How would a change to pension tax relief affect salary sacrifice THP

Random47

Trying to wrap my head around this. Lets say tax relief were to change under todays or future government. For example a flat 33%. How would that affect a SS take home pay arrangement.

Consider someone on £60K p.a. salary (net), who does a £10K p.a. AVC salary sacrifice, so in effect does not pay the UK standard 40% tax rate on their SS salary as it is now £50K? How would they be worse of under this arrangement with THP? 

Happy for smarter minds to offer other examples., or comment on other non SS examples / impacts.

zagfles

Been discussed here loads. Basically, 3 options:
1) Ban sal sac
2) Make employer pension conts a taxable benefit (with the flat rate rebate)
3) Limit employer pension conts eg to a % of salary

All have their pros and cons.
1) creates a massive unfairness between employers with generous pension schemes (eg public sector) and those with minimum pensions
2) gets too complicated particuarly with DB and will cause problems in the NHS etc similar to the AA/LTA etc
3) will still allow limited full marginal relief and so not save as much, but may be a good compromise

Random47

zagfles said:

Basically, 3 options:
All have their pros and cons.

Ah, thanks, better understanding now. Essentially it wouldn't an easy switch out of a tax relief rate form one percentage to another but a fairly massive upheaval of arrangements with known or estimated outcomes but probably with a whole lot of unintended consequences.

dunstonh

Random47 said:

zagfles said:

Basically, 3 options:
All have their pros and cons.

Ah, thanks, better understanding now. Essentially it wouldn't an easy switch out of a tax relief rate form one percentage to another but a fairly massive upheaval of arrangements with known or estimated outcomes but probably with a whole lot of unintended consequences.

Which is why it is more likely to be considered in the pension review rather than the autumn statment.

Exodi

The IFS released an article about this exact subject yesterday (well about how revenues could be raised from pension reform) the article can be read here (https://ifs.org.uk/articles/raising-revenue-reforms-pensions-taxation ) but a TL;DR summary would be:

• Capping up-front tax relief would not be sensible
  
  Instead you could:
  
  
• make pensions subject to inheritance tax
• reduce tax free lump sum ceiling to £100k
  
• reform employer pension contributions currently avoiding NI - this is essentially the main benefit of salary sacrifice.

I concur in thinking that a fixed up-front tax relief rate would not be sensible.

If it was capped at the basic tax rate for example, but you are a 40% tax payer, you would still be paying tax on the money going in, and then be expected to pay tax again on the money when it is drawn out. The inevitable consequence being that it discourages pension saving and leads even more people to be reliant on the state to provide their retirements.

To be honest, while I agree with the IFS suggestions that these are more equitable solutions, I can't help but feel a bit resentful at the prospect of current pensioners or those nearing retirement enjoying the benefit of decades of salary sacrifice or large tax free allowances, but then raising the ladder from future generations.

westv

dunstonh said:

Random47 said:

zagfles said:

Basically, 3 options:
All have their pros and cons.

Ah, thanks, better understanding now. Essentially it wouldn't an easy switch out of a tax relief rate form one percentage to another but a fairly massive upheaval of arrangements with known or estimated outcomes but probably with a whole lot of unintended consequences.

Which is why it is more likely to be considered in the pension review rather than the autumn statment.

Is October the usual  Autumn Statement? I thought it was going to be a budget speech 

MetaPhysical

Even reducing the TFLS to £100k is going to make many people squeal - myself included.  I have planned (and saved for and gone without other things) for that money for numerous expenditures upon my retirement - I was banking on that full 268k.  At 57 it is making me think that perhaps I should have taken it and I am seriously considering doing so - the full amount.  A bird in the hand and all that.

This uncertainty is a crazy state of affairs.

zagfles

Exodi said:

The IFS released an article about this exact subject yesterday (well about how revenues could be raised from pension reform) the article can be read here (https://ifs.org.uk/articles/raising-revenue-reforms-pensions-taxation ) but a TL;DR summary would be:

• Capping up-front tax relief would not be sensible
  
  Instead you could:
  
  
• make pensions subject to inheritance tax
• reduce tax free lump sum ceiling to £100k
  
• reform employer pension contributions currently avoiding NI - this is essentially the main benefit of salary sacrifice.

I concur that in thinking that a fixed up-front tax relief rate would not be sensible.

If it was capped at the basic tax rate for example, but you are a 40% tax payer, you would still be paying tax on the money going in, and then be expected to pay tax again on the money when it is drawn out. The inevitable consequence being that it discourages pension saving and leads even more people to be reliant on the state to provide their retirements.

To be honest, while I agree with the IFS suggestions that these are more equitable solutions, I can't help but feel a bit resentful at the prospect of current pensioners or those nearing retirement enjoying the benefit of decades of salary sacrifice or large tax free allowances, but then raising the ladder from future generations.

Capping tax free cash would be just as complicated. You'd need transitional rules like when the LTA was reduced so people just about to retire and relying on a large lump sum eg to pay off the mortgage aren't suddenly thrown under a bus. 

If a flat rate was introduced it would almost certainly be over 20%, probably 25% or 30%, I even read somewhere that 33% was revenue neutral. So anyone paying HR tax would still get more tax relief than the tax they pay on drawing provided they're BR taxpayers in retirement. And if not, it would act as a similar disincentive and penalty to the LTA, and on a similar level of pension (~£40k pension plus state pension to be a HR taxpayer in retirement, similar to a SWR from a £million pot). 

leosayer

MetaPhysical said:

Even reducing the TFLS to £100k is going to make many people squeal - myself included.  I have planned (and saved for and gone without other things) for that money for numerous expenditures upon my retirement - I was banking on that full 268k.  At 57 it is making me think that perhaps I should have taken it and I am seriously considering doing so - the full amount.  A bird in the hand and all that.

