FT - Tories to raid tax relief pensions

michaels

I thought we had scrapped autumn budgets now?  Or is it spring budgets?!
I could earn about 70k, the only earner in my household one wife, 3 kids.  Instead I work only 70% full time and sal sac down to NMW  - I think over all I am about 8k net down pa when adding take home plus benefits plus total pension contributions but work 35% less which seems like a very good deal.  Reason is otherwise I face a painful tax rate between 50 and 60k so I am an example of high marginal tax rates disincentivising work and leading to less tax revenue.  Some posters don't seem to be able to imagine that maximising income is not the only purpose in life but their are lots of us for whom second hand cars and no long haul holidays is a worthwhile trade-off for less work.

zagfles

This is the delayed autumn budget! And it looks like it might be delayed again.

It'll be far too late to announce any fundamental changes to the tax relief system in time for 6 April, so if any changes are made it's likely to be from April 2021, possibly with anti-forestalling measures applicable immediately.

Paul_Herring

zagfles said:

 possibly with anti-forestalling measures applicable immediately.

Hmm. Such as?

EdSwippet

Paul_Herring said:

zagfles said:

 possibly with anti-forestalling measures applicable immediately. 

Hmm. Such as?

For "prior art", take a look at the details of the irrational, arcane and baroque dog's dinner that Alistair Darling cooked up when trying to stop people working around his pension contributions tax grab back in 2009:

Pension Contributions - a Small Concession For Big Earners

Filo25

Lots of talk that this is still on the table in he press today, no surprise of course that the mansion tax idea has been binned.

THeir core voters are the elderly these days, who would obviously hate the idea of increased property taxation but obviously have no real concerns about pension accumulation anymore.

I'm not sure they will go the whole hog to 20% this year, but I do expect something to be announced, with 20% likely the final destination. Really they would have to cut off sal sacrifice as well to avoid the obvious workaround

Paul_Herring

Really they would have to cut off sal sacrifice as well to avoid the obvious workaround

What about Final Salary schemes? Don't they take 'advantage' of much the same things that SS does? Not that many outside the public sector use them, is the general impression I get...

(I seem to remember the last This Is Money podcast banging on about this a bit, but was only half paying attention to that specific bit while making sure the bus driver stopped to pick me up, but recall them saying something would be need to be addressed wrt DB schemes if they got rid of SS.)

And what happens with those companies that use SS to reduce their wage bills to be able to subsidise their 3% minimum contributions (via reduction in erNI) ? Reduced pay rises for all in the private sector shortly after to make up for it?

Sailtheworld

This story does the rounds just before every budget. Pretty sure it's sponsored by pension companies trying to mop up extra contributions before the government stops higher rate tax relief like they've been just about to do for as long as I can remember.

DairyQueen

Notwithstanding accusations of going off topic...

I have been reading The Institute of Fiscal Studies Green Paper on the October 2018 budget. The content is still relevant to this Spring's budget, and also to this thread and other issues of interest to forumites. Link for those interested.

The authors discount removing HRT pension relief for reasons discussed here amongst others. However, they are proponents of the following:

1) Removal of IHT and income tax relief on inherited pension funds (begins page 179)
2) Forgiveness of CGT on death (also page 179)
3) Changing the NI treatment of pension contributions and pensions in payment (page 178)

The rational for which is discussed in Section 5.4 (Taxing Older People - p.177).

They also discuss the pros and cons of raising Council Tax or imposing a Mansion Tax (p. 174). 

As much as it hurts to admit, their arguments are persuasive. For example, on the issue of taxing pension funds (and apologies for including such a long quote):

'Until recently, it was unusual for pension savings to be passed on when the saver died.Most people’s pension savings were converted to an annuity – an annual income for life – around the time they retired, leaving nothing to bequeath.

Two developments are changing this, however:

• First, there has been along term shift from the use of defined benefit pensions (where an employer provided an income from when the pension was drawn until death, but the individual had no fund of their own to pass on to descendants at death) to defined contribution pensions (where the saver ‘owns’ a pot of money that can be bequeathed).

• Second, the introduction of ‘pension freedoms’ in April 2015 removed the requirement to convert pension savings into an annuity by age 75. The proportion of people annuitising their (defined contribution) pension pot fell significantly following this reform.

  These developments mean that there is a rapidly growing number of pensioners who have a pot of bequeathable money instead of an annual pension income. This makes the tax treatment of bequeathed pension pots an important issue. However, as it stands, the treatment of pension pots is astonishingly generous both for income tax and for inheritance tax.

