FT - Tories to raid tax relief pensions

kinger101

Triumph13 said:

kinger101 said:

Triumph13 said:

I see we have a couple of posters trotting out the old line that removing HRT relief will lead to more people having to rely on benefits it retirement.  I'm afraid if you are earning double the median income you shouldn't need help from the government to fund your retirement.  You most definitely shouldn't need more help than the lower paid get.
If the loss of relief means fewer people can retire early then that's painful for the individuals concerned, but good news as far as the public finances and the wider economy.  Anything that encourages people to work (and pay taxes) is good news.

Very nice of you to accuse people of being trolls because they share a different viewpoint from you.  Perhaps you should acquaint yourself with forum rules.

Many people of higher rate tax aren't earning a fortune.  Perhaps £60K.  They've got to the salary late in life, and don't presently have an enormous pension pot.  There's a limited amount from their salary that can go into a pension, as they have a mortgage, children and travel costs pay for.  The reduction in tax relief will mean their pot at retirement will be smaller, so they'll have either have to risk higher drawdowns, or live off less in retirement.  If that pot runs out, people will be more reliant on the state.  Once the money has gone, it's gone.

FYI, the tax system is essentially a system of tax deferral.  They're putting their own earned money into the scheme to benefit from timing differences.  The government isn't funding their retirement.  If we want to talk about the government funding retirement, perhaps we can start looking at the the final salary pension schemes of the private sector.  

I'm not accusing people of being trolls, I'm pointing out a piece of faulty logic that turns up regularly on here.  People making the leap from 'this will make pensions unattractive for some, relatively wealthy people' to 'no-one will pay into a pension and everyone will be on benefits'.   

According to the Scottish Government only 7.7% of adults pay the 41% rate.  A better figure might be the UK one of 13.7% of taxpayers (as opposed to all adults) who pay HRT.  That will be skewed by people already retired, but, however you slice it, the fact remains that the great majority of the population do not ever earn enough to pay HRT and these are quite obviously the ones who are really at risk of ending up on benefits in retirement.

The argument you make about the tax relief being really your own money that HMRC aren't taking / your own income that you are deferring is a completely different point.  It is an idea with a lot of sense behind it and one which I would never say was 'wrong' - although I might argue that other ideas of fairness outweighed it.

My bad.  I misread "trolling" for trotting.

It's not faulty logic though.  I agree the incentives for BR taxpayers who cannot take advantage of salary sacrifice need improving.  But a lot of HR taxpayers will use an ISA instead of pension if they're offered the 6.25 % that BR taxpayers currently get.  The main reason being, there's more certainty of the tax position for the ISA.  Future rises in the basic rate, and decreases in the 25% tax free - could wipe out that 6.25 %.  

In the long run, it's in the government's interest that people use pensions rather than ISAs.  The tax is then collected after the pot has had decades of capital growth.  

On the fairness point, HR taxpayers are already paying ca. 42% instead of 32% taxes on their income.  I don't think there's anything inherently unfair about that, but at the same time, I don't see the need to generate more revenue from one lot of earners when this country's main problem is that income taxes in general can't provide the level of services we'd like.  2 p on basic rate, or an introduction of a more progressive system would seem fairer, and generate more revenue.  

zagfles

CSL0183 said:

zagfles said:

CSL0183 said:

zagfles said:

CSL0183 said:

Triumph13 said:

I see we have a couple of posters trotting out the old line that removing HRT relief will lead to more people having to rely on benefits it retirement.  I'm afraid if you are earning double the median income you shouldn't need help from the government to fund your retirement.  You most definitely shouldn't need more help than the lower paid get.
If the loss of relief means fewer people can retire early then that's painful for the individuals concerned, but good news as far as the public finances and the wider economy.  Anything that encourages people to work (and pay taxes) is good news.

I take it you are a basic rate taxpayer that is jealous of the relief that a higher rate taxpayer receives then? Why don’t we just have a fair flat tax rate then?

You are missing my point completely. Why would HRT save into pensions at all?

Take the example below...
NHS senior nurse in Scotland, earns about £48k with allowances/shifts. Stuck firmly in Scotland’s 53% tax band. They receive 20% relief on their contribution and have to pay 33% just to put their money into their pension scheme. Few years later in retirement and worse case scenario (especially if the 25% tax free allowance is removed) a large withdrawal is made that then puts them back into that 53% tax bracket. (State pension inclusive)
So it’s cost 33% just to get it into the pension and it’s cost 53% to take it out of the pension. 

