Tax Free Lump Sum and 2025 Budget

kinger101

ukdw said:

Aretnap said:

michaels said:

marathonic said:

michaels said:

Cobbler_tone said:

There are a few more ‘sensible’ articles around as the budget approaches. A few things stand out and have been getting airtime.
Gambling tax, a levy on pension funds (e.g. 0.25% collected from the provider) and pushing out the freeze on the tax bands to 2030. I can see them scrapping stamp duty on cheaper properties to help first time buyers and try to get the housing market moving. Counter acted by a ‘mansion tax’. 

Not long to wait now and hopefully nothing to scupper anyone’s immediate plans.

Can you say more about this levy on pensions - is it one off confiscation of a fraction of everyone's pension pot or an annual take?  How will it apply to DB pensions?

Ireland had a pension levy from 2011 to 2015. It was an annual charge on the total value of assets within the pension and was charged at:

0.6% for 2011-2013

0.75% for 2014

0.15% for 2015.

It was discontinued for 2016 onwards. Hopefully they don't go this route as it would be a significant cost for many. It would face a lot more backlash than some of the other options being considered.

Seems a bit odd to hand out tax breaks for pension saving with one hand and then confiscate pensions with the other.  

Hardly confiscation. Pension providers already pay plenty of taxes, which like all taxes levied on businesses are ultimately paid by the consumer. Is all that corporation tax paid by Hargreves Landsdown confiscation of pensions as well?

The proposal seems to be for a tax which would be paid by the pension companies as a small percentage of their assets under management. It would be sold as a tax on the pension providers rather than on pension savers as it would not be paid directly from your pension fund, and in theory the pension providers could choose to absorb the cost of paying it. In practice of course most or all of it would be passed on to the customer in the form of higher fees.

OTOH if it was set at a level in the region of 0.25% the end result would be that average fees on pensions would revert to where they were just a few years ago - not ideal, but hardly catastrophic either. I can see it provoking much less of a backlash that a lot of tax rises that might be considered.

If the total assets of all DC pension funds is £267 billion - according to this article
https://www.thepensionsregulator.gov.uk/en/document-library/research-and-analysis/occupational-defined-contribution-landscape-2024

Then 0.25% of this is I think only about £660 million -  I think if they are going to do something as unpopular as putting extra charges on DC pensions then they are going to want a raise a lot more cash than that.

That's just the Occupational Trust based DC schemes.  I believe the number is nearer GBP 500 billion if you include SIPPs.  As pension guy says, that number will quickly ramp given the number of DB schemes which are now closed.

The fact it won't impact NHS doctors won't have escaped the government.  

michaels

Aretnap said:

michaels said:

marathonic said:

michaels said:

Cobbler_tone said:

There are a few more ‘sensible’ articles around as the budget approaches. A few things stand out and have been getting airtime.
Gambling tax, a levy on pension funds (e.g. 0.25% collected from the provider) and pushing out the freeze on the tax bands to 2030. I can see them scrapping stamp duty on cheaper properties to help first time buyers and try to get the housing market moving. Counter acted by a ‘mansion tax’. 

Not long to wait now and hopefully nothing to scupper anyone’s immediate plans.

Can you say more about this levy on pensions - is it one off confiscation of a fraction of everyone's pension pot or an annual take?  How will it apply to DB pensions?

Ireland had a pension levy from 2011 to 2015. It was an annual charge on the total value of assets within the pension and was charged at:

0.6% for 2011-2013

0.75% for 2014

0.15% for 2015.

It was discontinued for 2016 onwards. Hopefully they don't go this route as it would be a significant cost for many. It would face a lot more backlash than some of the other options being considered.

Seems a bit odd to hand out tax breaks for pension saving with one hand and then confiscate pensions with the other.  

Hardly confiscation. Pension providers already pay plenty of taxes, which like all taxes levied on businesses are ultimately paid by the consumer. Is all that corporation tax paid by Hargreves Landsdown confiscation of pensions as well?

The proposal seems to be for a tax which would be paid by the pension companies as a small percentage of their assets under management. It would be sold as a tax on the pension providers rather than on pension savers as it would not be paid directly from your pension fund, and in theory the pension providers could choose to absorb the cost of paying it. In practice of course most or all of it would be passed on to the customer in the form of higher fees.

OTOH if it was set at a level in the region of 0.25% the end result would be that average fees on pensions would revert to where they were just a few years ago - not ideal, but hardly catastrophic either. I can see it provoking much less of a backlash that a lot of tax rises that might be considered.

For those who don't think this is a big deal, perhaps consider that a pension lasts perhaps 60 years counting accrual and then drawdown - 0.25% x 60 = 15% so we are talking about 15% of the total pension going to the government. 

A basic rate tax payer only benefits from a 5% tax break on their pension savings, if they are going to have 15% confiscated by the government then they are way better off putting their money in a sipp instead.

