes to the various tax relief brackets for contributions?

They don't seem to publish it as far as I can see - they just give the total relief, but they do show how much the amount is net of tax payments by pensioners

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407258/PEN6__2001-02_to_2013-14___for_publication.pdf

The last two pages of this document give the basis for the estimates:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/463101/September_2015_Pensions_publication.pdf

EdSwippet

chiefie wrote: »

From what I have read previosly 30% is cost neutral so when the change comes I expect 25%

If it comes to pass, it will make for interesting times for higher rate taxpayers.

At 25% flat rate, and absent salary sacrifice, anyone in higher rate tax now and who might also pay higher rate tax during drawdown may be better off not paying into pensions at all. 15% tax on the way in and a further 30% on the way out is 40.5%. This is worse than just taking salary, and with the additional disincentive of tying money up for decades.

The numbers are even more horrible for additional rate taxpayers and anyone stuck in the 60% allowance phase-out band.

Snakey

Technically it's marginally better since you also have 2% NI if you take the money now, but the big downside of pensions is that you're tying your money up and one of the big proposed changes is an increase in the age at which you can get your hands on it.

I'd still potentially go with it if I could be absolutely sure that the PCLS would still be around by the time I got there, but I don't think it will be.

I wonder whether they have built in behavioural change to their calculations? I suspect there is a relatively small number of people making the bulk of the higher-rate contributions - and these are, by definition, people who don't need the money. To assume that they'll be paying more tax one way or the other - either by making the same contributions, or being fully taxed on taking it as salary instead, would be naive.

If I go on a four-day week instead of putting £40k into my pension, who benefits? Not the economy, since my productivity is dropping by 20%, not the taxman who now has nothing to tax at all (now or in the future), and definitely not the forty people all putting in an extra £20 a week that the Government had assumed I would be subsidising, since if I'm not paying for it then it'll have to come out of some other pot.

zagfles

hugheskevi wrote: »

A good question. I would usually have said yes, but we already have the precedent of taxing people real money based on wildly inaccurate estimation processes. If you tolerate it for higher earners, perhaps it could be tolerated for all. It does primarily affect public sector, which could increase the probability of using an inaccurate valuation system.

I think it would be possible to use a scaled-up CETV-type estimate system. The cost and delivery would fall on schemes, and based on recent Annual Allowance changes there seems to be quite an appetite for frequent change which increases administration burdens for schemes and individuals but puts a minimal burden on HMRC. That would be my guess as what is done if the same treatment is applied to DB and DC schemes.

I really can't believe they'll do that. CETVs can change for all sorts of reasons including external factors, eg annuity rates. Are we really going to end up in a situation where an individual can end up with a very large tax bill just because annuity rates have gone down (causing the CETV to go up)?

Employer pension contributions will certainly have to be valued, but they should be valued in a simple and predictable way so that people can understand the effect it will have on their tax bill. I'm sure that will come before any attempt at getting an accurate valuation of the benefit. People who drive company cars don't get taxed on anything like the actual value of the use of the car.

zagfles

EdSwippet wrote: »

If it comes to pass, it will make for interesting times for higher rate taxpayers.

At 25% flat rate, and absent salary sacrifice, anyone in higher rate tax now and who might also pay higher rate tax during drawdown may be better off not paying into pensions at all. 15% tax on the way in and a further 30% on the way out is 40.5%. This is worse than just taking salary, and with the additional disincentive of tying money up for decades.

The numbers are even more horrible for additional rate taxpayers and anyone stuck in the 60% allowance phase-out band.

Well with the £1m LTA there really isn't much point even now in saving so much in a pension that you end up paying 40% tax when you draw it. Especially if they put the 40% threshold up to £50k as they promised.

hugheskevi

I really can't believe they'll do that. CETVs can change for all sorts of reasons including external factors, eg annuity rates. Are we really going to end up in a situation where an individual can end up with a very large tax bill just because annuity rates have gone down (causing the CETV to go up)?

I suspect there would be prescribed assumptions set by some authority, possibly HMRC, maybe the Pension Regulator. One of those assumptions would be the discount rate. I agree you wouldn't want this to be variable, so something like the SCAPE discount rate could be used. Although that then gets well away from established processes.

Things such as mortality basis and improvement basis may also probably need to be prescribed, otherwise there would be scope for abuse from small schemes using unreasonable assumptions, and in any event, should an individual pay more tax than an otherwise identical individual just because their scheme actuary has a different view on future mortality changes even if everything is genuinely set on a best estimate basis.

The only thing I think can be confidently said is that it is a good time to be a pension actuary .

westv

Snakey wrote: »

one of the big proposed changes is an increase in the age at which you can get your hands on it.

Really don't like the sound of that.

kidmugsy

A lot of well-paid people will want two things that might prove incompatible, namely (i) to protect themselves from potential legislative change, by leaving making their large pension contributions until as near their preferred retirement date as possible, and (ii) to take advantage of the 40% relief while it still exists.

The prospect of anti-forestalling legislation may complicate matters further.

OldBeanz

I cannot believe that the government will want to change the age differential of 10 years from state pension for personal pensions. The previous initiative was instigated by a Labour MP before the last election.
The present incentive for 40% tax payers to stuff their pensions is obvious. You could have a couple both earning £80k and by paying the max into their pensions still claim child allowance.
The Telegraph puts it thus "Taking the HMRC figures for 2011-12, the Centre for Policy Studies calculated that those earning £50,000 and above benefited from 53pc of total tax relief. Those earning under £30,000 benefited from 21pc.
Or you could cut the numbers this way: while 1.6 million savers, earning up to £15,000, shared pension tax relief worth £1bn, 186,000 savers earning £150,000 or more shared relief worth £6.3bn."
From a government point of view, higher rate tax payers are unlikely to become a burden on the state in retirement. Low tax payers may well be.
Why should they be providing tax incentives for those with the ability to save while constraining support to those likely to be short of funds and likely to fall back on the state? From one point of view anyone with a pension above £20k pa is unlikely to need government support so why provide any further incentives.
As for salary sacrifice, why would the government let people not pay NI?