Remind me why this would be an incentive to save into a pension scheme? Of course this person would then become a burden on the state in later life as with no pension savings, how would you expect them to survive?

It doesn’t need to be the NHS nurse, it doesn’t need to use Scotland’s 53% tax bands. The same applies for 42%/43% higher rate taxpayers up and down the UK right now. Have to pay 22-23% just to get it into your pension and then 32/33% to get it back out. 

Pensions become less attractive and people naturally are put off. 

Government won’t risk that. Never happening. Political suicide. 

For basic rate payers up and down the country currently receiving 32-33% relief. Remind why a flat rate of 20-25% would be any good for them?

Gets even more complicated with devolved governments. If Westminster scrapped salary sacrifice schemes and set relief at a flat rate of 20%, how is this fair on Scottish taxpayers that pay 21%? Both governments would need to agree and the SNP and Tories don’t agree on anything. Just another hurdle for the government to overcome when thinking about pension tax relief. 

Your example makes no sense. How is it 53% on the way out? Are you including NI? You realise that NI isn't charged on pension income, right? And it's contrived anyway.

As to why a HRT payer would save into a pension, why wouldn't they? As long as they can avoid HRT in retirement, it's still a big tax incentive. 25/30/33% or whatever relief on the way in and 15% on the way out (accounting for the PCLS).

The disincentive to have a pension worth more than around £50k pa is there already, as a pension at around that level would breach the LTA.

Scotland’s 53% tax band (41%+12%).
Yes, you’re correct, it would only be 41% and wouldn’t incur further NIC only the marginal rate of tax at the time. 

If they can mess with tax relief so that they create double taxation, the next thing to go would be the 25% tax free element. Would anyone realistically believe that this would still be there in retirement 20/30/40/50 yrs down the line? 

Ah yes, the usual "slippery slope" argument. Can't make change A as totally unrelated change B might then happen.

Double taxation is already here, the LTA, the AA. Closely related to pot/pension levels where you'd pay higher rate tax in retirement. Flat rate could mean both can be abolished.

The govt have promised to fix 2 problems with the pension system, the AA taper affecting the NHS, and the "net pay" trap affecting those on low incomes. A flat rate tax relief/rebate with the abolision of the AA & LTA would fix both, whilst also probably raising tax revenues for Boris's promised spending splurge.

Not disagreeing. However, looking at the demographics. What % are affected by double taxation / AA and LTA at the moment? Less than 1% at a guess, probably more in the region of 0.5%?

Around 70% of pension schemes utilise the salary sacrifice method. The majority of us are receiving a minimum of 32% tax relief. HRT a bit more. 

If you replace this with a flat rate of 20-25%, who benefits exactly? Tens of millions of us are receiving 32%+ at the moment. 

It would lose the government the next election. 

Course it wouldn't. Pension tax relief isn't even on most people's radar. The govt have abolished higher rate relief on loads of stuff over the last 30 years, from MIRAS to the married couples allowance, childcare, rental properties etc, and hardly raised an eyebrow. People who benefit from a flat rate above 20% is any basic rate taxpayer in a net pay scheme (ie most/all of the public sector), or any basic rate taxpayer using a SIPP, and anyone earning below the PA.  Sal sac could still be allowed to a limited extent, as per my suggestion above, otherwise employer conts would have to become a taxable benefit and that would get complicated and messy.

kinger101

michaels said:

kinger101 said:

michaels said:

Look at this from the govt point of view and 5 year time horizon.

If you do something that means higher earners use ISAs/LISAs rather than pension contributions to save for retirement you move a lot of tax forward to now from pension receipt time which looks brilliant from a psbr perspective and allows a lot more spending now. Sure you get less tax as people spend from their ISAs in retirement but that is several parliaments down the road before it is material.

There is already madness from the government's introduction of the LISA as a retirement vehicle.  It's great that BR taxpayers are able to access a method of retirement saving which has much better tax incentives - i.e. 25% net benefit.  Currently, the only way BR taxpayers can get that from the pension system is if they have a salary sacrifice scheme.  If they've maxed out the employer contributions, in my view, the LISA is the better vehicle than the pension savings, as its more likely income tax will rise in the future than fall (which would reduce the 25% benefit under salary sacrifice).  Although there's a short term gain for HMRC from the employer's NI element for post-tax payments made into a LISA, the net cost of doing this to the HMRC is actually higher in the long run, as they don't get to tax the income from the pension pot after the capital growth.  

