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

hugheskevi

Back in 2009/10 you could take a tax-free lump sum of up to £437,500 at the age of 50.

From April 2028 you will be able to take a tax-free lump sum of up to £268,275 at the age of 57.

Many members were contributing to a pension before 2009/10 who won't take a pension until after April 2028. You don't need to make huge changes immediately affecting individuals who will moan louder than a pensioner having their WFA taken off them, just make a series of much smaller changes and tighten the noose over time.

zagfles

hugheskevi said:

Back in 2009/10 you could take a tax-free lump sum of up to £437,500 at the age of 50.

From April 2028 you will be able to take a tax-free lump sum of up to £268,275 at the age of 57.

Many members were contributing to a pension before 2009/10 who won't take a pension until after April 2028. You don't need to make huge changes immediately affecting individuals who will moan louder than a pensioner having their WFA taken off them, just make a series of much smaller changes and tighten the noose over time.

And there were protections when those limits were reduced (ie the LTA) so the change wasn't retrospective. 

Reducing the LSA in real terms by about 3% a year should do the trick. Easy. Just don't index it. 

zagfles

JoeCrystal said:

zagfles said:

Triumph13 said:

zagfles said:

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? 

I see no problem with that at all as they are completely different beasts and trying to treat them 'the same' just leads to unnecessary complications in pension legislation.  A DB scheme is a promise to pay an income in the future, and that income will be taxed perfectly adequately at the time.  I see no need to differentiate between how you incentivise either higher or lower paid employees to join the scheme.  You just need to not waste money on letting the well paid DB owners cash in on personal pensions too - hence the need to include them in the AA.  Most importantly, there is little or no scope for people to actively use them to minimise the tax they pay.

The rates I suggested above would still give people in DC schemes a good incentive to pay in if their income in retirement will be taxed at basic rate.  It just shifts the balance of the incentive away from the better paid and towards the lower paid.  If anyone is going to be a higher rate taxpayer in retirement, there is no possible public policy reason to want to help them save more.

Can I set up my own DB scheme? I promise to pay myself 1/60th of my final salary for every year I contribute, for the rest of my life once I've retired. I'll engage an actuary to calculate how much I need to contribute to achieve that. Then ask my employer to pay the necessary amount into it and lower my salary by that amount. And so I get full marginal tax relief plus NI relief no matter what my tax rate is, right? 

That might be quite expensive!!! Is it even possible to set up a DB pension scheme these days? They are dying breed after all.

Why not? I'll think they'll be resurrected pretty quick if they're a dodge to get full marginal relief in a flat rate relief system.  

Triumph13

zagfles said:

JoeCrystal said:

zagfles said:

Triumph13 said:

zagfles said:

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? 

I see no problem with that at all as they are completely different beasts and trying to treat them 'the same' just leads to unnecessary complications in pension legislation.  A DB scheme is a promise to pay an income in the future, and that income will be taxed perfectly adequately at the time.  I see no need to differentiate between how you incentivise either higher or lower paid employees to join the scheme.  You just need to not waste money on letting the well paid DB owners cash in on personal pensions too - hence the need to include them in the AA.  Most importantly, there is little or no scope for people to actively use them to minimise the tax they pay.

The rates I suggested above would still give people in DC schemes a good incentive to pay in if their income in retirement will be taxed at basic rate.  It just shifts the balance of the incentive away from the better paid and towards the lower paid.  If anyone is going to be a higher rate taxpayer in retirement, there is no possible public policy reason to want to help them save more.

Can I set up my own DB scheme? I promise to pay myself 1/60th of my final salary for every year I contribute, for the rest of my life once I've retired. I'll engage an actuary to calculate how much I need to contribute to achieve that. Then ask my employer to pay the necessary amount into it and lower my salary by that amount. And so I get full marginal tax relief plus NI relief no matter what my tax rate is, right? 

That might be quite expensive!!! Is it even possible to set up a DB pension scheme these days? They are dying breed after all.

Why not? I'll think they'll be resurrected pretty quick if they're a dodge to get full marginal relief in a flat rate relief system.  

The old ones closed because employers didn't fancy being on the hook for potentially huge costs if annuity rates went the wrong way.  They won't be keen to re-open them just to save their higher paid employees a bit of tax.  

To set one up yourself, you are either looking at paying for regular actuarial valuations and potentially suddenly having to contribute huge amounts, or you are hoping that insurers will sell you a future dated annuity - which they probably will, but at huge cost to compensate for them taking on the risk.  More to the point though, why would they legislate to allow you to do so?  A DB scheme needs a sponsoring employer.  They get corporation tax relief on their contributions and you get personal tax relief on the salary they pay you.  To make it work you'd need to set up a limited company and persuade your actual employer to invoice the company rather than paying you, then you get all the IR35 fun and games.

zagfles

Triumph13 said:

zagfles said:

JoeCrystal said:

zagfles said:

Triumph13 said:

zagfles said:

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? 

I see no problem with that at all as they are completely different beasts and trying to treat them 'the same' just leads to unnecessary complications in pension legislation.  A DB scheme is a promise to pay an income in the future, and that income will be taxed perfectly adequately at the time.  I see no need to differentiate between how you incentivise either higher or lower paid employees to join the scheme.  You just need to not waste money on letting the well paid DB owners cash in on personal pensions too - hence the need to include them in the AA.  Most importantly, there is little or no scope for people to actively use them to minimise the tax they pay.