  Income tax on pension savings bequeathed before age 75

  As explained above, income tax is not levied on money contributed to a private pension but is instead levied when the money is withdrawn from the pension fund. If the pension saver dies with money left in the pension pot, the general rule is that whoever inherits the pension pot is liable for income tax on it whenever they withdraw the money, in lieu of the income tax that the saver would otherwise have paid. However, if the pension saver dies before age 75, an exception is made and there is no tax liability on the money withdrawn. It is hard to see a good rationale for this exception. There is no good reason why earnings should escape income tax altogether if they are put into a pension fund and then bequeathed before age 75. Nor is there any good reason to encourage people to keep as much money as possible in their pension fund until age 75 rather than use it to finance their retirement, or save less or in a different form.

  Inheritance tax on bequests of pension savings

  When inheritance tax is paid after a death, most of the deceased person’s assets are included in their taxable estate. But any pension savings they bequeath are not.

  This has created an absurd position where the tax system incentivises people to use everything except their pension to pay for their retirement, and instead to bequeath their pension intact as far as possible. Pension freedoms make this course of action a real possibility.

  Recent IFS research examining the behaviour of pensioners (before the introduction of pension freedoms) shows that people draw down their non-pension wealth surprisingly little in retirement. That does not necessarily imply that they will behave the same way with their pension funds, but it at least suggests that people might be able to resist the temptation to spend their pension savings at the earliest available opportunity. It certainly seems plausible that they will finance their retirement from other sources – or simply spend less in retirement – now that they do not have to use their pension for that purpose. The inheritance tax system steers them in that direction.

  The obvious option would have been to bring pensions within the inheritance tax net at the time that pension freedoms were introduced. Having missed that opportunity, the government should introduce this reform as soon as possible. The longer it waits, the greater the revenue loss – and the political resistance – will become, as more and more people move into old age with large (unannuitised) pension pots and the expectation that they will be able to bequeath them free of inheritance tax.

  These two policies unfairly favour those who inherit pension wealth rather than other forms of wealth, and inefficiently encourage people to keep their wealth in pensions. They also cost the exchequer revenue: a tiny amount at the moment, since most existing pensioners – especially older ones nearer the end of life – are still receiving an annual income from a defined benefit or already annuitised defined contribution pension, and so are not able to take advantage of the generous tax treatment of unannuitised pension pots. But the amount of pension wealth bequeathed is likely to grow rapidly, and the revenue loss with it.

  This rapid growth is likely not only as people bequeath more of their pension wealth, but also as they put more into pensions in the first place. Whereas in the past people saving in order to leave money to their children when they die will not have used pensions for that purpose, it now makes sense to do so. Even without specific tax exemptions at death, the income tax and NICs systems provide generous tax treatment for pension saving. There is some justification for tax incentives when pensions represent people’s retirement savings; it is harder to justify such subsidies if pensions can be bequeathed (or indeed withdrawn and spent at age 55) rather than used to provide a retirement income. Moreover, the effects of generous tax treatment of pension saving during life, greater freedom in how the pension savings are used, and generous treatment at death, all reinforce each other in encouraging the use of pensions as a savings vehicle for bequests.

  To appreciate how big this tax advantage can be – and why we might therefore expect it to be widely exploited and cost a lot to the exchequer – consider a higher-rate taxpayer who saves £1 million in a pension and dies at age 70, bequeathing it all to her children along with a house of sufficient value to use up her inheritance tax nil-rate band. There will be no tax to pay on that £1 million at any stage: no income tax, no employer or employee NICs (if the pension contributions were made via the employer) and no inheritance tax. £1 million paid by her employer becomes £1 million for her children to spend. In contrast, if her employer paid the same amount but she now saved in another form – even a tax-free vehicle such as an ISA or a bigger main home – then, after income tax and NICs on the earnings and inheritance tax on the bequest, the children would be left with only £305,800 of the £1 million to spend. Using a pension rather than another savings vehicle saves the family £694,200 in tax: the difference between the government taking almost 70% of the £1 million in tax and taking none of it at all. It is hard to understand why the government should subsidise saving for bequests via a pension, while at the same time levying inheritance tax on other bequests.'

Filo25

I don't think it is particularly off topic at all, Dairyqueen. It just goes to show issues caused by the piecemeal nature of a lot of our tax legislation, I really do think things could be simplified considerably

Thrugelmir

Pull a lever there's inevitably an unintended consequence elsewhere. As day follows night as a certainty. Action will be taken to block the hole.