How many people actually get to the LTA?

Flugelhorn

It is hairy - my predicted pension once took an almighty nose dive as the WTE salary was 50% of what it should be - turned out an ad hoc job I did had been marked down as a 15 hour working day instead of 7.5 hr day, the daily rate had been divided by 15 rather than 7.5 and then multiplied up again to give an annual equivalent.

Thankfully they took my word for it when I pointed out it out but took hours to get to the bottom of it and multiple attempts at contact with the uncontactables

SouthCoastBoy

Due to governments altering the LTA downwards, either by way of a freeze or actually changing the thresholds I see the LTA only going in one direction, a good analogy, as mentioned previously on this thread, is the higher rate income tax band, relatively moderate earners are now being caught with this, another example is the child benefit allowance threshold.

Personally I have invested a lot of money into S&S ISAs meaning I don't have all my eggs in one tax treatment basket, I have around a a 50:50 split so although I have about 1.3m to 1.4m "pot" I shouldn't hit the LTA and also when drawing income I will be paying less tax, therefore needing to draw less of my pension. So I think the hybrid model has worked best for me.

Anonymous101

The problem as I see it is that people do start to think "why earn more?" when they hit these sorts of thresholds.
I know you shouldn't let the tax tail wag the savings dog but people do question the sense in paying 42% tax and NI plus losing Child Benefit once you become a higher rate tax payer. Granted its a more fortunate position than many are in to be able to make those decisions but I do find myself thinking this way. I can LTA influencing thinking in this way too.

SCB's approach to saving in S&S ISA's and Pensions goes some way to mitigating this. However if say you were contributing everything over BR tax into a pension via SS then you hit the LTA, maybe you'd sooner have a day a week off than pay tax through earnings or the LTA? Its not good for the economy as a whole IMO.

lisyloo

Kim1965 said:

If only 2 %of people have a pot equal to lta, does this make the freeze on lta seem more reasonable?? 

I would say no.
youre ignoring those who choose to retire before LTA who could offer a great deal to society e.g. dentists, NHS consultants.

i agree not good for society as a whole.

Albermarle

Kim1965 said:

I accept that it works against certain proffessions like  doctors in db schemes for example. 
 As a point, I would have thought that tax breaks for pensions  should be for retirement not inheritance.
 I would also think a flat rate incentive would also be fairer a 30 % rate would benefit  lower paid savers.
 Also salary sacrifice, as i understand allows a person to avoid /divert national insurance into pension funds. Many do not have access to ss, seems unfair.
 I have no idea how such changes could be implemented, but it will be interesting to see what happens after a change if government. 

In my opinion the salary sacrifice issue is the most glaringly obvious issue to resolve. It is costing the government more and more every year in lost NI employee and employer payments. Plus it discriminates against employees not in these schemes.
In addition a minority use the salsac to avoid student loan repayments, and it allows high earners to still claim child benefit, if they can afford to salsac a big enough %.

A 30% rate for tax relief is a non starter though. There are a lot more 20% tax payers than 40% , so having a universal 30% relief would cost the Treasury Billions . A figure of 25% has been mooted in the past .

Regarding the laws on inheriting pension pots , they clearly need looking at . Not just about them not being included in IHT calculations, but the preferential tax treatment that beneficiaries get, and that even these advantages can be passed on down multi generations . I think it is clearly a trick legal problem though,  and would be a tricky political problem with some kind of complicated transition to a new regime. 

Malthusian

Albermarle said:

In my opinion the salary sacrifice issue is the most glaringly obvious issue to resolve. It is costing the government more and more every year in lost NI employee and employer payments. Plus it discriminates against employees not in these schemes.

There is only one way the salary sacrifice issue will be "resolved" which is to make it illegal and apply NI to all pension contributions. Which won't make employees unable to access salary sacrifice any better off. It will just make everyone else worse off.

Arguably it's not politically feasible because you would have to make doctors and nurses and other public servants (TM) pay National Insurance on their employer contributions. At 20.68% * 15.05% that's effectively a 3.25% pay cut for Ms Nightingale. Good luck with that.

<div>A 30% rate for tax relief is a non starter though. There are a lot more 
20% tax payers than 40% , so having a universal 30% relief would cost 
the Treasury Billions . A figure of 25% has been mooted in the past .</div><div></div>

Do we know how much of the tax relief "bill" represents 20% taxpayers vs 40% taxpayers? While there are a lot more 20% taxpayers, 40% taxpayers tend to save more of their income into pensions for obvious reasons.

A 25% / 30% rate of tax relief would mean higher rate taxpayers would stop saving into pensions en masse, at least DC ones.

