Is it too early for an Autumn Statement thread?

Snakey

I clearly have too much time on my hands as I am already wondering what the new Chancellor, with all the economic impact of a Brexit on his hands that wasn't factored in to the last Budget/Finance Bill, might do about pensions.

It impacts me because I stopped making contributions in order to be able to get Fixed Protection, and am now wrestling with a "nice problem to have, but..." personal allowance clawback (62% marginal tax rate! eek!). If anybody was to come along and abolish the LTA, I'd rather they did it this year than in the future, so that I could start making contributions again in the current tax year.

Just wondering if anybody else might care, for whatever different reason you may have for doing so, and feel inclined to swap random and ultimately futile guesses with me? I quite enjoyed all the kerfuffle around last time, considering the impact of various possibilities, even though in the end nothing changed. All that condoc stuff is still out there somewhere, just waiting to be picked up by somebody new...

ex-pat_scot

What I would like: "unfair" wrinkles ironed out, including

- abolish LTA entirely and use the Annual Allowance as a throttle for "excessive" pension tax relief.
- full transfer of unused spouse Nil Rate Band, so as not to penalise families who choose to have one working spouse rather than two
- abolish the Nil Rate Band clawback on salaries above £100,000 (which makes the marginal rate 62%)
- limit Child Benefit to 2 children, for those born from 2017 onwards (so as not to penalise those families already with > 2 children).
- treat and tax (& benefit) families as a unit consistently, rather than piecemeal
- remove the gesture politics in restricting tax relief on pension contribs for higher earners (>£150,000)
- keep the highest rate of tax at 45%
- keep the highest MARGINAL rate of tax at <50% (great idea; impossible in practice)
- if you have to withdraw CB, then do so on FAMILY combined income basis, not on individuals (current situation of 2 earners on £50,000 each receiving full CB but one earner on £60,000 receiving none)
- student loan rates at LIBOR +1% as a guaranteed tracker rate.
- keep CT @20% minimum rate, rather than a race downwards (see Eire).
- leave pension access age at 50, as it was before. If there are concerns about aggressive depletion of funds, then restrict max annual depletion of pot (requiring an age-scale max % allowed to spend - eg for a 55 year old with life expectancy of 35 years, allow a max of 150% of 1/35th of the pot). In principle, if you determine you have sufficient funds upon which to retire and can support yourself, then why deny a person access to their OWN money?
- allow pension contributions into spouse pension at marginal tax relief rate. (eg for one working person, allow them the £40,000 AA for themself and also for their non-working spouse. The retirement funds will have to cover both of them in their dotage)
- allow employees whose employer does not offer childcare voucher or tax free bikes to get the equivalent tax relief via Self Assessment (At the moment, if your employer does not offer these, then you cannot get the benefit of them).
- don't for God's sake start messing around with Flat Rate pension relief. Once that genie is out of the bottle, then it will be open season to tinker (downwards) on the rate until it is no longer viable.
- if you must, then restrict the tax free cash element of FUTURE pension contributions.
- in general, stop messing around with pensions like it's an annual itch that requires constant scratching. Trust is a vital component in encouraging people to lock their funds away for decades - at present, there's little certainty over the stability of the present approach to pensions even over the short (3-5 year) window, never mind the longer timeframe typical of workers.
- disengage the Triple Lock. It's an expensive gesture that is resulting in transfer of wealth to the elderly

What do I THINK will happen?
- lots of posturing about BREXIT having fundamentally changed the basis of the country finances, and as a result using this as an excuse to revisit pretty much anything they choose.

RuleTheWorld

surely no fundamentals will be changed until after we are out of europe which may be a year or two yet

Thrugelmir

Let's see what the OBR forecasts. Been a while.

JUNE 30, 2016

Statement on our work following the EU referendum

In light of the vote to leave the European Union in last week’s referendum – and given the remit set out for us by Parliament in primary and secondary legislation – we have set out the OBR’s role in assessing the potential implications for the economy and public finances. In summary, we stand ready to produce our next medium term forecast in the autumn as requested by the Chancellor and we have cancelled the planned July 2016 publication of our long-term projections based on the March 2016 forecast.

