Effect of busting Lifetime Allowance

zagfles

ex-pat_scot wrote: »

Whilst my spreadsheet does indeed index the LTA each year, I have zero expectation that in 7 -odd years' time, when I will be first able to access my funds, the LTA will look anything like the £1m, indexed or not.


I #hope# that the whole sorry mess will be destroyed, and that the sensible throttle of Annual Allowance will be used as the pragmatic control over appropriate limits to pension tax relief.


However we are in a current climate of "bash the rich", and anyone remotely touching either the £40,000 AA or £1m LTA is viewed as fair game for "just a little bit more for the sake of the many". As such, any concession or removal of this will be seen as the chancellor giving valuable tax breaks to His Chums (registered trade mark pending).

Yes ironic since the LTA was £1.8 million and the AA was around £250k under Labour, the Tories/coalition reduced them massively to £1M/£40k yet they constantly get accused of giving handouts to the "rich" by those who judge by stereotypes rather than facts.

GunJack

Just a thought......

anyone taking tax relief out of the system on £40k pension contributions is getting 1 to 1.5 pensioner's-worth a year....is this morally right??

just saying....

EdSwippet

GunJack wrote: »

anyone taking tax relief out of the system on £40k pension contributions is getting 1 to 1.5 pensioner's-worth a year....is this morally right??

Yes. It is not tax relief, it is tax deferral. Withdrawals from the pension will be taxed. And after pension growth over time, that tax on withdrawals will fund more than 1 to 1.5 pensioner's-worth a year.

Just saying.

GunJack

EdSwippet wrote: »

Yes. It is not tax relief, it is tax deferral. Withdrawals from the pension will be taxed. And after pension growth over time, that tax on withdrawals will fund more than 1 to 1.5 pensioner's-worth a year.

Just saying.

even if one is hrt on the way in but brt on way out?? still looks rather unbalanced....

just saying.....

EdSwippet

GunJack wrote: »

even if one is hrt on the way in but brt on way out?? still looks rather unbalanced

Only because the higher and basic tax rates are hugely unbalanced in the first place.

ex-pat_scot

EdSwippet wrote: »

Only because the higher and basic tax rates are hugely unbalanced in the first place.

Frankly not nearly as unbalanced as headlines might suggest.
It's simplistically 20% vs 40% "saved" in tax for BR vs HR.


However:
Salary sacrifice means that it is 32% vs 42% BR vs HR. Not quite such a chasm.


As to whether getting tax relief on pension contributions is morally right...


The greater tax relief "enjoyed" by HR taxpayers is a natural consequence of the progressive tax regime.
As others have noted, it is "tax deferred", not "tax relief". Yes there may be arbitrage in rates of tax whilst working vs in retirement. But fundemantally, if we believe that it is A Good Thing to encourage saving for one's dotage, then I cannot see any other mechanism that would work.


We could always turn to a totally fair transparent tax regime of flat rate tax. It is in place in Singapore @ 20%. However we are a very long way culturally from ever getting that discussion on the table, even if it were desirable.


There has to be some carrot to encourage locking your funds away at considerable long term risk. There's a lot that can change between now and retirement, including (but not limited to)
- changing the entry date from 55 upwards
- taxing growth in current funds
- introducing pensioner tax surcharges
- introducing pensioner NI charges
- forcing purchase of annuities or govt bonds
- reducing LTA or AA further


etcetera.

System

GunJack wrote: »

Just a thought......

anyone taking tax relief out of the system on £40k pension contributions is getting 1 to 1.5 pensioner's-worth a year....is this morally right??

just saying....

Yes, taxation is legalised extortion.

Malthusian

GunJack wrote: »

even if one is hrt on the way in but brt on way out?? still looks rather unbalanced....

just saying.....

Yes, but we keep very quiet about this because it is one of the few ways moderately well off earners can get something back out of the system. Over the course of their lifetime they will still contribute far more than they take out. And as per Lord Clyde no man is obliged to order his affairs to maximise HMRC's tax take.

The richest 10% of taxpayers (those earning over £51,400 a year) pay 60% of total income tax, which sounds extremely unbalanced, but no-one complains about that (unless they want a pillorying).

We don't make the rules and this is the consequence of having a regressive tax system. As ex-pat scot said, if the Government didn't want people to arbitrage the difference in tax rates in working life and in retirement, they could switch to a flat tax system. Or fulfill its pledge that income tax was a temporary measure and abolish it altogether, and adjust VAT and corporation tax to compensate.

RD42

Don't forget that you might die before you get a chance to access the funds.