It would have been far better to just to improve incentives for BR taxpayers within pensions (via the NI).  

Better for who?  For the country overall perhaps but for a govt with a 5 years max time horizon then getting tax now at the cost of a bigger hole to fill in 10-50 years time is a no brainer.

Better for long-term tax take, and therefore the country overall.  The problem is these sort of things end up in Finance Bills, which the House of Lords rubber stamps.  Makes any long-term thinking nigh-on impossible.

zagfles

DairyQueen said:

History suggests that the law of unintended consequences applies to any significant tax change.

Higher earners still contribute disproportionately to the tax take despite engaging in creative ways to mitigate their tax bills. Tax relief on pensions being onesuch. If that method becomes less advantageous then, no doubt, others will emerge. For example, tax free transfers between spouses have the potential to divert pension contributions from the higher to the lower earner in order to make the most of each of the partner's tax allowances when the pensions are in payment. 

Remove the 'way-in' advantage of accumulation by an HRT-payer and tax paid on the 'way-out' becomes more important. As does the distribution of contributions between spouses, and other tax shelters such as ISAs.

Make the tax regime too egregious for a higher earner and they will simply vote with their feet and move to a more tax-friendly nation either before or after retirement. Money buys options and those who contribute the most to the tax coffers have the option of whether to contribute to the UK system at all.

Several decades ago Labour increased the top rate of tax to 90%. Indeed, if I recall correctly, the effective rate of tax for those at the very top was over 100%. Unsurprisingly, many of those effected left. The UK ended up with 90-100% of nothing.

Projections of extra tax revenue courtesy of cutting pension tax relief may be very wide of the mark. HRT-payers will change their behaviour in response and behaviour changes are rarely factored-in by government soothsayers.

I think people here are way overestimating the significance of this. People on this board might put large amounts into their pensions and get a huge amount of tax relief, but most people don't, even higher rate taxpayers. I work with and know people in their 50's and 60's who mostly contribute 10% or less, even the higher rate taxpayers. For most this is a trivial issue they'd hardly notice.

DairyQueen

zagfles said:

DairyQueen said:

History suggests that the law of unintended consequences applies to any significant tax change.

Higher earners still contribute disproportionately to the tax take despite engaging in creative ways to mitigate their tax bills. Tax relief on pensions being onesuch. If that method becomes less advantageous then, no doubt, others will emerge. For example, tax free transfers between spouses have the potential to divert pension contributions from the higher to the lower earner in order to make the most of each of the partner's tax allowances when the pensions are in payment. 

Remove the 'way-in' advantage of accumulation by an HRT-payer and tax paid on the 'way-out' becomes more important. As does the distribution of contributions between spouses, and other tax shelters such as ISAs.

Make the tax regime too egregious for a higher earner and they will simply vote with their feet and move to a more tax-friendly nation either before or after retirement. Money buys options and those who contribute the most to the tax coffers have the option of whether to contribute to the UK system at all.

Several decades ago Labour increased the top rate of tax to 90%. Indeed, if I recall correctly, the effective rate of tax for those at the very top was over 100%. Unsurprisingly, many of those effected left. The UK ended up with 90-100% of nothing.

Projections of extra tax revenue courtesy of cutting pension tax relief may be very wide of the mark. HRT-payers will change their behaviour in response and behaviour changes are rarely factored-in by government soothsayers.

I think people here are way overestimating the significance of this. People on this board might put large amounts into their pensions and get a huge amount of tax relief, but most people don't, even higher rate taxpayers. I work with and know people in their 50's and 60's who mostly contribute 10% or less, even the higher rate taxpayers. For most this is a trivial issue they'd hardly notice.

I would be very surprised if those at the very top (i.e. those who contribute the most to the tax take) are so sanguine about their tax position. I agree that some of those who are marginally above the HRT threshold may be rather less aware of the issues. HRT isn't as prominent an issue for those who pay proportionately less in the upper tax brackets.