OldBeanz

Too late at night to be going into Ex Pat's list in full detail but a couple could be earning £90k each and still be paid CB if they each whack £40k into a pension. The Gvernment have spent years disentangling married allowances, they are unlikely to reverse that process. I think the money that a 40% tax payer can save by paying into a pension is highly disproportionate to someone struggling on the minimum wage. It is those on the minimum wage who need the encouragement to save.

jamesd

ex-pat_scot wrote: »

- leave pension access age at 50, as it was before. If there are concerns about aggressive depletion of funds, then restrict max annual depletion of pot (requiring an age-scale max % allowed to spend - eg for a 55 year old with life expectancy of 35 years, allow a max of 150% of 1/35th of the pot). In principle, if you determine you have sufficient funds upon which to retire and can support yourself, then why deny a person access to their OWN money?

Why do you want to deny people access to their own money at the time they most need it, before state pension age and before any other pensions are in payment? This is a time when high and unsustainable long term rates are required. You appear to be assuming 35 years life expectancy and that's too high for many people. You might be basing it on the value of the pot each year so at age 100 it's still 150% of 1/35th of the pot.

Pension income taking doesn't need to be long term sustainable, it's the overall plan that does need to be. It's entirely possible to draw the lot out over five years and have a sustainable plan, just not for that particular pension pot. Say while deferring the state pension, when you might draw 8k a year from a 32k pot. Or taking all of a pot that has no guaranteed annuity rate to save one that does.

1/35th is also a very low level for drawdown, just 2.86% or at 150%, 4.3%. Modern drawdown rules for a 30 year plan can go above 6% without expecting to have to decrease income even in worst cases, more is likely in other cases. And for shorter life expectancy higher still. So you're in effect proposing to ban people from taking out all of the money from their pension pots using your suggested numbers, a horribly bad idea.

Pension access age at 50 would be good, it would provide a welcome incentive to use pensions for earlier retirement planning, instead of forcing people doing that to not use pensions for part of their planned income. It's unfortunate that your other proposal would force people not to use pensions for much of their planned early retirement income.

ex-pat_scot wrote: »

What do I THINK will happen?

what I dread is someone doing what you mentioned and capping how much I can take from pension income now I've already made the contributions knowing there's no cap so I'll be able to draw as fast as I need. That would retroactively mean I should have used VCTs or ISA instead of pension contributions, when it's too late for me to change the contributions I've already made. It would either force me to delay retirement, or greatly restrict my income having already retired, or force me to restart working, possibly after many years of retirement.

ex-pat_scot wrote: »

- abolish the Nil Rate Band clawback on salaries above £100,000 (which makes the marginal rate 62%)

It's useful revenue so dropping to to an 80k starting point and spreading it over the range to £150k seems more likely as a way to reduce the marginal tax rate.

ex-pat_scot wrote: »

- limit Child Benefit to 2 children, for those born from 2017 onwards (so as not to penalise those families already with > 2 children).

Why punish the extra children, they are who the money is for.

ex-pat_scot wrote: »

- remove the gesture politics in restricting tax relief on pension contribs for higher earners (>£150,000)

It's not just gesture politics, this is also the group that can most afford it and their money might be used instead to help new businesses via the VCT, EIS and SEIS reliefs instead. There are already indications that VCTs are going to benefit from higher demand.

ex-pat_scot wrote: »

- allow pension contributions into spouse pension at marginal tax relief rate. (eg for one working person, allow them the £40,000 AA for themself and also for their non-working spouse. The retirement funds will have to cover both of them in their dotage)

Allowing it instead of rather than in addition to the one for the first person might be interesting. There is a tax cost because the spouse is likely to have lower tax rate in retirement. Allowing it for two people is just an increased tax relief gift to high earners and a political non-starter, I assume.

ex-pat_scot wrote: »

- in general, stop messing around with pensions like it's an annual itch that requires constant scratching. Trust is a vital component in encouraging people to lock their funds away for decades - at present, there's little certainty over the stability of the present approach to pensions even over the short (3-5 year) window, never mind the longer timeframe typical of workers.