Edit - only the money paid in in the first year is in the pension for 60 years, perhaps the average time for funds to be in the pension is only 30 years so maybe it is only 7.5% of the pension fund that is to be confiscated - still a really bad deal for anyone who is a basic rate taxpayer.

ukdw

michaels said:

Aretnap said:

michaels said:

marathonic said:

michaels said:

Cobbler_tone said:

There are a few more ‘sensible’ articles around as the budget approaches. A few things stand out and have been getting airtime.
Gambling tax, a levy on pension funds (e.g. 0.25% collected from the provider) and pushing out the freeze on the tax bands to 2030. I can see them scrapping stamp duty on cheaper properties to help first time buyers and try to get the housing market moving. Counter acted by a ‘mansion tax’. 

Not long to wait now and hopefully nothing to scupper anyone’s immediate plans.

Can you say more about this levy on pensions - is it one off confiscation of a fraction of everyone's pension pot or an annual take?  How will it apply to DB pensions?

Ireland had a pension levy from 2011 to 2015. It was an annual charge on the total value of assets within the pension and was charged at:

0.6% for 2011-2013

0.75% for 2014

0.15% for 2015.

It was discontinued for 2016 onwards. Hopefully they don't go this route as it would be a significant cost for many. It would face a lot more backlash than some of the other options being considered.

Seems a bit odd to hand out tax breaks for pension saving with one hand and then confiscate pensions with the other.  

Hardly confiscation. Pension providers already pay plenty of taxes, which like all taxes levied on businesses are ultimately paid by the consumer. Is all that corporation tax paid by Hargreves Landsdown confiscation of pensions as well?

The proposal seems to be for a tax which would be paid by the pension companies as a small percentage of their assets under management. It would be sold as a tax on the pension providers rather than on pension savers as it would not be paid directly from your pension fund, and in theory the pension providers could choose to absorb the cost of paying it. In practice of course most or all of it would be passed on to the customer in the form of higher fees.

OTOH if it was set at a level in the region of 0.25% the end result would be that average fees on pensions would revert to where they were just a few years ago - not ideal, but hardly catastrophic either. I can see it provoking much less of a backlash that a lot of tax rises that might be considered.

For those who don't think this is a big deal, perhaps consider that a pension lasts perhaps 60 years counting accrual and then drawdown - 0.25% x 60 = 15% so we are talking about 15% of the total pension going to the government. 

A basic rate tax payer only benefits from a 5% tax break on their pension savings, if they are going to have 15% confiscated by the government then they are way better off putting their money in a sipp instead.

Edit - only the money paid in in the first year is in the pension for 60 years, perhaps the average time for funds to be in the pension is only 30 years so maybe it is only 7.5% of the pension fund that is to be confiscated - still a really bad deal for anyone who is a basic rate taxpayer.

Not sure about multiplying 0.25 by 30 - would it not be  something like 100*(1-(.9975^30) ) =7.234%
So slightly less - but still quite a lot - probably a whole years growth.

michaels

ukdw said:

michaels said:

Aretnap said:

michaels said:

marathonic said:

michaels said:

Cobbler_tone said:

There are a few more ‘sensible’ articles around as the budget approaches. A few things stand out and have been getting airtime.
Gambling tax, a levy on pension funds (e.g. 0.25% collected from the provider) and pushing out the freeze on the tax bands to 2030. I can see them scrapping stamp duty on cheaper properties to help first time buyers and try to get the housing market moving. Counter acted by a ‘mansion tax’. 

Not long to wait now and hopefully nothing to scupper anyone’s immediate plans.

Can you say more about this levy on pensions - is it one off confiscation of a fraction of everyone's pension pot or an annual take?  How will it apply to DB pensions?

Ireland had a pension levy from 2011 to 2015. It was an annual charge on the total value of assets within the pension and was charged at:

0.6% for 2011-2013

0.75% for 2014

0.15% for 2015.

It was discontinued for 2016 onwards. Hopefully they don't go this route as it would be a significant cost for many. It would face a lot more backlash than some of the other options being considered.

Seems a bit odd to hand out tax breaks for pension saving with one hand and then confiscate pensions with the other.  

Hardly confiscation. Pension providers already pay plenty of taxes, which like all taxes levied on businesses are ultimately paid by the consumer. Is all that corporation tax paid by Hargreves Landsdown confiscation of pensions as well?

The proposal seems to be for a tax which would be paid by the pension companies as a small percentage of their assets under management. It would be sold as a tax on the pension providers rather than on pension savers as it would not be paid directly from your pension fund, and in theory the pension providers could choose to absorb the cost of paying it. In practice of course most or all of it would be passed on to the customer in the form of higher fees.