Anecdotally, I can confirm that tax is a very consuming issue for those who are well above the HRT threshold.

si2winit

CSL0183 said:

Triumph13 said:

I see we have a couple of posters trotting out the old line that removing HRT relief will lead to more people having to rely on benefits it retirement.  I'm afraid if you are earning double the median income you shouldn't need help from the government to fund your retirement.  You most definitely shouldn't need more help than the lower paid get.
If the loss of relief means fewer people can retire early then that's painful for the individuals concerned, but good news as far as the public finances and the wider economy.  Anything that encourages people to work (and pay taxes) is good news.

I take it you are a basic rate taxpayer that is jealous of the relief that a higher rate taxpayer receives then? Why don’t we just have a fair flat tax rate then?

You are missing my point completely. Why would HRT save into pensions at all? 

Take the example below...
NHS senior nurse in Scotland, earns about £48k with allowances/shifts. Stuck firmly in Scotland’s 53% tax band. They receive 20% relief on their contribution and have to pay 33% just to put their money into their pension scheme. Few years later in retirement and worse case scenario (especially if the 25% tax free allowance is removed) a large withdrawal is made that then puts them back into that 53% tax bracket. (State pension inclusive)
So it’s cost 33% just to get it into the pension and it’s cost 53% to take it out of the pension. 

Remind me why this would be an incentive to save into a pension scheme? Of course this person would then become a burden on the state in later life as with no pension savings, how would you expect them to survive?

It doesn’t need to be the NHS nurse, it doesn’t need to use Scotland’s 53% tax bands. The same applies for 42%/43% higher rate taxpayers up and down the UK right now. Have to pay 22-23% just to get it into your pension and then 32/33% to get it back out. 

Pensions become less attractive and people naturally are put off. 

Government won’t risk that. Never happening. Political suicide. 

For basic rate payers up and down the country currently receiving 32-33% relief. Remind why a flat rate of 20-25% would be any good for them?

Gets even more complicated with devolved governments. If Westminster scrapped salary sacrifice schemes and set relief at a flat rate of 20%, how is this fair on Scottish taxpayers that pay 21%? Both governments would need to agree and the SNP and Tories don’t agree on anything. Just another hurdle for the government to overcome when thinking about pension tax relief. 

Living in Scotland and being in the tax rate of 53% I point blank refuse to give them the money. After my work SIP and annual pay increase I work out the percentage I need to add salary sacrifice to not pay HRT. Also as my wife is a low earner I get to keep my marriage allowance too.
I will continue to do this for as long as I’m allowed to. 

zagfles

DairyQueen said:

zagfles said:

DairyQueen said:

History suggests that the law of unintended consequences applies to any significant tax change.

Higher earners still contribute disproportionately to the tax take despite engaging in creative ways to mitigate their tax bills. Tax relief on pensions being onesuch. If that method becomes less advantageous then, no doubt, others will emerge. For example, tax free transfers between spouses have the potential to divert pension contributions from the higher to the lower earner in order to make the most of each of the partner's tax allowances when the pensions are in payment. 

Remove the 'way-in' advantage of accumulation by an HRT-payer and tax paid on the 'way-out' becomes more important. As does the distribution of contributions between spouses, and other tax shelters such as ISAs.

Make the tax regime too egregious for a higher earner and they will simply vote with their feet and move to a more tax-friendly nation either before or after retirement. Money buys options and those who contribute the most to the tax coffers have the option of whether to contribute to the UK system at all.

Several decades ago Labour increased the top rate of tax to 90%. Indeed, if I recall correctly, the effective rate of tax for those at the very top was over 100%. Unsurprisingly, many of those effected left. The UK ended up with 90-100% of nothing.

Projections of extra tax revenue courtesy of cutting pension tax relief may be very wide of the mark. HRT-payers will change their behaviour in response and behaviour changes are rarely factored-in by government soothsayers.

I think people here are way overestimating the significance of this. People on this board might put large amounts into their pensions and get a huge amount of tax relief, but most people don't, even higher rate taxpayers. I work with and know people in their 50's and 60's who mostly contribute 10% or less, even the higher rate taxpayers. For most this is a trivial issue they'd hardly notice.

I would be very surprised if those at the very top (i.e. those who contribute the most to the tax take) are so sanguine about their tax position. I agree that some of those who are marginally above the HRT threshold may be rather less aware of the issues. HRT isn't as prominent an issue for those who pay proportionately less in the upper tax brackets.

Anecdotally, I can confirm that tax is a very consuming issue for those who are well above the HRT threshold.

