Tax on wealth suggested

thegentleway

zagfles said:

thegentleway said:

zagfles said:

thegentleway said:

TC56_803_9 said:

thegentleway said:

TC56_803_9 said:

thegentleway said:

Grumpy_chap said:

• For most 20-something couples setting out on life's great big adventures, having "wealth" of £1m is very likely an impossible dream.

You’re grossly underestimating the power of compound interest. A couple of 20 year olds only need to invest £50 a month each to have a million by retirement age! 

24 year olds investing and never removing a penny for 43 years putting in £100 per month between them need an annulised return of 11.25% to achieve £1m.  That will require elements of risk well beyond anything guaranteed by the FSC.  And with that risk there are winners and there are losers.  

That’s because you’ve stolen 3 years of compounding! I said a 20 year old and retirement age (currently 66)
£100 a month for 46 years at 10% (historical yearly return) gets you a million. If you want to do it in 43 years you’ll need £134 a month. Whichever way you look at it’s hardly an impossible dream.

The OP of this stated 20 somethings.  You might interpret that as 20 year olds. Being fair I could have gone for a mid 25 but elected to grant another year of contributions and interest.  Even then the concept is fanciful. 

I was sold two endowments and various pension products and such like with estimates of 10% return (historical yearly return).  Not one of them got anywhere near that - historically  - which was exactly what I thought when I was sold them. The salesman said it would do XXX.  That it will actually do YYY and that YYY is less than XXX is a truism.

Concept isn't fanciful at all. Compounding works, especially for long time frames. You can quibble about the rate of return and the number of years but it's very achievable for 20-25 year old couples to have £1 million by retirement if they start investing small sums monthly.

It's not "quibbling" about the rate of return, if you get 3%pa real returns then investing £100 per month, even after 50 years you'd only have £137,000. Nowhere near a million. There's no reason to believe that greater returns than that are inevitable or even likely.

3% - lol. You’re funny 😆 

Yeah, the FCA have the same sense of humour, they reckon 3-5% for equities https://www.fca.org.uk/publication/research/rates-return-fca-prescribed-projections.pdf

Then take off charges, maybe 1% total on average (ok here maybe 0.5% for those who don't use advisers or active). 2-4% net.

10% real long term, now that is funny Historic worldwide equity return from last 100 years is around 5% real. So about 4% after typical charges https://www.financial-expert.co.uk/historical-real-investment-returns-by-asset-class-and-country/

Investing £100 a month won't make you a "real" millionaire at retirement.

Schooled to be fair I missed the real but inflation is only 3% historically right? The 10% comes from
https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysisTools/portfolioAnalytics/historicalRiskReturn
which is obviously not inflation adjusted but that doesn't add up? 5 + 3 isn't 10
Nobody can predict the future (not even the FCA) but I agree 10% is rather optimistic moving forward. Our lovely 20-25 year old couple is prob not going to be a millionaire from their £100pm investments but add a paid off house and a couple of pensions and they shouldn't be far off - got to keep the dream for 20 year olds alive!

thegentleway

coyrls said:

thegentleway said:

coyrls said:

thegentleway said:

coyrls said:

thegentleway said:

A._Badger said:

thegentleway said:

zagfles said:

thegentleway said:

Black_Cat2 said:

Being taxed on how much your pension is worth seems unfair to me (if I read this correctly?).  We are encouraged to pay what we can into one to support our retirement so how is it then fair to bring in a tax on it now?  DC and DB pensions meant you sacrifice your salary to be entitled to them and take the gamble that your hard earned money may go up as well as down 🤔

I'm the first to admit I've probably missed the point lol, be kind 😘

You can use that argument to make out all taxation is unfair. E.g. I work hard at my job so it’s unfair that the government takes a cut of my income.
This kind of selfish greedy thinking doesn’t consider how to pay for defence, healthcare, infrastructure, etc... that we all benefit from. Without government expenditure you wouldn’t have a job or a pension in the first place. 