The rates I suggested above would still give people in DC schemes a good incentive to pay in if their income in retirement will be taxed at basic rate.  It just shifts the balance of the incentive away from the better paid and towards the lower paid.  If anyone is going to be a higher rate taxpayer in retirement, there is no possible public policy reason to want to help them save more.

Can I set up my own DB scheme? I promise to pay myself 1/60th of my final salary for every year I contribute, for the rest of my life once I've retired. I'll engage an actuary to calculate how much I need to contribute to achieve that. Then ask my employer to pay the necessary amount into it and lower my salary by that amount. And so I get full marginal tax relief plus NI relief no matter what my tax rate is, right? 

That might be quite expensive!!! Is it even possible to set up a DB pension scheme these days? They are dying breed after all.

Why not? I'll think they'll be resurrected pretty quick if they're a dodge to get full marginal relief in a flat rate relief system.  

The old ones closed because employers didn't fancy being on the hook for potentially huge costs if annuity rates went the wrong way.  They won't be keen to re-open them just to save their higher paid employees a bit of tax.  

To set one up yourself, you are either looking at paying for regular actuarial valuations and potentially suddenly having to contribute huge amounts, or you are hoping that insurers will sell you a future dated annuity - which they probably will, but at huge cost to compensate for them taking on the risk.  More to the point though, why would they legislate to allow you to do so?  A DB scheme needs a sponsoring employer.  They get corporation tax relief on their contributions and you get personal tax relief on the salary they pay you.  To make it work you'd need to set up a limited company and persuade your actual employer to invoice the company rather than paying you, then you get all the IR35 fun and games.

It would be quite easy and low risk for older employees who are retiring in maybe 10 or less years. Just invest in IL gilts to hedge annuity rates. Employers would save 13.8% NI, HRT paying employees 42% tax/NI. Could be better than 33% flat relief and gambling that the stockmarket makes enough to make up for the huge difference in tax relief. 

najan49

There are at least a couple of insurance companies that offer “annuity tracker” funds.

As I understand it they aim to invest in the same basket of gilts and other instruments that annuities do, so that as real-world annuity rates change, so the value of the fund changes in the opposite direction to maintain purchasing power.

Sarahspangles

zagfles said:

JoeCrystal 

That might be quite expensive!!! Is it even possible to set up a DB pension scheme these days? They are dying breed after all.

Why not? I'll think they'll be resurrected pretty quick if they're a dodge to get full marginal relief in a flat rate relief system.  

Small companies may reintroduce them, the kind where the directors are always working with their accountant to optimise their remuneration based on the current tax regime. But if DB pensions are reinstated more widely they are likely to cost employers more. So salaries would be lowered. 

To withdraw DB pensions, some employers simply stated that the change was required to remain competitive, and employees had to accept that. Others issued ‘fire and rehire’ contracts. Backing that out would be equally painful - employees have mortgages to pay and a pay cut will impact this. The ripples through the economy would be significant.

hugheskevi

I doubt the main risk would come from legitimate companies reinstating traditional DB schemes.

If there was a significant difference in tax relief between DB and DC, the risk would come from companies seeking to exploit the difference with sham DB schemes. These would not be traditional large companies, but shell companies set up for the specific purpose of exploiting any differences and loopholes in regulation.

For example, a scheme with a DB underpin and a DC top-up is not unusual, whereby salary up to a limit is DB and above that limit is DC. But to exploit a tax difference, you could guarantee a de minimis amount of pension and have DC top-up on everything else. So it would be a DB scheme in name and tax treatment, but the risk to the sponsoring company is trivial. Similar perhaps to the way investment bonds use life insurance features.

Govt. would need to consider the regulatory changes and enforcement required to avoid such abuses, not insurmountable, but definitely opening up potential new areas of exploitation which would need careful consideration.

LHW99

You just need to not waste money on letting the well paid DB owners cash in on personal pensions too - hence the need to include them in the AA.  Most importantly, there is little or no scope for people to actively use them to minimise the tax they pay.

I seem to remember at one time in the past (long ago certainly) you could only have one pension? or at least if you had a DB you weren't allowed a second pension in most cases. The introduction of FSAVC's seemed to be the point at which it changed.

zagfles

hugheskevi said:

I doubt the main risk would come from legitimate companies reinstating traditional DB schemes.

If there was a significant difference in tax relief between DB and DC, the risk would come from companies seeking to exploit the difference with sham DB schemes. These would not be traditional large companies, but shell companies set up for the specific purpose of exploiting any differences and loopholes in regulation.

For example, a scheme with a DB underpin and a DC top-up is not unusual, whereby salary up to a limit is DB and above that limit is DC. But to exploit a tax difference, you could guarantee a de minimis amount of pension and have DC top-up on everything else. So it would be a DB scheme in name and tax treatment, but the risk to the sponsoring company is trivial. Similar perhaps to the way investment bonds use life insurance features.

Govt. would need to consider the regulatory changes and enforcement required to avoid such abuses, not insurmountable, but definitely opening up potential new areas of exploitation which would need careful consideration.

I think you could also get genuine ones as an option for employees, the real risk in DB pensions is when they're invested in equities etc. If an employer used a DB scheme invested in annuity tracking funds ie mainly gilts then the risk to them would be minimal.

It probably wouldn't be sensible for someone young to invest in such a low risk scheme but for those approaching retirement it would be if there was a significant tax relief benefit. So a company could offer employees a choice of schemes. 

All theoretical nonsense anyway as I doubt there's any way we'll end up in a situation where the tax relief between DC and DB is significantly different.