Third State Pension age review: independent report call for evidence - published today

Exodi

hugheskevi said:

Exodi said:

Just to be fair to both sides of the debate - an employee enrolled in a run of the mill workplace pension scheme will be effectively paying NI on their pension contribution that is not relieved at source with the income tax. In this situation, charging NI in retirement would thus cause NI to be charged on the same money twice.

Of course, alternatively in a net pay arrangement (ironically named, as i refers to contributions taken from gross pay), such as salary sacrifice, NI is not incurred, meaning they never pay NI on their private pension contributions or withdrawals.

A net pay arrangement is different to salary sacrifice, and employee NI is levied on contributions made through net pay. To recap, there are 4 main ways of contributing to a pension:

• Relief-at-Source - Both income tax and employee NI deducted by employer, 80% of gross contribution deducted by employer and sent to provider, basic rate relief added by provider, employee claims any extra relief due from HMRC. 
• Net Pay - Both income tax and employee NI deducted by employer, 100% of gross contribution deducted by employer and sent to provider.
• Salary sacrifice - contractual change such that employee has lower pay in return for higher employer contributions, so no income tax or employee NI payable on contribution. Employer may share some or all of the savings on employer NI with employee.
• Lump sum contribution with no relief - members pay from their own funds, and claim all income tax relief back from HMRC. Employee NI will have already been paid if funds come from employment income.

Apologies you're right - this should have been framed as Salary Sacrifice (no NI levied) vs other methods (NI levied). I was trying to make the point (poorly) tha charging NI in retirement can be seen as unfair because some people (specifically, those who don't have access to sal-sac) would have already paid it on the same money going in.

zagfles

Exodi said:

hugheskevi said:

Exodi said:

Just to be fair to both sides of the debate - an employee enrolled in a run of the mill workplace pension scheme will be effectively paying NI on their pension contribution that is not relieved at source with the income tax. In this situation, charging NI in retirement would thus cause NI to be charged on the same money twice.

Of course, alternatively in a net pay arrangement (ironically named, as i refers to contributions taken from gross pay), such as salary sacrifice, NI is not incurred, meaning they never pay NI on their private pension contributions or withdrawals.

A net pay arrangement is different to salary sacrifice, and employee NI is levied on contributions made through net pay. To recap, there are 4 main ways of contributing to a pension:

• Relief-at-Source - Both income tax and employee NI deducted by employer, 80% of gross contribution deducted by employer and sent to provider, basic rate relief added by provider, employee claims any extra relief due from HMRC. 
• Net Pay - Both income tax and employee NI deducted by employer, 100% of gross contribution deducted by employer and sent to provider.
• Salary sacrifice - contractual change such that employee has lower pay in return for higher employer contributions, so no income tax or employee NI payable on contribution. Employer may share some or all of the savings on employer NI with employee.
• Lump sum contribution with no relief - members pay from their own funds, and claim all income tax relief back from HMRC. Employee NI will have already been paid if funds come from employment income.

Apologies you're right - this should have been framed as Salary Sacrifice (no NI levied) vs other methods (NI levied). I was trying to make the point (poorly) tha charging NI in retirement can be seen as unfair because some people (specifically, those who don't have access to sal-sac) would have already paid it on the same money going in.

Although even with net pay schemes, the employer contribution part is free of NI. So for people with generous employer contributions, eg public sector, they avoid NI on a large chunk of their remuneration both while working and while a pensioner. 

Exodi

zagfles said:

Exodi said:

hugheskevi said:

Exodi said:

Just to be fair to both sides of the debate - an employee enrolled in a run of the mill workplace pension scheme will be effectively paying NI on their pension contribution that is not relieved at source with the income tax. In this situation, charging NI in retirement would thus cause NI to be charged on the same money twice.

Of course, alternatively in a net pay arrangement (ironically named, as i refers to contributions taken from gross pay), such as salary sacrifice, NI is not incurred, meaning they never pay NI on their private pension contributions or withdrawals.

A net pay arrangement is different to salary sacrifice, and employee NI is levied on contributions made through net pay. To recap, there are 4 main ways of contributing to a pension:

• Relief-at-Source - Both income tax and employee NI deducted by employer, 80% of gross contribution deducted by employer and sent to provider, basic rate relief added by provider, employee claims any extra relief due from HMRC. 
• Net Pay - Both income tax and employee NI deducted by employer, 100% of gross contribution deducted by employer and sent to provider.
• Salary sacrifice - contractual change such that employee has lower pay in return for higher employer contributions, so no income tax or employee NI payable on contribution. Employer may share some or all of the savings on employer NI with employee.
• Lump sum contribution with no relief - members pay from their own funds, and claim all income tax relief back from HMRC. Employee NI will have already been paid if funds come from employment income.

Apologies you're right - this should have been framed as Salary Sacrifice (no NI levied) vs other methods (NI levied). I was trying to make the point (poorly) tha charging NI in retirement can be seen as unfair because some people (specifically, those who don't have access to sal-sac) would have already paid it on the same money going in.

