Telegraph reporting - pensions tax threat

eskbanker

C_Mababejive said:

i do begin to despair> We have been fed the message for decades that if we work hard, provide for ourselves then all will be well and the conservatives will smile upon us. Now we are told that pensioners have to be the whipping boys for mythical debt and that they want to attack pensions.

Try not taking speculative and sensationalised newspaper stories so seriously, or read better ones....

MoJoeGo

I've always wanted the chance to join the exclusive 'fixed protection' club.

(not)

EdSwippet

Albermarle said:

The LTA is not particularly high when you consider a pot of say £1m and the income and taxation that flows from it.

Except in the large majority of cases a significant proportion of the One Million will have been free money from the government in the form of very generous 40% tax relief plus some 'free money' from an employer . So even if some more is taken back,  most people in the enviable position of having a Million Pounds pension pot , will be quids in still.

The money you have characterised as "free" here is actually a) in the case of employer contributions, compensation for working that is simply paid out to employees in a way other than salary, and b) in the case of the government element, largely tax deferral. One could of course chose to forgo these, but either way they are not any form of gift.

The only true "free" money in a pension is the "tax relief" paid to non-earning non-taxpayers who make annual £3,200 pension contributions.

ex-pat_scot

Albermarle said:

The LTA is not particularly high when you consider a pot of say £1m and the income and taxation that flows from it.

Except in the large majority of cases a significant proportion of the One Million will have been free money from the government in the form of very generous 40% tax relief plus some 'free money' from an employer . So even if some more is taken back,  most people in the enviable position of having a Million Pounds pension pot , will be quids in still.

Ouch! Where to start.


1. There is no free money from the Government. Really; no.  It has generously allowed you to keep a portion of YOUR salary without incurring tax now, on the expectation that (a) as a prudent saver you won't be a drain on society in later life (b) you will pay tax on that money (and its accrued growth) once you actually access it.  It's not tax free; merely tax deferred.
Clearly it would be disengenuous not to mention tax arbitrage - if you are HR taxpayer now, and BR taxpayer in retirement, then you would benefit from the differential tax rates. Anyone on SalSac also benefits in this manner too.

In pensions world, the only free money is where a non-earner can get a topup from £2880 to £3,600 for annual pension contribution, and where those with LISA get the topup.

2. Free money from the employer. It's free in exactly the same way as your salary is free money from your employer.  It's part of your compensation package. It's not free

Malthusian

EdSwippet said:

The only true "free" money in a pension is the "tax relief" paid to non-earning non-taxpayers who make annual £3,200 pension contributions.

£3,600 gross, £2,880 net. And it's only free money if it isn't means-tested away. For MoneySavers taking advantage of the £3,600 allowance this won't be an issue but for people who actually have no earnings it would be.

For those contributing £2,880 to a non-taxpayer spouse's pension, it can be assumed that they are using taxed income to do so, meaning it is essentially nothing more than moving income from the higher-earning spouse's name into that of the other. Although marriages are a joint enterprise, as per divorce law, and moving money from one spouse to the other this is normal for IHT and CGT planning, the Government restricts you from doing the same with income tax planning for largely arbitrary and historical reasons.

Company owners have significant scope to move their earnings into the spouse's name by making the spouse a shareholder and paying them a nominal salary to answer the phone and shuffle paper occasionally (thus earning a free State Pension) but salaried high earners cannot, meaning they are restricted to tinkering like paying £2,880 into the spouse's pension out of their taxed income.

SomeMadeUpName

EdSwippet said:

The only true "free" money in a pension is the "tax relief" paid to non-earning non-taxpayers who make annual £3,200 pension contributions.

ex-pat_scot said:

In pensions world, the only free money is where a non-earner can get a topup from £2880 to £3,600 for annual pension contribution, and where those with LISA get the topup.

Agree with what both of you say, but to be a bit pedantic:

It's possible to get upto about £2.5k of 'free money' by contributing all of your earned income (so long as it is above £12.5k).

Eg: say you earn £20k pa, but are able to contribute an amount equivalent to all of that gross (maybe you have other investment incomes from ISA, or savings you are spending down, or a well paid partner, etc).  You will have paid only about £1.5k in tax on those earnings, but if you contribute £16k to a SIPP you will get £4k back in 'tax'.  So you are getting 'back in tax £2.5k more than you paid on that salary.

For the purposes of the above example I have kept the numbers really rounded for simplicity so they are not quite the current tax thresholds, plus I tried to give examples of how this might be affordable that didn't bring their own tax implications into it, but hopefully you get my point.  Potentially the max free money is circa £2.5k, not just the £720 you both quote.  It would though I admit be for only a very few in very particular situations (earners who have savings outside pension, but are moving funds into pension being the most obvious one*).

*ie me

Albermarle

ex-pat_scot said:

Albermarle said:

The LTA is not particularly high when you consider a pot of say £1m and the income and taxation that flows from it.

Except in the large majority of cases a significant proportion of the One Million will have been free money from the government in the form of very generous 40% tax relief plus some 'free money' from an employer . So even if some more is taken back,  most people in the enviable position of having a Million Pounds pension pot , will be quids in still.

Ouch! Where to start.