The main problem is the same problem mentioned above with abolishing salary sacrifice. Higher rate taxpayer public servants in DB schemes would have to pay additional tax on their pension contributions, representing the difference between the 40% tax relief received at source and the 25% / 30% they are entitled to.

Regarding the laws on inheriting pension pots , they clearly need looking at . Not just about them not being included in IHT calculations, but the preferential tax treatment that beneficiaries get, and that even these advantages can be passed on down multi generations . I think it is clearly a trick legal problem though,  and would be a tricky political problem with some kind of complicated transition to a new regime.

On another thread I mooted a solution: no tax charge on the first death and a 40% tax charge on the second and every subsequent death. So your widow can still get the whole DC fund but the inheritance benefits diminish rapidly.

It doesn't seem particularly controversial considering the 82% tax charge that used to apply on unspent drawdown funds on death.

Grumpy_chap

Albermarle said:

In my opinion the salary sacrifice issue is the most glaringly obvious issue to resolve. It is costing the government more and more every year in lost NI employee and employer payments. Plus it discriminates against employees not in these schemes.
In addition a minority use the salsac to avoid student loan repayments, and it allows high earners to still claim child benefit, if they can afford to salsac a big enough %.

SS, to this extent, is (or was) largely a niche issue.  In order to SS you need to be an employee.  Most employers have limits on the amount of salary they will allow you to SS which prevents the "extreme" cases.

Within those bounds, there would always be some that could SS extra and avoid HICBIC or avoid withdrawal of personal allowance, but that would only ever be a small part of the total pool of employees.  For the most part, an individual who goes through the £50k threshold for HICBIC will still grow their career and salary will go out the other side of £60k threshold and be outside what the employer allows to be reduced through SS so HICBIC comes into play after a delay in an event.

What has caused the large increase in SS in the latest period (2021-22 onwards) is the expansion of IR35. 

In the past contractors operated through Ltd Co., paid salary of £12.5k (subject to NI), paid corporation tax (19%) took £2k tax-exempt dividend, and then paid dividend tax on the remainder at 7.5% (now 8.75%).  All-in still quite a lot of tax contribution.
Some of those contractors also paid themselves a pension from the Ltd Co (if they were well-advised for the long term).

What now happens is the contractor operates through Umbrella Company, takes NMW and SS the remainder into pension (subject to AA, but using carry-forward from previous years of unused AA).  This then creates the "extreme" case of NMW around £17k per year plus a massive pension contribution but paying hardly any income tax, NI, avoiding HICBIC, avoiding personal allowance withdrawal, reducing liability to student loan contributions etc.  Own children become eligible for student loans at the most favourable basis.

The exact opposite of what the Government intended through making IR35 apply.

These extreme cases may well subside once people have burned through annual allowance carry-forward but there are probably few contractors that will reach that concern this tax year or even next.  Anything could happen within 24 months.

It is probably only the fact that these contractors generally have a "comfortable" level of savings that means they cannot SS to NMW and then claim Universal Credit.  Now, that really would be an abuse.  I am not sufficiently knowledgeable as to whether it would be theoretically possible.

Albermarle

There is only one way the salary sacrifice issue will be "resolved" which is to make it illegal and apply NI to all pension contributions. Which won't make employees unable to access salary sacrifice any better off. It will just make everyone else worse off.Arguably it's not politically feasible because you would have to make doctors and nurses and other public servants (TM) pay National Insurance on their employer contributions. At 20.68% * 15.05% that's effectively a 3.25% pay cut for Ms Nightingale. Good luck with that.

The fact that it would be difficult to resolve, probably very difficult,  still does not mean that a loophole costing the Treasury increasing Billions every year should be just ignored . 

On another thread I mooted a solution: no tax charge on the first death and a 40% tax charge on the second and every subsequent death. So your widow can still get the whole DC fund but the inheritance benefits diminish rapidly.

I remember your suggestion now . Sounds like a good idea . Maybe the 40% could be only on funds above say £200K , to soften the transition and penalise lower wealth families less ( in general ) 

Thrugelmir

I can recall conversations some three decades ago with people that viewed pension mortgages as the route to financial freedom. Perceptions are shaped by recent events. The landscape can rapidly change. 

Kim1965

I think half the applications fto cash in db schemes, apart from being dazzled by the pound notes, is that the proceeds can be passed on as inheritance. Peehaps they would not be so keen if was szbjected to tax.
 As somone who has not/will not inherit a bean, It is if comfort to think my kids are likely to benefit when i check out.