Although even with net pay schemes, the employer contribution part is free of NI. So for people with generous employer contributions, eg public sector, they avoid NI on a large chunk of their remuneration both while working and while a pensioner. 

Yes and that's exactly the point I was making -

The problem with the view 'retirees should pay NI on their pensions' is that some have.

The inequality lies between those who have access to sal-sac and those that don't (and this is from someone who does).

zagfles said:

Exodi said:

While I can get behind merging of NI into Income Tax, I think the biggest source of injustice stems from, what some might see as, overly generous salary sacrifice perks, whereas others might see as an unfair imbalance of workplace pension schemes. Another issue, in my opinion, is the LEL, which disproportionately hamstrings lower income income workers ability to save for retirement.

Why? 11 hours a week at NMW would reach the LEL. 

Someone working full time at NMW would earn ~£24k per year or ~£2k per month would would receive a pension contribution from their employer based on about 3/4s of their wages.

Someone working half full time hours, earning ~£12k or ~£1k per month would receive a pension contribution from their employer based on about half of their wages. So you're getting a lower amount on a lower amount.

Someone working quarter full time hours, earning ~£6k or ~£500 per month would not receive a pension contribution from their employer at all.

It is a double whammy, not only do lower income works get less from percentage based contributions, but they also get disproportionately affected by the fixed LEL threshold.

Now there's not an easy answer - and the pessimists might just suggest they should work/earn more. Removing the LEL is an option, however in a cost of living crisis it would prove challenging, as it would effectively reduce money in the lowest paid workers pockets during a cost of living crisis today, albeit to their future benefit. Making employer contributions mandatory without employee contributions removes some motivation for workers to save for their retirement, which is bad in the long run.

Unfortunately leaving it as is means lower income or part time workers (particularly mothers who have chop and changed their job around children) are sleepwalking into the eventual realisation that they have no real pension provision. I was helping my sister with her pension recently (she had received a WULS offer from Morrisons) and was suprised to find out her total contribution to her pension (from her and her employer) is £18 per month. As you can probably guess, she works part time around the children (it will become easier when they're both in school though).

Conversely (and I'm happy to be challenged if this is an unfair way to administer our our salary sacrifice scheme) but our calculations are based on an employer contribution on your total earnings, ignoring both the LEL and the UEL.

Universidad

Exodi said:

The problem with the view 'retirees should pay NI on their pensions' is that some have.

This is one of several reasons why I no longer believe that pensioners should be asked to pay NI. But, as I've said, I also no longer believe that employee NI should be a thing. I think it should be abolished, and income tax raised, and all incomes be subject to it.

That will avoid the fact of double taxation. As to the perception of double taxation, well... it's hardly unique for the rules to change on people over time, leading to suboptimal outcomes for investment strategy. That's one of the main reasons folks don't like these speculation threads!

Andy_L

The other problem with the idea that NI should be paid on pensions is that pensioners can't claim most of the benefits that NI pays for.

zagfles

Exodi said:

zagfles said:

Exodi said:

hugheskevi said:

Exodi said:

Just to be fair to both sides of the debate - an employee enrolled in a run of the mill workplace pension scheme will be effectively paying NI on their pension contribution that is not relieved at source with the income tax. In this situation, charging NI in retirement would thus cause NI to be charged on the same money twice.

Of course, alternatively in a net pay arrangement (ironically named, as i refers to contributions taken from gross pay), such as salary sacrifice, NI is not incurred, meaning they never pay NI on their private pension contributions or withdrawals.

A net pay arrangement is different to salary sacrifice, and employee NI is levied on contributions made through net pay. To recap, there are 4 main ways of contributing to a pension:

• Relief-at-Source - Both income tax and employee NI deducted by employer, 80% of gross contribution deducted by employer and sent to provider, basic rate relief added by provider, employee claims any extra relief due from HMRC. 
• Net Pay - Both income tax and employee NI deducted by employer, 100% of gross contribution deducted by employer and sent to provider.
• Salary sacrifice - contractual change such that employee has lower pay in return for higher employer contributions, so no income tax or employee NI payable on contribution. Employer may share some or all of the savings on employer NI with employee.
• Lump sum contribution with no relief - members pay from their own funds, and claim all income tax relief back from HMRC. Employee NI will have already been paid if funds come from employment income.

Apologies you're right - this should have been framed as Salary Sacrifice (no NI levied) vs other methods (NI levied). I was trying to make the point (poorly) tha charging NI in retirement can be seen as unfair because some people (specifically, those who don't have access to sal-sac) would have already paid it on the same money going in.

Although even with net pay schemes, the employer contribution part is free of NI. So for people with generous employer contributions, eg public sector, they avoid NI on a large chunk of their remuneration both while working and while a pensioner. 

Yes and that's exactly the point I was making -

The problem with the view 'retirees should pay NI on their pensions' is that some have.