No it isn't. The PPs point seems to be that we are encouraged to support ourselves in retirement by paying into a pension, if the government keep changing the goalposts about how they're taxed etc then that's similar to retrospective taxation, and it will cause people to lose faith in pension savings. Nothing at all like whinging about taxes on employment income. If the govt put taxes on employment income up then people can decide eg not to work overtime etc in the future because it's not worth it. Rather than retrospectively getting a bill for extra tax on the overtime they worked in the past.

You’re welcome to your opinion but I think it’s the same logic:
you can’t tax pension coz you discourage people saving for retirement is the same as you can’t tax higher earners more coz you discourage hard work and career progression. It’s the same very weak argument against taxation which you can apply to anything you don’t want taxed.

In what way is it a weak argument? I have known more than a few tradesmen and small business owners who have consciously avoided growing or expanding their businesses because 'it's not worth it'. High taxation is a very real disincentive. It also encourages tax evasion so tends to be self-defeating. 

I'm genuinely confused as to how 1% tax could be construed as high taxation? Compare UK tax to other countries and you'll see it's low.

Somebody retired and living in London in a house worth £1M and a DC pension that they withdraw at 4% per year, a tax of 1% on the value of the pension is then equivalent to an additional 25% tax (with no personal allowance) on a year's income from their DC pension.

No because the report suggests that where wealth tax due in respect of pension wealth the payment period would be over five years and, where the taxpayer had difficulty paying, they could apply for a further deferral. You're looking at maximum 5% additional income tax even in your extreme scenario, i.e. still low taxation.

The report says "payable at 1% per year for 5 years"  and so it would either be 25% additional tax for 5 years or if you're saying you have 5 years to pay each year's liability, 5% extra for 25 years.  I don't see why my scenario is extreme; it is very close to my own position.

A pension is there to provide income and will be taxed as income as it is paid; the capital is not available without an income tax liability.  I don't see why it should be treated both as capital and income.

It’s a one off and you have 5 years to pay it.

Why should someone with £750k house but £250k more in their pension than you pay less when you have similar wealth? Or why should someone with 1.25 mil house but £250k less in their pension pay more than you? 

I am quoting the report "1% per year for 5 years".  They are not proposing 1% with 5 years to pay.

People are not paying income tax on the increase in the value of their house but they are paying income tax on withdrawals from their pension.

Yes you're right. It's a 5% one off over 5 years, so 1% per year. Sorry, I got mixed up. Lots of humble pie for me in this thead

You pay capital gains on houses, not income tax.
I'm not sure why you compare it to income tax. They did consider increasing income tax but are proposing a one-off wealth tax because of the pandemic. I'm guessing your house and pension haven't been negatively affected by the pandemic? However people with lower wealth have been affected. I think it's a good idea to try to spread the financial pain of the pandemic; someone has to pay and it makes sense that the people who haven't suffered financially foot the bill.

coyrls

I was making the point that a wealth tax on capital shouldn't logically be applied to a pension that is designed to provide income that will be subject to income tax.  As you know, you do not pay capital gains tax on your primary residence but that is a tax on capital, as it's name suggests.  I am not against a wealth tax but applying it to pensions is not logical.  I suspect they had to include pensions to make the numbers big enough.  When calculating net worth for example, pensions are usually excluded.

[Deleted User]

coyrls said:

I was making the point that a wealth tax on capital shouldn't logically be applied to a pension that is designed to provide income that will be subject to income tax.  As you know, you do not pay capital gains tax on your primary residence but that is a tax on capital, as it's name suggests.  I am not against a wealth tax but applying it to pensions is not logical.  I suspect they had to include pensions to make the numbers big enough.  When calculating net worth for example, pensions are usually excluded.

