Telegraph reporting - pensions tax threat

Thrugelmir

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.

Windfall gains of recent years are just luck and a matter of being invested at the right time time. Money makes money. Hence the widening wealth gaps. 

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.

Agreed, however the principle is still the same - that 25% could be obtained free. 

Also if one earned £60K and paid 15% then that would all be HR relief. But I do take that point though. 

EdSwippet

jimi_man said:

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? 

What you appear to be missing is that in order to get your example £600k into a pension and claim £400k in tax relief, you would have to have earned £1m in salary, and have paid £400k tax on it. So the added ("enhanced") £400k is not free, not a gift, and not something you get for nothing.

Compared to normal income tax and NI rates, getting back £850k from £1m of earnings would not be a bad deal by any means -- this effect is much of what makes pension attractive retirement savings vehicles, relative to taking salary -- but getting back less than you effectively had to earn and put in to a pension is certainly not "free money". It is "less heavily taxed money".

michaels

jimi_man said:

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!

So convert your DB to a DC at 20x and then try and use the pot to buy an annuity paying the same as the DB you have given up....you will find that you need to value the DB at 40 times to make the maths work.

jimi_man

EdSwippet said:

jimi_man said:

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? 

What you appear to be missing is that in order to get your example £600k into a pension and claim £400k in tax relief, you would have to have earned £1m in salary, and have paid £400k tax on it. So the added ("enhanced") £400k is not free, not a gift, and not something you get for nothing.

Compared to normal income tax and NI rates, getting back £850k from £1m of earnings would not be a bad deal by any means -- this effect is much of what makes pension attractive retirement savings vehicles, relative to taking salary -- but getting back less than you effectively had to earn and put in to a pension is certainly not "free money". It is "less heavily taxed money".

I'm not sure of your point? 'Less heavily taxed money', to all intents and purposes is free money. If you hadn't put it in a pension then you'd have paid tax on it? 

I get that you'd have needed to earn £1 million, but you have 'diverted' £400k from HMRC into your pension. It's free money to you from the Govt.

ex-pat_scot

jimi_man said:

ex-pat_scot said:

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. 

It's more a rail that it is not the government giving money to you; it is merely not taking as much of your money as it otherwise might.
The net financial effect might be the same, but the language and sentiment is important.

To imply that the government is gifting free money is to start with the stance that your income belongs to the government, and they generously allow you to keep some or most of it.

The alternative view is that your money is indeed yours, and you are required to contribute a portion of it in tax to support government spending.  

It may seem pedantic, but I find the whole "government free money" really frustrating.

jimi_man

michaels said:

jimi_man said:

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!

So convert your DB to a DC at 20x and then try and use the pot to buy an annuity paying the same as the DB you have given up....you will find that you need to value the DB at 40 times to make the maths work.

I wasn't suggesting that it's not generous (and maybe slightly unfair), just that it would affect me greatly.

However if that's how tax revenue is to be raised then so be it. There will have to be some tax hits somewhere, so who knows who'll be targeted. The LTA down to £800k would hit me as well - with everything added up. 

doodling

jimi_man said:

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. 

I think there is a difference in peoples of understanding of free money.

My understanding of free money is that someone gives me some money.

Your understanding of free money appears to be along the lines of: you have £100 in your pocket and I decide not rob you, therefore you have £100 of free money.

There really isn't any free money from the government (except in the case of non-taxpayers making pension contributions).  All that varies is the extent and timing of the tax the government decides to impose.  Different levels of tax are paid depending on rates of pay, rates of pension contribution and rate of pension withdrawal.  The government gets to play the stock market with other peoples money on the side which is probably beneficial to them as well.

Your figures are (taking them at face value) show that someone accrues £1m of pension funds and pays tax of £150k.  That feels like the opposite of free money to me.  Note that the tax is the same whether that person is a higher rate tax payer or a basic rate tax payer while they are earning.  The fairness of this arrangement is of course open to discussion.

If you want to look at it from a cost point of view then it costs a basic rate taxpayer £800k buy that benefit whilst it costs a higher rate taxpayer £600k to buy that benefit.  That could be considered unfair but only if you look at it in isolation.  In order to buy at this cheap price, the higher rate taxpayer will have had to give the government at least ~£190k in tax over the years (difference between income tax allowance and higher rate threshold times 25 years (£40k pa contribution to get £1m) times basic rate tax).  The basic rate taxpayer may not have given the government any income tax.  The difference is therefore ~£790k vs. £800k cost, not quite such a difference.

If I add in salary sacrifice then the higher rate taxpayer pays ~£770k for their £1m pot whilst the basic rate taxpayer pays £670k.  The fairness of this arrangement is of course open to discussion.

Ganga

I thought that your employers contributions to your pension pot was free money ? am i wrong.
lso if employer A) matched what you put in say 2% , but employer B put in 12% to your 2% surly thats an extra10% free as the employee pays no tax on an employers contributions OR have i got it wrong .

DT2001

Ganga said:

I thought that your employers contributions to your pension pot was free money ? am i wrong.
lso if employer A) matched what you put in say 2% , but employer B put in 12% to your 2% surly thats an extra10% free as the employee pays no tax on an employers contributions OR have i got it wrong .

I think the argument would be that the employer contribution was part of the overall package so not free. You might take a slightly lower paid job with higher contribution from your employer as overall you were better off.