Yes, please. I'd like to know I can plan on the current system not suddenly changing to lock up my money.

ex-pat_scot wrote: »

- disengage the Triple Lock. It's an expensive gesture that is resulting in transfer of wealth to the elderly

It's a major helper of low income households, often single women with a deceased spouse. There's a manifesto commitment to it and still a long way to go before we get back tot eh Thatcher-era income replacement level. Thatcher is when the income link was broken. But it is arguable that relative targets like 60% of average income for poverty just aren't right for a wealthy country like ours and that some absolute measure would make more sense.

stephennt

jamesd wrote: »

It's useful revenue so dropping to to an 80k starting point and spreading it over the range to £150k seems more likely as a way to reduce the marginal tax rate.

Personally I'd prefer they just changed the tax rate to 45% from 100k upwards rather than withdraw the allowance in this way. Having an allowance withdrawal looks more like a gimmick so they can say they haven't put income tax up.

jamesd wrote: »

Why punish the extra children, they are who the money is for.

Obviously a tricky topic; as the money doesn't go directly to the children it can also act as a small incentive to have extra children. Perhaps it should taper off in the same way as the dropoff from the 1st to the 2nd child?

jamesd wrote: »

It's not just gesture politics, this is also the group that can most afford it and their money might be used instead to help new businesses via the VCT, EIS and SEIS reliefs instead. There are already indications that VCTs are going to benefit from higher demand.

I would argue that anyone paying 40k into their pension pot can afford it, plus those earning such high amounts are also mostly likely to pay 40% on the way out too (so actually the cost of providing tax relief to them is less). Why not just cut the annual limit to 30k for everyone if it's about increasing revenue for govt?

jamesd wrote: »

Allowing it instead of rather than in addition to the one for the first person might be interesting. There is a tax cost because the spouse is likely to have lower tax rate in retirement. Allowing it for two people is just an increased tax relief gift to high earners and a political non-starter, I assume.

Agreed: I can't see the government touching this.

ex-pat_scot

jamesd wrote: »

Why do you want to deny people access to their own money at the time they most need it, before state pension age and before any other pensions are in payment? This is a time when high and unsustainable long term rates are required. You appear to be assuming 35 years life expectancy and that's too high for many people. You might be basing it on the value of the pot each year so at age 100 it's still 150% of 1/35th of the pot.

Pension income taking doesn't need to be long term sustainable, it's the overall plan that does need to be. It's entirely possible to draw the lot out over five years and have a sustainable plan, just not for that particular pension pot. Say while deferring the state pension, when you might draw 8k a year from a 32k pot. Or taking all of a pot that has no guaranteed annuity rate to save one that does.

1/35th is also a very low level for drawdown, just 2.86% or at 150%, 4.3%. Modern drawdown rules for a 30 year plan can go above 6% without expecting to have to decrease income even in worst cases, more is likely in other cases. And for shorter life expectancy higher still. So you're in effect proposing to ban people from taking out all of the money from their pension pots using your suggested numbers, a horribly bad idea.

Pension access age at 50 would be good, it would provide a welcome incentive to use pensions for earlier retirement planning, instead of forcing people doing that to not use pensions for part of their planned income. It's unfortunate that your other proposal would force people not to use pensions for much of their planned early retirement income.

I was rather clumsily trying to suggest that an argument against allowing earlier (50) access to one's own retirement fund might be seen to be insufficiently prudent, and that there might be some sort of safeguard in place to maintain some residual funds in place.
If a 55 year old had a life expectancy of 90 (say), then the overall pension funds should be planned to last that long (ie 35 years) and some sort of depletion of assets check #might# be sufficient.
As you point out, that approach would have to consider those people front-running a DB (and SP) by deliberately running down DC pots.

I guess we won't know the behavioural aspects of Pensions Freedom for some time. My understanding of the Australian approach is that people are rather too cautious in actual spending of funds, rather than being reckless.

I do worry that there are some suggestions that people shouldn't be allowed to retire early (George Osborne, if I recall), and that earliest access to one's own funds should be SPAge minus 10 or SPAge minus 5 (or even SPAge).
That would be a big spanner in my works, as my SPAge is 68.

jamesd wrote: »

Why punish the extra children, they are who the money is for.

