Will the Pension LTA be Re-Invented by any Government?

RogerPensionGuy

I have always been paranoid and unhappy with LTA and especially the way in which it was reduced and then frozen, but currently happy its been removed. 

I am just about stopping paid employment in the next few months and pension inputs will stop and am lucky to have a good deferred DB and I have gone past its NRA of 60 so its rolling up at about 6% currently due late activation PA plus inflation of up to a max of 5% in any year and also a DC scheme.

If the LTA of 1.073M was still here I would currently be about 20% over that LTA figure and would be venting both of my pensions ASAP I suspect, the DB is 66% and the DC pot is 33% of my total pensions and I am due full SP at age 67 in 5 years from now.

I have sufficient liquid cash(ISAs & GIA) to fund lifestyle for many years and do not need to draw pensions quickly at all.

I was getting all set to activate DB scheme ASAP to hopefully ensure I get some good value out of it and it has a spouse 66% deal also which is convenient and only vent some DC cash whenever I felt appropriate, maybe just venting a few years till 67 and going up to the 40% Tax bracket until SP starts.

I am still currently planning on leaving my DC pot well alone generally and using the IHT to best effect for family.

The last few days I have been reviewing how the introduction of the LTA was carried out in 2005ish and how the various protections worked back then and also how it fared during one upward and many downwards ramps.

With all the above in mind and still paranoid that the LTA will get put back on the table I am becoming more minded to let both pensions cook longer to be in the best position should the LTA be back on the table.   

I am interested for any views here please?
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https://www.investcentre.co.uk/articles/guide-enhanced-protection-and-primary-protection
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I was watching the video below and at time point 56mins 50secs  (56:50) these two well respected guys gave a few comments on this subject and I'm now feeling more paranoid, this video maybe of interest to view for some.
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https://www.youtube.com/watch?v=7_JjqIs2aEs&t=1808s
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Grumpy_chap

I don't think the LTA will be coming back soon - by which I mean the current or next electoral cycle.  
Remember, LTA was originally introduced by Labour Government at a much higher level than it was before eventually being scrapped by the Conservative Government.  That scrapping was in part encouraged by Labour urging something to be done to ensure medical professionals worked rather than retire early once AA / LTA thresholds were reached.

Having said that, some kind of tightening of restrictions on pension contributions does seem quite possible.  The current generosity, plus ability to use previous years unused allowances, does offer the scope for people to take advantage in ways that are above and beyond what may have been expected, particularly where SS is available:

• Avoiding the 62% equivalent (IT plus NI) rate through the taper of personal allowance
• Avoiding withdrawal of child care funding
• Avoiding the HICBIC

There was a thread in here recently where an individual was discussing using SS to bring salary down to ensure they retained benefits (UC).
https://forums.moneysavingexpert.com/discussion/6471425/salary-sacrifice-universal-credit-and-avc#latest

I was sent an article a few days back about HMRC investigating IR35 as the change in tax receipts had not materialised as it was expected, citing pension SS and "inventive" application of NMW rules and expenses rules as possible reasons.  Sorry, I can't find that article now to provide a link.

Add to all of that the early retirement ages (from 55) and it does mean that anyone over, say 50 yo, can consider high rates of pension contributions as a shortish term savings vehicle with relatively easy access yet still gain from the taxation savings in the interim.  A 50 yo earning £110k could theoretically use SS to bring them selves down to basic rate tax band with all the pension / income benefits going to the pension plus then retain child care and avoid HICBIC in the full knowledge that if things go pear shaped a few years along the line, they can draw that pension.

There is a clear societal benefit in individuals making good provision to fund their retirement.
Applying some of the tax incentives to avoid the worse excesses of the "progressive" taxation rules is possibly something HMRC will have foreseen.
"Innovative" application of IR35 rules or SS to such an extent that the individual can then qualify for mean-tested benefits is probably beyond what HMRC would have foreseen.

Pension rules, like so much of our taxation system, seems to be dysfunctional because of the incessant need by Government to tinker.  It is certain there will be another new "tinker" shortly.

It does seem to be a case of "make hay while the sun shines".

Linton

AS I see it the LTA was a quick fix to prevent blatant use of pensions for large scale tax avoidance rather than for providing people with income in retirement.  Since then inflation made it increasingly unappropriate.

So I can see the possibility of the introduction  of means of ensuring that pensions are used for the purpose for which they are intended but it would seem unlikely to be equally simplistic with the same trigger level as previously.

RogerPensionGuy

I always remember being told by the pension industry that the phrase "too good to be true probably isn't true" just isn't the case with most pensions.