Pensions have undergone a huge change since 2014/15. Prior to that, (most) people thought their personal pensions would simply augment their state pension in retirement. Most were content to receive an annual statement six months in arrears approximating their position (and how the financial services industry wish they were still operating in those times). Now it has become the principle asset of most people of working and retirement age. Many of us view a SIPP as a vehicle for growing wealth in a tax-sheltered environment before handing it on as a legacy. There is no moral or practical justification for Govt to allow this without taxation. Logically, pensions should be taxed more punitively than PAYE. 

zagfles

thegentleway said:

zagfles said:

thegentleway said:

zagfles said:

thegentleway said:

TC56_803_9 said:

thegentleway said:

TC56_803_9 said:

thegentleway said:

Grumpy_chap said:

• For most 20-something couples setting out on life's great big adventures, having "wealth" of £1m is very likely an impossible dream.

You’re grossly underestimating the power of compound interest. A couple of 20 year olds only need to invest £50 a month each to have a million by retirement age! 

24 year olds investing and never removing a penny for 43 years putting in £100 per month between them need an annulised return of 11.25% to achieve £1m.  That will require elements of risk well beyond anything guaranteed by the FSC.  And with that risk there are winners and there are losers.  

That’s because you’ve stolen 3 years of compounding! I said a 20 year old and retirement age (currently 66)
£100 a month for 46 years at 10% (historical yearly return) gets you a million. If you want to do it in 43 years you’ll need £134 a month. Whichever way you look at it’s hardly an impossible dream.

The OP of this stated 20 somethings.  You might interpret that as 20 year olds. Being fair I could have gone for a mid 25 but elected to grant another year of contributions and interest.  Even then the concept is fanciful. 

I was sold two endowments and various pension products and such like with estimates of 10% return (historical yearly return).  Not one of them got anywhere near that - historically  - which was exactly what I thought when I was sold them. The salesman said it would do XXX.  That it will actually do YYY and that YYY is less than XXX is a truism.

Concept isn't fanciful at all. Compounding works, especially for long time frames. You can quibble about the rate of return and the number of years but it's very achievable for 20-25 year old couples to have £1 million by retirement if they start investing small sums monthly.

It's not "quibbling" about the rate of return, if you get 3%pa real returns then investing £100 per month, even after 50 years you'd only have £137,000. Nowhere near a million. There's no reason to believe that greater returns than that are inevitable or even likely.

3% - lol. You’re funny 😆 

Yeah, the FCA have the same sense of humour, they reckon 3-5% for equities https://www.fca.org.uk/publication/research/rates-return-fca-prescribed-projections.pdf

Then take off charges, maybe 1% total on average (ok here maybe 0.5% for those who don't use advisers or active). 2-4% net.

10% real long term, now that is funny Historic worldwide equity return from last 100 years is around 5% real. So about 4% after typical charges https://www.financial-expert.co.uk/historical-real-investment-returns-by-asset-class-and-country/

Investing £100 a month won't make you a "real" millionaire at retirement.

Schooled to be fair I missed the real but inflation is only 3% historically right? The 10% comes from
https://advisors.vanguard.com/VGApp/iip/advisor/csa/analysisTools/portfolioAnalytics/historicalRiskReturn
which is obviously not inflation adjusted but that doesn't add up? 5 + 3 isn't 10
Nobody can predict the future (not even the FCA) but I agree 10% is rather optimistic moving forward. Our lovely 20-25 year old couple is prob not going to be a millionaire from their £100pm investments but add a paid off house and a couple of pensions and they shouldn't be far off - got to keep the dream for 20 year olds alive!

Average inflation was 5.6% over the last 50 years!

https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cdko/mm23

So if that repeats, they might well be a millionaire in nominal terms. But with prices having risen over 15 fold, a million would be worth only £64k in todays terms. Probably less than 2 years' average salary. It's not going to get them a decent pension or anything near it.

Another_Saver

That 10.29% includes:
Dividend yield 3.97%, compared with current 1.6%
And 6.09% capital growth, which you can break down as:
CPI 2.88% (doesn't make a difference if only looking at real returns)
0.96% rerating from a PE of 10.13 to 24.88 over 94 years (no reason to expect that to continue, boomer/Millennial demographics)
1.11% population growth, expected to slow to 0 in future

Leaving real earnings growth per capita of 1.02%.

