One-off contribution help - so unfair!!

grey_gym_sock

ratechaser wrote: »

there are those that won't be happy until the 'rich' are taxed at 98% and have to turn up to the HMRC office in sackcloth and ashes to pay their dues in person... :doh:

there are 'rich' ppl who complain about a top rate of tax of 47% (including income tax + employee NI) as if it were about the same as 98%.

westv wrote: »

Should the person who has an bad ache in their leg not complain because others have had an amputation?

it's a matter of how you complain ... imagine you're on a crowded train, mostly full of amputees, and somebody pushes past inconsiderately, kicking you on the shin ... do you say: "excuse me, do you realize you just kicked me? i could have moved, if you'd said you were trying to get past." ... or: "oh my god! how can i live with superficially damaged leg! i am in agony!"

princeofpounds

Ah, but the 'loophole' people will say is you defer your marginal high tax rate for a much lower tax rate in retirement.

Yes, that's why I say that there is an incentive by design. It's not a loophole, it's the intended consequence of the entire idea behind saving deferred compensation for retirement.


Any government changes will probably preserve some kind of incentive, but will remove the underlying principle of deferred compensation.


Edswippet described it more eloquently than I will, but I think people fundamentally forget that the way we do income tax is actually pretty unfair.


We don't tax actually the wealthy much at all (capital gains is much much lower than income tax, especially with all the reliefs available). What we actually tax is people generating wealth through salaried employment - especially those who receive compensation on a lumpy basis - which is a very different thing.


We also have entirely arbitrary one-year cut off periods which mean that anyone who earns a large salary in some years and then mediocre salary in other years actually does much worse than someone who earns the same amount in a steady manner.


It would actually be much fairer to have some kind of progressive taxation on the cumulative amount of money earned over a lifetime (though impractical, because the current system does at least roughly match the timing of tax obligations and cashflow).

princeofpounds

there are 'rich' ppl who complain about a top rate of tax of 47% (including income tax + employee NI) as if it were about the same as 98%.

And if you include VAT, council tax, removal of tax free allowance and child benefit etc. the underlying tax take is far north of 50% - probably nearer 70%.


I personally favour a progressive tax rate. But I also think there is something potentially immoral about government taking more than half of somebody's income. You have to question at which point you stop being an individual and start becoming a serf of the state.

Triumph13

zagfles wrote: »

Which is why I think the govt will go for a simple model. Flat rate is incredibly complicated - employer pension conts have to be valued and probably become a taxable benefit, tax bills could be unknown and hard to work out. You have the prospect of taxing the same income twice.

Another reason I'm betting on a simple model is that there has been so much tinkering lately he really has to sell this as an easily understandable system that has the potential to stay largely unchanged for a generation. The more complicated they make it the more ongoing tinkering it will need and the more it will have to change when other tax rules change.

PensionTech

Which is why my money's on a simpler system of:
scrapping the AA for DB,
scrapping the LTA for DC,
tapered much lower AA for DC which effectively limits the total tax relief (like they've already done for additional rate payers), so a higher limit for basic rate taxpayers say £15k, maybe £12k for higher rate payers, giving a bit under £5k total relief,
top up for basic rate taxpayers say 12% if they use personal pensions or net pay to an employer's scheme (none for sal sac as they already get NI relief).
Full marginal relief on contributions.
Sal sac & employer conts not an issue (other than counting towards the AA).
No PCLS, or perhaps a nominal one of £30k or so (existing 25% on current pension values preserved)
LTA for DB set at about £750k.
Those in both DC and DB, LTA reduced by DC conts £ for £

That would be truely EET. Much easier to understand and implement I think.

Phew! I'm impressed by your ability to call this simple - you must be well used to the existing "simplifications" that have already occurred in pensions

Although I think the raft of changes you've predicted would be insanely hard to communicate to the average saver, and they don't seem to tally with any industry speculation that I've read so far (of which there is a lot), that's not the main reason that I don't see this happening. You've drawn a very thick line between DB and DC. Although I suppose you could argue that the recent freedoms have enforced this disparity, I would tend to say that the differences between DB and DC are becoming less defined, not more, and it would be politically dangerous to separate them even further, given that active DB members are now almost all public sector workers (including politicians) and much would be made of their "preferential" tax treatment.

My favourite suggestion so far (and I'm sorry that I don't remember who came up with it, but it was someone on this board) is that we continue with the current system, but scrap the AA and LTA, and the actual amount of tax relief per individual is limited to, say, £300k. After that point, no more tax relief. Done.

EdSwippet

grey_gym_sock wrote: »

... imagine you're on a crowded train, mostly full of amputees, and somebody pushes past inconsiderately, kicking you on the shin ... do you say: "excuse me, do you realize you just kicked me? i could have moved, if you'd said you were trying to get past." ... or: "oh my god! how can i live with superficially damaged leg! i am in agony!"