Not punishing the children. Just indicating that state support for them is no longer endless.
Perhaps a steeper sliding scale of CB for subsequent children would also achieve the same message.

I

jamesd

Some sort of safeguard might seem prudent but at what level? Is the state pension sufficient, so what would have to be reserved is sufficient money to buy enough years of NI to get to the flat rate cap? Any more than that is clearly above what society thinks is needed since that's also above the means test level. And does that money have to be in pensions or is downsizing a mansion or say a million pounds of ISA money sufficient instead?

I'm not keen on the old 20k guaranteed income (meaning annuity or defined benefit) in payment, ignoring future state pension. Partly because that's way too high and partly because it's daft to buy an annuity at relevant ages unless you have money to burn. I don't have that sort of money to burn and am not keen on a bung to insurance companies as a condition.

A sort of number might be saying, "OK, we think you must have state pension income level and we accept you can use drawdown, and we'll use more modern drawdown rules and assume 8% if your health is normal, boosted for shorter life expectancy for these common conditions... . To get that £8k you must have total potentially available assets of £8k / 0.08 = £100,000. Qualifying assets are all financial assets you have except that the value of a home is net after mortgage balance and you must have enough to buy a median price one bedroom flat in the cheapest part of the country on top. If you do not own a home your income target is increased by the median rent for a bedsit in the cheapest part of the country. Alternatively you must have 8k per year to state pension age plus the rental substitute for ownership if applicable. If you're a couple the requirement is 1.5 times the single person limit for income before housing allowance."

That's still not great for those with lower income targets but it's at least not as excessive as 20k or very low drawing rates. But that 8k per year rule... that's 12.5 years for a 100k pot. Which is about the same as state pension age from an age 55 start. So maybe 8k plus possible rental allowance times years to state pension age would be a simpler substitute rule for total net worth. But that doesn't allow for investment growth beyond inflation so maybe 8k per year for the five years closest to state pension age, 7500 for the preceding five and 7000 for the rest.

Most people planning deliberate early retirement would probably have higher targets than that so I suppose it wouldn't be too restrictive if we ignore potentials like inheritance.

For me and quite likely for you the possibility of earlier retirement is a significant incentive that already means I'll probably not ever again be dependent on means tested benefits.

I was pleasantly surprised when the government just left it to us to do whatever is sensible for our own situations, taking into account our whole financial and life expectancy position, and that of family if relevant. Means that as long as I trust it, I can do sensible planning to use pension money.

It's not only Australia where people tend to be too cautious, the same happens in the US and the discussions here about when to retire also make it clear that the same issues is present in the UK. So you can effectively punish the ones who'd think ahead to protect those who don't and only paid in what they had to or were nagged into doing, but that's not great policy and nagged into probably isn't going to make a huge difference to outcome.

Agreed about the need to have a suitable planning horizon but still, that's flexible as can be target incomes throughout retirement.

I agree that there does seem to be some incentive to have many children while on benefits.

Thrugelmir

stephennt wrote: »

Why not just cut the annual limit to 30k for everyone if it's about increasing revenue for govt?

In addition add 30% tax relief to all contributions made. This would then provide a welcome incentive to encourage people to save for their own retirement.

ex-pat_scot

Thrugelmir wrote: »

In addition add 30% tax relief to all contributions made. This would then provide a welcome incentive to encourage people to save for their own retirement.

No! On two reasons.


1. the current marginal rates of tax on contributions are 32% (basic rate) / 42% (higher rate).
A flat rate at less than 32% is actually reducing the incentive for BRT payers.


[this is rather academic unless you do it under salary sacrifice, I will admit].


2. you do not ADD tax relief. It is simply NOT deducted. It might seem like semantics, but it is a fundamental principle. You are not being given extra money - you are simply not being taxed yet on the money you earn today.


I really do fear the introduction of a flat rate relief, for both of the above. It will be down to the largesse of the state that we are "allowed" any pension tax relief, and decoupling it from your marginal tax rate would mean that successive governments would be free to tinker with the % rate as they saw fit.