1. There is no free money from the Government. Really; no.  It has generously allowed you to keep a portion of YOUR salary without incurring tax now, on the expectation that (a) as a prudent saver you won't be a drain on society in later life (b) you will pay tax on that money (and its accrued growth) once you actually access it.  It's not tax free; merely tax deferred.
Clearly it would be disengenuous not to mention tax arbitrage - if you are HR taxpayer now, and BR taxpayer in retirement, then you would benefit from the differential tax rates. Anyone on SalSac also benefits in this manner too.

In pensions world, the only free money is where a non-earner can get a topup from £2880 to £3,600 for annual pension contribution, and where those with LISA get the topup.

2. Free money from the employer. It's free in exactly the same way as your salary is free money from your employer.  It's part of your compensation package. It's not free

ex-pat_scot said:

Albermarle said:

The LTA is not particularly high when you consider a pot of say £1m and the income and taxation that flows from it.

Except in the large majority of cases a significant proportion of the One Million will have been free money from the government in the form of very generous 40% tax relief plus some 'free money' from an employer . So even if some more is taken back,  most people in the enviable position of having a Million Pounds pension pot , will be quids in still.

Ouch! Where to start.


1. There is no free money from the Government. Really; no.  It has generously allowed you to keep a portion of YOUR salary without incurring tax now, on the expectation that (a) as a prudent saver you won't be a drain on society in later life (b) you will pay tax on that money (and its accrued growth) once you actually access it.  It's not tax free; merely tax deferred.
Clearly it would be disengenuous not to mention tax arbitrage - if you are HR taxpayer now, and BR taxpayer in retirement, then you would benefit from the differential tax rates. Anyone on SalSac also benefits in this manner too.

In pensions world, the only free money is where a non-earner can get a topup from £2880 to £3,600 for annual pension contribution, and where those with LISA get the topup.

2. Free money from the employer. It's free in exactly the same way as your salary is free money from your employer.  It's part of your compensation package. It's not free

OK I was probably overreacting to the previous poster , who was being very negative about a system that had enabled them to build up a Million pound pot !

i do begin to despair> We have been fed the message for decades that if we work hard, provide for ourselves then all will be well and the conservatives will smile upon us. Now we are told that pensioners have to be the whipping boys for mythical debt and that they want to attack pensions.

Best not to get involved it the financial system. Swap your fake money for tangible assets as soon as you can and keep as much of it off the books.

jimi_man

ex-pat_scot said:

Albermarle said:

The LTA is not particularly high when you consider a pot of say £1m and the income and taxation that flows from it.

Except in the large majority of cases a significant proportion of the One Million will have been free money from the government in the form of very generous 40% tax relief plus some 'free money' from an employer . So even if some more is taken back,  most people in the enviable position of having a Million Pounds pension pot , will be quids in still.

Ouch! Where to start.


1. There is no free money from the Government. Really; no.  It has generously allowed you to keep a portion of YOUR salary without incurring tax now, on the expectation that (a) as a prudent saver you won't be a drain on society in later life (b) you will pay tax on that money (and its accrued growth) once you actually access it.  It's not tax free; merely tax deferred.
Clearly it would be disengenuous not to mention tax arbitrage - if you are HR taxpayer now, and BR taxpayer in retirement, then you would benefit from the differential tax rates. Anyone on SalSac also benefits in this manner too.

In pensions world, the only free money is where a non-earner can get a topup from £2880 to £3,600 for annual pension contribution, and where those with LISA get the topup.

2. Free money from the employer. It's free in exactly the same way as your salary is free money from your employer.  It's part of your compensation package. It's not free

It's an odd stance to come out with 'There is no free money from the Government. Really; no.' and then go on to explain that actually there is free money in the form of the difference between HR/BR tax rates and also Salary Sacrifice. 

Maybe I don't understand the principles but I always thought there was substantial value in it. For example with our hypothetical £1 million pot, the person pays in £600K, it gets enhanced to £1 million (I know it doesn't physically, you have to claim it back but the effect is the same). He then takes 25% tax free (also not mentioned as part of the free money) and then pays 20% on the other £750K, so another £150K.

Thus he's left with £600K and with his £250K that makes £850K in total, as compared to £600K that he's paid in - a difference of £250K - 25% of the pot.

Seems to me to be a substantial amount of free money unless I've got the maths wrong, which is entirely possible? 

I totally get that the employer contribution is not free money. 

SouthCoastBoy

a lot of the pot value will be from gains as opposed to contributions and not all the contributions may be at 40% relief so I think the numbers aren't as straight forward as that implied.

Personally I don't think £1m is much especially when compared against DB pensions, if the DB multiple was set at 40 I think it would be fairer.

jimi_man

SouthCoastBoy said:

a lot of the pot value will be from gains as opposed to contributions and not all the contributions may be at 40% relief so I think the numbers aren't as straight forward as that implied.

Personally I don't think £1m is much especially when compared against DB pensions, if the DB multiple was set at 40 I think it would be fairer.

Well as someone who is currently taking his DB pension which is just over 60% of LTA, as well as contributing to a Civil Service pension and a DC pension, it's probably fair to say that I don't share your sentiments!

I'd be dumped over the line straight away if the multiple was 40, even without the other two!