With the above in mind, savings of NI and income tax on the way in, plus employer contributions and using salary sacrifice getting employers to plonk in a % of their NI savings did make it look too good to be true in my eyes and admit I didn't feed pensions enough generally until I was close on 40 years old and decided pensions now look much shorter term being available to vent from age 50 but, then 55 and going to 57 soon so I decided to maximise contributions and even doing more hours work very often and normally avoiding higher rate income tax and NI made the extra hours more bearable in my head.

Looks like all my extra hours and family commitments to pumping has potentially paid off now.

I've been reading and reading how primary and enhanced protections were applied in 2006ish and finding it a bit confusing.com which is normal as I'm slow to understand much stuff unfortunately. 

I was so close to kicking off my deffered DB before it was inflation uplifted the last few Aprils that pasted, that LTA made me mad and so much talk it may get reduced to 800 or 900K anytime and planned to be frozen till 2028, I was 90% going to activate it March this year, but just kept hoping it would get increased especially the NHS narrative and they had to do something to stem the flow of workers from leaving the NHS. 

I was hoping it may nudge up to 1.2 or maybe 1.5M and was very happy when it was fully removed, hard to believe and lots of political talking for just a few weeks after it was announced, looks like its old news now.

So with all the above said, I'm just currently thinking of delaying reducing/activation of the value of the pensions for anything like the old or new LTA being back on the table.

I found the link below of some interest to me, I'll keep reading it and use it as a possible guide for me.

Cheers Roger. 

☆☆☆

https://techzone.abrdn.com/public/pensions/pension-primary-protection#:~:text=Primary protection was introduced, alongside,allowance (LTA) tax charge.

zagfles

[Deleted User] said:

Linton said:

AS I see it the LTA was a quick fix to prevent blatant use of pensions for large scale tax avoidance rather than for providing people with income in retirement. 

I am not sure that is right.  In 2002 when it was the lifetime limit was first consulted on it was not a quick fix and had nothing to do with tax avoidance.  It was there for the same reason as previous limits, the governmented wanted some control on how much each person can draw as tax privileged pension benefits.

Indeed, the 2006 "A-day" changes (when the LTA was introduced) liberalised pensions massively, before there were strict limits on pension contributions and caps on max pensions, for instance as an employee you couldn't put more than 15% of pay into a pension inc your DB conts. I remember being limited to AVCs of 10% of pensionable pay and 15% of non pensionable (because the DB cont was 5% of pensionable pay).

The A-day regime enabled "large scale tax avoidance" rather than stopping it, by allowing people to put all their earned income into a pension if they had other resources to live on eg an inheritance. Even more stupidly, the "tax credits" system enabled people to fully deduct pension contributions so someone earning £200k could put £200k into a pension, get tax relief on the lot, and also claim tax credits based on a zero income!

RogerPensionGuy

I feel very lucky that I'm just stopping pension contributions if the government continues tinkering with pension stuff and especially at short notice, I had backed off contributions a bit the last few years due the LTA and have just opened the gate to maximum in April this year and can only hope if when they poke at pensions and do any tinkering or u-turns, they will have similar protections if required.

I think a poster on here said previously in a or all Scandinavian countries, any pension changes need a ten year space between confirming and actually doing changes, plus sensible transition or grandfather rules.

I can only hope when they play with pensions from now on as they so most likely will, they listen to people and the industry and only slowly blend in charges and fair transition allowance for pension already in their pension journeying. 

dunstonh

[Deleted User] said:

Linton said:

AS I see it the LTA was a quick fix to prevent blatant use of pensions for large scale tax avoidance rather than for providing people with income in retirement. 

I am not sure that is right.  In 2002 when it was the lifetime limit was first consulted on it was not a quick fix and had nothing to do with tax avoidance.  It was there for the same reason as previous limits, the governmented wanted some control on how much each person can draw as tax privileged pension benefits.

IIRC, the concern at the time was the golden handshakes for FTSE100 directors piling their remuneration into pensions.     in its early years, it was only around 5,000 people that were captured by the lifetime allowance.

RogerPensionGuy

Just a little reference material in the link/links below for helping understanding the LTA saga.
☆☆☆
https://www.economicsobservatory.com/what-are-the-implications-of-removing-the-pensions-lifetime-allowance

dunstonh

My recollection is different but you may have had more FTS100 clients than me. The rules for approved pension were well defined (two-third final remuneration after 20 years / 15%, up to earnings cap for post-89 people) making it difficult to pile remuneration in. 