The inequality lies between those who have access to sal-sac and those that don't (and this is from someone who does).

No, it's more between those who have high employer contributions (whether through sal sac or not) and those who don't. Someone in the civil service DB scheme probably avoids NI on more of their remuneration than someone in a min AE scheme sal sac'ing 30% of salary. 

It's employer contributions that avoid NI, whether those are standard (eg a DB scheme) or manufactured (through a sal sac scheme)

Someone working full time at NMW would earn ~£24k per year or ~£2k per month would would receive a pension contribution from their employer based on about 3/4s of their wages.

Someone working half full time hours, earning ~£12k or ~£1k per month would receive a pension contribution from their employer based on about half of their wages. So you're getting a lower amount on a lower amount.

Someone working quarter full time hours, earning ~£6k or ~£500 per month would not receive a pension contribution from their employer at all.

It is a double whammy, not only do lower income works get less from percentage based contributions, but they also get disproportionately affected by the fixed LEL threshold.

Now there's not an easy answer - and the pessimists might just suggest they should work/earn more. Removing the LEL is an option, however in a cost of living crisis it would prove challenging, as it would effectively reduce money in the lowest paid workers pockets during a cost of living crisis today, albeit to their future benefit. Making employer contributions mandatory without employee contributions removes some motivation for workers to save for their retirement, which is bad in the long run.

Unfortunately leaving it as is means lower income or part time workers (particularly mothers who have chop and changed their job around children) are sleepwalking into the eventual realisation that they have no real pension provision. I was helping my sister with her pension recently (she had received a WULS offer from Morrisons) and was suprised to find out her total contribution to her pension (from her and her employer) is £18 per month. As you can probably guess, she works part time around the children (it will become easier when they're both in school though).

Conversely (and I'm happy to be challenged if this is an unfair way to administer our our salary sacrifice scheme) but our calculations are based on an employer contribution on your total earnings, ignoring both the LEL and the UEL.

You're talking just about min AE schemes. Not all employers use min AE schemes, mine doesn't, the employer pension cont is based on full salary. It's nothing to do with the LEL itself, which is a NI threshold to get NI benefits. It's just the min AE rules use it, they could use something else or just use full salary. 

sgx2000

dunstonh said:

I think they should abandon it, freeze retirement age and start to work on a proper fair taxation regime and redistribution of wealth.

fair in whose eyes?

Why should wealth be distributed to those who have not earned it?

But also why should wealth receive a massivly disproportionate  share of the overall wealth of society?
The wealthy have, by nature, become greedier and greedier....

Notepad_Phil

Universidad said:

Exodi said:

The problem with the view 'retirees should pay NI on their pensions' is that some have.

This is one of several reasons why I no longer believe that pensioners should be asked to pay NI. But, as I've said, I also no longer believe that employee NI should be a thing. I think it should be abolished, and income tax raised, and all incomes be subject to it.

That will avoid the fact of double taxation. As to the perception of double taxation, well... it's hardly unique for the rules to change on people over time, leading to suboptimal outcomes for investment strategy. That's one of the main reasons folks don't like these speculation threads!

But you're only increasing income tax because you've abolished national insurance - so you're not really avoiding double taxation. It may not be as much, but it'll still be there. And I wonder how much the income tax rates would need to be increased to compensate for the removal of national insurance?

Universidad

Notepad_Phil said:

But you're only increasing income tax because you've abolished national insurance - so you're not really avoiding double taxation. It may not be as much, but it'll still be there. And I wonder how much the income tax rates would need to be increased to compensate for the removal of national insurance?

Yes, that's true. Not shying away from it! But it's not factually double taxation - not that there aren't plenty of examples of that in the wild* - it is in practice simply an increase in the tax band for everyone. (That happens to come with a matching tax break for workers...)

Increasing the amount of tax folks have to pay is basically the modus operandi when it comes to the middle class, I'm just suggesting a way to do this for pensioners that - for once - doesn't hit working middle earners any harder, until they themselves retire.

Given that the alternative seems to be that middle class earners will cover the gap, and then recieve significantly less benefits when their time comes to retire, it strikes me as being much fairer that all pensioners (including myself one day) pay the higher rate, than that I pay a higher rate now, and recieve much less pension later in life. 

Either way you look at it some cohort is effectively paying twice, and I'd rather split that across all of us than, once again, make it the job of middle class workers to fund, fund, fund without receiving.  

* re double taxation, the one where you pay VAT on petrol, including the portion of the price which is fuel duty, is a particularly egregious example. 

artyboy

sgx2000 said:

dunstonh said:

I think they should abandon it, freeze retirement age and start to work on a proper fair taxation regime and redistribution of wealth.

fair in whose eyes?

Why should wealth be distributed to those who have not earned it?

But also why should wealth receive a massivly disproportionate  share of the overall wealth of society?
The wealthy have, by nature, become greedier and greedier....

Oh please... not another closed down thread...