Thinking about the next 30 years, if you expect current valuations to maintain, the dividend yield to continue around the past 30 year average of 2%, population growth of say 0.5% and real earnings per capita growth of say 1%, I don't see how anyone expects the US market to return close to those historic averages of 7.2% real/10.3% nominal in future.

thegentleway

Another_Saver said:

That 10.29% includes:
Dividend yield 3.97%, compared with current 1.6%
And 6.09% capital growth, which you can break down as:
CPI 2.88% (doesn't make a difference if only looking at real returns)
0.96% rerating from a PE of 10.13 to 24.88 over 94 years (no reason to expect that to continue, boomer/Millennial demographics)
1.11% population growth, expected to slow to 0 in future

Leaving real earnings growth per capita of 1.02%.

Thinking about the next 30 years, if you expect current valuations to maintain, the dividend yield to continue around the past 30 year average of 2%, population growth of say 0.5% and real earnings per capita growth of say 1%, I don't see how anyone expects the US market to return close to those historic averages of 7.2% real/10.3% nominal in future.

Cool - time to sell up and go all in on bitcoin/gold instead

Another_Saver

thegentleway said:

Another_Saver said:

That 10.29% includes:
Dividend yield 3.97%, compared with current 1.6%
And 6.09% capital growth, which you can break down as:
CPI 2.88% (doesn't make a difference if only looking at real returns)
0.96% rerating from a PE of 10.13 to 24.88 over 94 years (no reason to expect that to continue, boomer/Millennial demographics)
1.11% population growth, expected to slow to 0 in future

Leaving real earnings growth per capita of 1.02%.

Thinking about the next 30 years, if you expect current valuations to maintain, the dividend yield to continue around the past 30 year average of 2%, population growth of say 0.5% and real earnings per capita growth of say 1%, I don't see how anyone expects the US market to return close to those historic averages of 7.2% real/10.3% nominal in future.

Cool - time to sell up and go all in on bitcoin/gold instead

I'm 1/3 FTSE 100 and 1/3 FTSE 250 🤷‍♂️

thegentleway

Another_Saver said:

thegentleway said:

Another_Saver said:

That 10.29% includes:
Dividend yield 3.97%, compared with current 1.6%
And 6.09% capital growth, which you can break down as:
CPI 2.88% (doesn't make a difference if only looking at real returns)
0.96% rerating from a PE of 10.13 to 24.88 over 94 years (no reason to expect that to continue, boomer/Millennial demographics)
1.11% population growth, expected to slow to 0 in future

Leaving real earnings growth per capita of 1.02%.

Thinking about the next 30 years, if you expect current valuations to maintain, the dividend yield to continue around the past 30 year average of 2%, population growth of say 0.5% and real earnings per capita growth of say 1%, I don't see how anyone expects the US market to return close to those historic averages of 7.2% real/10.3% nominal in future.

Cool - time to sell up and go all in on bitcoin/gold instead

I'm 1/3 FTSE 100 and 1/3 FTSE 250 🤷‍♂️

How come so much UK bias?

kinger101

Mickey666 said:

And here’s another suggestion.
I’ve never understood why there is an upper limit on employee NI contributions.  Imagine if income tax was treated in the same way!  

Why not remove the upper limit (or rather the upper reduction) on NI contributions?  This would have no effect on anyone earning less than around £50k pa.  Might be a big jump to abolish it in one go, but why not over a few years?

There isn't actually an upper limit on NI (any more), but the rate drops from 12 % to 2% at about the same point where income tax increases from 20 % for 40 %.  Effectively meaning people are taxed mostly at 0 %, 32 % and then 42 %.  It would be perverse IMO to jump from 32 % to 52 % without first introducing additional bands for people earning over £30K.  

We have a structural deficit because everyone always thinks someone richer than them should pay more, despite us having the lowest taxes in NW Europe.