This uncertainty is a crazy state of affairs.

Same here, although I'm 54 so don't have the option of taking it right now.

My savings and retirement plans over the past 10 years has been based on the expectation of taking the tax free lump sum I'm entitled from DB and DC schemes. If that were to be taken away or reduced then my retirement plans wold have to be re-assessed.

In preparation, I have taken voluntary redundancy from work - that's something that can't be undone.

Triumph13

zagfles said:

Exodi said:

The IFS released an article about this exact subject yesterday (well about how revenues could be raised from pension reform) the article can be read here (https://ifs.org.uk/articles/raising-revenue-reforms-pensions-taxation ) but a TL;DR summary would be:

• Capping up-front tax relief would not be sensible
  
  Instead you could:
  
  
• make pensions subject to inheritance tax
• reduce tax free lump sum ceiling to £100k
  
• reform employer pension contributions currently avoiding NI - this is essentially the main benefit of salary sacrifice.

I concur that in thinking that a fixed up-front tax relief rate would not be sensible.

If it was capped at the basic tax rate for example, but you are a 40% tax payer, you would still be paying tax on the money going in, and then be expected to pay tax again on the money when it is drawn out. The inevitable consequence being that it discourages pension saving and leads even more people to be reliant on the state to provide their retirements.

To be honest, while I agree with the IFS suggestions that these are more equitable solutions, I can't help but feel a bit resentful at the prospect of current pensioners or those nearing retirement enjoying the benefit of decades of salary sacrifice or large tax free allowances, but then raising the ladder from future generations.

Capping tax free cash would be just as complicated. You'd need transitional rules like when the LTA was reduced so people just about to retire and relying on a large lump sum eg to pay off the mortgage aren't suddenly thrown under a bus. 

If a flat rate was introduced it would almost certainly be over 20%, probably 25% or 30%, I even read somewhere that 33% was revenue neutral. So anyone paying HR tax would still get more tax relief than the tax they pay on drawing provided they're BR taxpayers in retirement. And if not, it would act as a similar disincentive and penalty to the LTA, and on a similar level of pension (~£40k pension plus state pension to be a HR taxpayer in retirement, similar to a SWR from a £million pot). 

This.  33% flat relief and making employer's DC contributions a taxable and NI'able benefit would nicely do the job of incentivising people who might otherwise be a burden on the state, whilst avoiding giving most of the tax relief to the better paid, who should really be able to provide for their retirement without too much help from HMRC.  I don't see a problem with just ignoring DB schemes - other than to the extent they use up your AA.  It might also be worth establishing a right to have your pension contributions as pay instead, if you can demonstrate you have sufficient existing provision, to avoid disincentives for the higher paid to keep working once they were in HR tax in retirement territory.  And yes, I do realise it's easy for me to say that after having benefited from lots of 40% relief in the past, but I felt the same at the time.

zagfles

Triumph13 said:

zagfles said:

Exodi said:

The IFS released an article about this exact subject yesterday (well about how revenues could be raised from pension reform) the article can be read here (https://ifs.org.uk/articles/raising-revenue-reforms-pensions-taxation ) but a TL;DR summary would be:

• Capping up-front tax relief would not be sensible
  
  Instead you could:
  
  
• make pensions subject to inheritance tax
• reduce tax free lump sum ceiling to £100k
  
• reform employer pension contributions currently avoiding NI - this is essentially the main benefit of salary sacrifice.

I concur that in thinking that a fixed up-front tax relief rate would not be sensible.

If it was capped at the basic tax rate for example, but you are a 40% tax payer, you would still be paying tax on the money going in, and then be expected to pay tax again on the money when it is drawn out. The inevitable consequence being that it discourages pension saving and leads even more people to be reliant on the state to provide their retirements.

To be honest, while I agree with the IFS suggestions that these are more equitable solutions, I can't help but feel a bit resentful at the prospect of current pensioners or those nearing retirement enjoying the benefit of decades of salary sacrifice or large tax free allowances, but then raising the ladder from future generations.

Capping tax free cash would be just as complicated. You'd need transitional rules like when the LTA was reduced so people just about to retire and relying on a large lump sum eg to pay off the mortgage aren't suddenly thrown under a bus. 

If a flat rate was introduced it would almost certainly be over 20%, probably 25% or 30%, I even read somewhere that 33% was revenue neutral. So anyone paying HR tax would still get more tax relief than the tax they pay on drawing provided they're BR taxpayers in retirement. And if not, it would act as a similar disincentive and penalty to the LTA, and on a similar level of pension (~£40k pension plus state pension to be a HR taxpayer in retirement, similar to a SWR from a £million pot). 

This.  33% flat relief and making employer's DC contributions a taxable and NI'able benefit would nicely do the job of incentivising people who might otherwise be a burden on the state, whilst avoiding giving most of the tax relief to the better paid, who should really be able to provide for their retirement without too much help from HMRC.  I don't see a problem with just ignoring DB schemes - other than to the extent they use up your AA.  It might also be worth establishing a right to have your pension contributions as pay instead, if you can demonstrate you have sufficient existing provision, to avoid disincentives for the higher paid to keep working once they were in HR tax in retirement territory.  And yes, I do realise it's easy for me to say that after having benefited from lots of 40% relief in the past, but I felt the same at the time.

You don't see a problem with "ignoring" DB pensions but making DC pensions a taxable/NI'able benefit? So people with one type of pension get taxed on the benefit but people with another type don't?