And with that ridiculously overstretched metaphor, this thread reaches rock bottom. I doubt the OP will return. If it were me, I certainly would not.

The original post could have used a bit less editorializing. And the title is definitely suboptimal. But at its core, this is a question about how to make best use of pension savings. None of us knows the OP's situation. They might be a champagne-swilling fatcat city hedge fund manager. Or maybe a medic working 20 hour shifts. Doesn't matter, apparently; same level of opprobrium no matter which.

Which of us, in what little we know of the OP's situation, would not be taking similar action?

Responses like this one dissuade both new joiners and dissenting views. Perhaps there are those here who wish this forum to become a monoculture that functions only as an echo chamber for their own views. Well okay, but that doesn't seem desirable to me.

Triumph13

PensionTech wrote: »

My favourite suggestion so far (and I'm sorry that I don't remember who came up with it, but it was someone on this board) is that we continue with the current system, but scrap the AA and LTA, and the actual amount of tax relief per individual is limited to, say, £300k. After that point, no more tax relief. Done.

Three good reasons not to like that one:

1. It HUGELY encourages people to max out the relief then leave the country. In my firm we'd have a revolving door of high earners coming into the UK to work for a year or three, pay hardly any tax, then leave.
2. You'd have all the fun and games of maintaining the records of tax relief granted to date and adjusting brought forward balances for inflation each year
3. How do you apply it to DB schemes? You'd have to value the accrual every year and apply the appropriate tax rate. You'd also still need a mechanism for taxing further accrual once the £300k limit was breached so all you've really done is create a much more complicated version of the 'LTA for DB' idea.

ratechaser

princeofpounds wrote: »

And if you include VAT, council tax, removal of tax free allowance and child benefit etc. the underlying tax take is far north of 50% - probably nearer 70%.


I personally favour a progressive tax rate. But I also think there is something potentially immoral about government taking more than half of somebody's income. You have to question at which point you stop being an individual and start becoming a serf of the state.

+1000 to that. And that is why I complained loudly when I was being directly taxed at 52%. Whereas 47% - although more than I would really like to pay - is at least something I'll keep my peace about...

EDIT: for a moment there, I forgot about the effective 62% rate between £100-120k. So now I'm grumpy again...

greenglide

Was it the 70s or 80s when the top rate of tax was 98%? 85% normal income tax plus 13% investment surcharge - reduced from normal 15% to allow some income.

At a certain point income tax becomes effectively an employer tax as the highest paid tend to have a significant input into how much they are paid.

No sympathy from me. There is a level that is simply "too much". I do understand that competition with other countries is an issue but something needs to be done, just "what".

zagfles

PensionTech wrote: »

Phew! I'm impressed by your ability to call this simple - you must be well used to the existing "simplifications" that have already occurred in pensions

It's "simple" in terms of implementation, and also the effect it would have on a 'normal' pension saver. Basically unless you're on a high salary (top 5% or so) or you want to make unusually large pension savings, it won't really affect you. Other than the basic rate taxpayers bonus. Which is nice to get even if you don't understand why!

Although I think the raft of changes you've predicted would be insanely hard to communicate to the average saver, and they don't seem to tally with any industry speculation that I've read so far (of which there is a lot), that's not the main reason that I don't see this happening.

I think this govt like doing the unexpected

You've drawn a very thick line between DB and DC. Although I suppose you could argue that the recent freedoms have enforced this disparity, I would tend to say that the differences between DB and DC are becoming less defined, not more, and it would be politically dangerous to separate them even further, given that active DB members are now almost all public sector workers (including politicians) and much would be made of their "preferential" tax treatment.

Well they get preferential treatment now. But it's not really preferential when you look at it over the long term. A £10k AA would likely produce more than £750k over a lifetime, so a £10k+ AA could be argued to be more generous than a £750k LTA.

This stacks against the horrendous problem of trying to annually value and potentially tax a DB pension, which would have to be done if flat rate relief were introduced, otherwise that would much more unfair.

My favourite suggestion so far (and I'm sorry that I don't remember who came up with it, but it was someone on this board) is that we continue with the current system, but scrap the AA and LTA, and the actual amount of tax relief per individual is limited to, say, £300k. After that point, no more tax relief. Done.

Interesting, I didn't see that suggestion. You'd still have the problem of valuing DB, although you wouldn't need to do it annually, except for people getting close to the limit.

Some problems with it I can see:
A big payrise for someone with a few decades in a final salary scheme could result in a large tax bill.
Would people starting eg in a graduate job where they expect to be earning big in 10 years or so be put off making pension savings, after all why "waste" tax relief now when they're only paying basic rate tax when they could save it for when they pay higher rate?
Would the tax relief on investment returns count towards the total, after all if DB is valued by working out the increase in pension value over inflation, it wouldn't really be fair to work out DC just using contributions.

But an interesting idea...