2006 doesnt sound that long ago but it certainly feels it.  Memories fade, mine included!

The earnings cap of the 1989 rules led to an increase of unapproved pension schemes (FURBS and UURBS) which effectively allowed uncapped contributions and no limits on benefits (as you mention)

So, whilst the regular individual had the constraints of the 1989 regime, 1987 regime,1970 regime, RAC rules or the 2001 personal pension rules, there were ways around it if you had enough wealth and the inclination.






The NAO was requested to do a review of the Government figures.  It used the data of 60 FTSE100 companies and it found that the estimate of 5,000 people was at the lower end of the range of reasonable estimates.   It led to the March 2004 budget increasing the LTA to £1.5m and indexation to 1.8m until 2010.

So, the purpose was to place a lifetime cap on pensions, irrespective of contribution method and the cap would be set at a level that would only affect the very highest earners, many of whom had turned to unapproved schemes following the 1989 regime.

It was only in later years that the LTA became a political football and moved to hitting middle earners.   When the LTA was created, there was never any expectation that train drivers, nurses, teachers, self employed etc would get near the LTA.

RogerPensionGuy

Grumpy_chap said:

I don't think the LTA will be coming back soon - by which I mean the current or next electoral cycle.  
Remember, LTA was originally introduced by Labour Government at a much higher level than it was before eventually being scrapped by the Conservative Government.  That scrapping was in part encouraged by Labour urging something to be done to ensure medical professionals worked rather than retire early once AA / LTA thresholds were reached.

Having said that, some kind of tightening of restrictions on pension contributions does seem quite possible.  The current generosity, plus ability to use previous years unused allowances, does offer the scope for people to take advantage in ways that are above and beyond what may have been expected, particularly where SS is available:

• Avoiding the 62% equivalent (IT plus NI) rate through the taper of personal allowance
• Avoiding withdrawal of child care funding
• Avoiding the HICBIC

There was a thread in here recently where an individual was discussing using SS to bring salary down to ensure they retained benefits (UC).
https://forums.moneysavingexpert.com/discussion/6471425/salary-sacrifice-universal-credit-and-avc#latest

I was sent an article a few days back about HMRC investigating IR35 as the change in tax receipts had not materialised as it was expected, citing pension SS and "inventive" application of NMW rules and expenses rules as possible reasons.  Sorry, I can't find that article now to provide a link.

Add to all of that the early retirement ages (from 55) and it does mean that anyone over, say 50 yo, can consider high rates of pension contributions as a shortish term savings vehicle with relatively easy access yet still gain from the taxation savings in the interim.  A 50 yo earning £110k could theoretically use SS to bring them selves down to basic rate tax band with all the pension / income benefits going to the pension plus then retain child care and avoid HICBIC in the full knowledge that if things go pear shaped a few years along the line, they can draw that pension.

There is a clear societal benefit in individuals making good provision to fund their retirement.
Applying some of the tax incentives to avoid the worse excesses of the "progressive" taxation rules is possibly something HMRC will have foreseen.
"Innovative" application of IR35 rules or SS to such an extent that the individual can then qualify for mean-tested benefits is probably beyond what HMRC would have foreseen.

Pension rules, like so much of our taxation system, seems to be dysfunctional because of the incessant need by Government to tinker.  It is certain there will be another new "tinker" shortly.

It does seem to be a case of "make hay while the sun shines".

Thanks to all posters here and I tend to hope/pray that the post quoted above especially the first paragraph will turn out to be the case.

Don't think anyone here is much thinking the LTA or very similar will be reintroduced in the short term(3/5yrs) at least. 

Looking like politically the government(whichever) will need to let the last changes settle down a fair while or it will knock general confidence in pensions we have in the UK. 

IMHO the maximum 25% 268K tax-free will stay for a long period of time as an offset for all the posertive changes made in April 2023.

I'm guessing they(whoever) will tinkle with the AA, the carrying forward options of the AA and the IHT rules on DC pots at their next musical chairs and pension confidence knocking event.

Hopefully no more changes in the next 5 years and allow confidence in pensions to grow as a positive in general for the UK.

The auto enrolment looks like a good change and hopefully they will at least nudge up the minimum 8% to maybe 10% after this economic cycle and cost of living looks more stable and better, then maybe 12% a few years on from upping to 10% and I hope employer and employee share the % uplifts 50/50 on these few uplifts. 

Cheers Roger. 

ader42

I find the £268k tax-free limit to be irritating as in my opinion it unfairly punishes successful investing.