Will the second LTA test even be there in 17 years time??

crv1963

ex-pat_scot wrote: »

I am sure that in 25 years' time, the rules will be markedly different for AA, LTA, FP etc.

It's nuts. A bit like the Laffer curve effect on overall tax take when reducing top rate from 50% to 45%, but since when has ever tax policy been logical or sensible (or fair)?

No one will abolish the LTA in my view, the age may change but no party can afford the abolish it politically as it would be screamed that they are favoring the well off, if not rich.

If anything I believe that there will be tighter limits on the total of "tax safe" savings such as ISAs, such as the current LTA limit and possibly a tax surcharge above a certain limit to "help fund social care needs" on pension incomes and bringing pension pots into the pot to be liable for IHT. All of which would make political capital for the then Govt, at the expense of a minority that plan and save.

However most ire will be reserved for landlords who can easily be scapegoated for the poor quality housing stock nationally. Of course I may be wide of the mark and there could be greater incentives to encourage workers to save more now in the hope of reducing the overall benefit bill later?

Tax policy seems to be driven by immediate political need not coherent common sense!

ukdw

It wouldn't surprise me if most of the age 75 tests are at some point moved right down to age 55 as this would bring them a windfall of up to 20x their usual LTA tax take in the year that it is implemented.

Arguably this would also make the whole LTA system a bit simpler as a fair number of the other BCE's could then be dropped.

zagfles

ukdw wrote: »

It wouldn't surprise me if most of the age 75 tests are at some point moved right down to age 55 as this would bring them a windfall of up to 20x their usual LTA tax take in the year that it is implemented.

Arguably this would also make the whole LTA system a bit simpler as a fair number of the other BCE's could then be dropped.

How would that work? It's currently linked to the age at which you stop getting tax relief on pension contributions. If the age 75 tests were lowered to 55 then either you'd need to stop people aged 55+ getting tax relief on pension conts, hard when most people aren't retired by 55, or they'd be allowed to grow uncrystallised funds with tax relief but no further LTA tests!

John467

The thing about LTA tax charges being on 'the rich', ignores quite a few things, as for example how many people the pension has to support and for how long.


I my case I have family still in education (for another 8years in total), and my wife is 9 years younger than me, so my pot of of pension cash has to support other people for anything up to (say) in my wifes case another 40 or 50 years, and the pension pot will likely be needed long after I am dead and gone. I suddenly don't feel very 'rich' when I look at it that way. I wish now I had paid in far less to my pension in the days when I was struggling (and paying 20% income tax), when I may have to pay 55% on some of that on the way out !! It makes no sense at all to me.


I am certainly better off than many so not complaining, but rich? Doesn't feel that way.

John467

jamesd wrote: »

You avoid an increase in pot value by taking money out.

If desirable it's possible to u VCT buying to offset the income tax cost of the drawing.

This suggests to me that since you're crystallising it all with 100% LTA use you can avoid issues at 75.

.

Thats clever (I think). Does that mean say if you draw out £50k to reduce the balance, and have to pay tax on it at 40% (if drawn early) or 55% if taken as a lump, that tax can be mitigated by investing the £50k in Venture Capital Trusts? I did a quick google and I understand that would get 30% tax relief, so you only pay 10%-25% net. Is that what you mean?


If that works it makes sense, and is a partial solution if the rules are still there in 17 years time. I like that, its high risk perhaps but is certainly worth considering.


That said I may have completely misunderstood, as I am not familiar with VCTs.

Albermarle

That said I may have completely misunderstood, as I am not familiar with VCTs.

Neither am I except I do know they are normally only recommended for very experienced investors.

zagfles

John467 wrote: »

The thing about LTA tax charges being on 'the rich', ignores quite a few things, as for example how many people the pension has to support and for how long.


I my case I have family still in education (for another 8years in total), and my wife is 9 years younger than me, so my pot of of pension cash has to support other people for anything up to (say) in my wifes case another 40 or 50 years, and the pension pot will likely be needed long after I am dead and gone. I suddenly don't feel very 'rich' when I look at it that way. I wish now I had paid in far less to my pension in the days when I was struggling (and paying 20% income tax), when I may have to pay 55% on some of that on the way out !! It makes no sense at all to me.


I am certainly better off than many so not complaining, but rich? Doesn't feel that way.

The UK tax system doesn't account for dependants except in a few very limited ways. Pensions aren't intended for the support of other people (except perhaps your spouse, but things are moving towards away from even that - now that virtually all women have income/pensions of their own for most of their lifetime), they're intended for the support of yourself in old age.

Although from what you've written, I'm not sure you fully understand the LTA. Unless you/the recipient of the beneficiary's pension is a higher rate taxpayer, you shouldn't need to pay 55% tax. You can pay a 25% LTA charge and them income tax at marginal rate, with basic rate tax it works out to 40%.

If you die under 75 with uncrystallised funds, then the beneficiary can choose whether incur the LTA charge, then take income tax free, or avoid the LTA charge (by waiting 2 years) and pay income tax on drawdown.

You pay 55% if you take a lump sum, but you/your beneficarys don't have to take a lump sum.

John467

Yes, I do understand. The 55% is the likely top end if nothing is done until the age of 75yrs, and taking the cash out at that point is prefered, but as the amounts involved are likely to be large at that point the 55% option is actually quite realistic as an option, and 45% (25% + 20%) maybe if the amounts are smaller.. or indeed 65% (25% + 40%) to a higher rate tax payer.


I am just using the 55% example as a 'headline' rate.

zagfles

John467 wrote: »

Yes, I do understand. The 55% is the likely top end if nothing is done until the age of 75yrs, and taking the cash out at that point is prefered,

OK, it seemed you were saying the money would be required over a long period, which would make taking it all out in one go unnecessary and probably not a sensible decision.

but as the amounts involved are likely to be large at that point the 55% option is actually quite realistic as an option, and 45% (25% + 20%) maybe if the amounts are smaller.. or indeed 65% (25% + 40%) to a higher rate tax payer.

Well you've not quite understood there. The LTA charge and the income tax compound, since you can pay the LTA charge from the pension. They don't add.

So 25% LTA charge and 20% income tax makes an overall tax of 40% (1-0.8*0.75). Or (1-0.6*0.75) = 55% for higher rate.

Each £1000 in the pension becomes £750 after LTA charge which becomes £600 after basic rate income tax or £450 after higher rate tax.

John467

zagfles wrote: »

So 25% LTA charge and 20% income tax makes an overall tax of 40% (1-0.8*0.75). Or (1-0.6*0.75) = 55% for higher rate.

Each £1000 in the pension becomes £750 after LTA charge which becomes £600 after basic rate income tax or £450 after higher rate tax.

Ah, got it now, that makes sense. Thanks.