Those at the "very top" are currently getting hammered by the AA taper, and probably the LTA. A flat rate solution that got rid of these would likely benefit them!

EdSwippet

zagfles said:

Those at the "very top" are currently getting hammered by the AA taper, and probably the LTA. A flat rate solution that got rid of these would likely benefit them!

... although perhaps only in the same manner as decapitation solves a migraine!

CSL0183

zagfles said:

CSL0183 said:

JoeCrystal said:

CSL0183 said:

Around 70% of pension schemes utilise the salary sacrifice method. The majority of us are receiving a minimum of 32% tax relief. HRT a bit more. 

If you replace this with a flat rate of 20-25%, who benefits exactly? Tens of millions of us are receiving 32%+ at the moment. 

It would lose the government the next election. 

Where did you come across that 70% statistic? Here I was thinking that most DC pension schemes are not salary sacrifice. Certainly, none of the companies I worked for utilises it, unfortunately.

This article from 2014 reported 61%

https://employeebenefits.co.uk/issues/november-2014/pensions-salary-sacrifice-what-employers-need-to-know/

This article from 2017 states 68%

https://employeebenefits.co.uk/issues/february-online-2017/68-employers-use-salary-sacrifice-deliver-workplace-pension-scheme/

This article has a varied list of figures depending on the size of the company..

https://www.lambert-chapman.co.uk/blog/embrace-the-power-of-the-salary-sacrifice-scheme/

I have seen a banded around figure more recently of 70% of pensions are SS schemes but I can’t remember where that was now. 61% in 2014, so it won’t be far off that 70% in 2020. 
If your company are not using the SS model then they are not very tax efficient. It’s poor financial planning as there are employer benefits too, namely the 13.8% NI element that they save by adopting the scheme. 

Those seem to be private sector companies, the public sector don't generally use sal sac for pensions AFAIK. They use net pay. Even if they are included in those figures for schemes, the public sector schemes are much bigger generally than private sector. So in terms of numbers of employees it'll be a completely different, and almost certainly much lower figure than the number of schemes

Public sector pension schemes are mainly Final salary or now more commonly CARE schemes. They have benefits over and above anything in the GPP money purchase schemes. Although yes, not benefitting from salary sacrifice. 

Certainly for private companies, SS schemes make a lot of sense, Infact it would be bad financial planning for a private company not to use salary sacrifice. 

Thrugelmir

CSL0183 said:

zagfles said:

CSL0183 said:

JoeCrystal said:

CSL0183 said:

Around 70% of pension schemes utilise the salary sacrifice method. The majority of us are receiving a minimum of 32% tax relief. HRT a bit more. 

If you replace this with a flat rate of 20-25%, who benefits exactly? Tens of millions of us are receiving 32%+ at the moment. 

It would lose the government the next election. 

Where did you come across that 70% statistic? Here I was thinking that most DC pension schemes are not salary sacrifice. Certainly, none of the companies I worked for utilises it, unfortunately.

This article from 2014 reported 61%

https://employeebenefits.co.uk/issues/november-2014/pensions-salary-sacrifice-what-employers-need-to-know/

This article from 2017 states 68%

https://employeebenefits.co.uk/issues/february-online-2017/68-employers-use-salary-sacrifice-deliver-workplace-pension-scheme/

This article has a varied list of figures depending on the size of the company..

https://www.lambert-chapman.co.uk/blog/embrace-the-power-of-the-salary-sacrifice-scheme/

I have seen a banded around figure more recently of 70% of pensions are SS schemes but I can’t remember where that was now. 61% in 2014, so it won’t be far off that 70% in 2020. 
If your company are not using the SS model then they are not very tax efficient. It’s poor financial planning as there are employer benefits too, namely the 13.8% NI element that they save by adopting the scheme. 

Those seem to be private sector companies, the public sector don't generally use sal sac for pensions AFAIK. They use net pay. Even if they are included in those figures for schemes, the public sector schemes are much bigger generally than private sector. So in terms of numbers of employees it'll be a completely different, and almost certainly much lower figure than the number of schemes

Public sector pension schemes are mainly Final salary or now more commonly CARE schemes. They have benefits over and above anything in the GPP money purchase schemes. Although yes, not benefitting from salary sacrifice. 

Be a significant saving for the Exchequer in the funding of public sector schemes. With the cost of "going green" estimated at some £700 billion for infrastructure alone. Going to require some radical thinking and reform.