OTOH if it was set at a level in the region of 0.25% the end result would be that average fees on pensions would revert to where they were just a few years ago - not ideal, but hardly catastrophic either. I can see it provoking much less of a backlash that a lot of tax rises that might be considered.

For those who don't think this is a big deal, perhaps consider that a pension lasts perhaps 60 years counting accrual and then drawdown - 0.25% x 60 = 15% so we are talking about 15% of the total pension going to the government. 

A basic rate tax payer only benefits from a 5% tax break on their pension savings, if they are going to have 15% confiscated by the government then they are way better off putting their money in a sipp instead.

Edit - only the money paid in in the first year is in the pension for 60 years, perhaps the average time for funds to be in the pension is only 30 years so maybe it is only 7.5% of the pension fund that is to be confiscated - still a really bad deal for anyone who is a basic rate taxpayer.

Not sure about multiplying 0.25 by 30 - would it not be  something like 100*(1-(.9975^30) ) =7.234%
So slightly less - but still quite a lot - probably a whole years growth.

Yeah - it sort of depends on the profile of the deposits/withdrawals/real growth/balance on death.

But I think that we can all agree that for a basic rate taxpayer who gets 20% tax relief on the way in but then pays 15% on drawdown (including the TFLS), that the govt taking an extra 7% plus means they would be better off using an ISA than a pension as their retirement savings vehicle.

ukdw

ISA
80*1.05^30=345.755
Pension with extra charge
100*(1.05-0.0025)^30*0.85=342.0108

yes - assuming growth of average 5% after charges over 30 years - looks like 20% in and 15% out pensioners would be worse off by about 1.25% vs ISA if above two calculations are correct

At present without the extra charge
100*(1.05)^30*0.85=367.365
you would be
(367.365/345.755-1)*100=6.25 better off

marathonic

The calculations would be a lot more complex.Tthe early contributions, that are impacted most, occur early in ones career, when their salary is at its lowest. Also, people tend to contribute the minimum early in life as other priorities are in place and then contribute a higher percentage as they start to realise that retirement comes around quicker than they initially thought.

Bookle

Does today's updated IFS recommendations doubling down on capping TFLS carry any more weight / make it more likely than previously?

Cobbler_tone

Bookle said:

Does today's updated IFS recommendations doubling down on capping TFLS carry any more weight / make it more likely than previously?

TBF their report reads as though it is coming from another political party. i.e. 'don't do this', 'don't do that', without a lot of tangible substance or suggestions.
They lost me at "That means grasping the nettle".
It is a pretty comprehensive report on how just about everyone could be upset!   

Ultimately, to raise the billions that they need to certain people are going to be upset. It just depends if you are personally impacted or not. Some will be impacted directly and suspect most will be indirectly. e.g. I'd be content with the reduction of the TFLS but wouldn't like tax relief on contributions cutting. Where as someone with a big pot and more modest contributions may be more content with things the other way around.

Just to demonstrate just about every scenario is covered, so shouldn't be viewed to cause hysteria and pass it off as overly influential for anyone:

"The most straightforward course of action for a Chancellor seeking to raise substantial sums is to turn to the UK’s three largest taxes: income tax, National Insurance contributions (NICs) and value added tax (VAT)....Increases in the rates of income tax and NICs would both be progressive: higher-income households would pay more both in absolute terms and as a proportion of their incomes."

Progressive is a positive word, right?

hugheskevi

Cobbler_tone said:

"The most straightforward course of action for a Chancellor seeking to raise substantial sums is to turn to the UK’s three largest taxes: income tax, National Insurance contributions (NICs) and value added tax (VAT)....Increases in the rates of income tax and NICs would both be progressive: higher-income households would pay more both in absolute terms and as a proportion of their incomes."

Progressive is a positive word, right?

I think it would be a somewhat simplistic argument. Higher income doesn't necessarily mean wealthiest. A household with a single earner in London living in rented accommodation (or with a big mortgage, which will be the case even if they are just living in a 3 bed semi), paying a student loan, bringing up a family including children and pets is going to need a pretty big income, but could be far from wealthy, and even as a higher rate taxpayer could well be struggling.

Whereas a retired couple living in mortgage free property with no children and both having a £40,000 annual income both have a lower income, but are in a far stronger financial position. There is a real problem levying 42% marginal tax when the threshold has now become so low as to frequently not equate with wealthy.

One policy I have not seen suggested would be to announce that from 2030 the Triple Lock will be continued for those in receipt of the Basic State Pension but discontinued for those receiving the new State Pension. It could be presented as 'fair' due to the difference in headline rates, and would pit older pensioners against younger pensioners - older pensioners would view it as a reasonable and proportionate policy and defend the change, whilst younger pensioners would struggle to present their case as to why they should be protected given they get higher State Pensions - the nuances of Additional Pension and contracting-out always go over the heads of the vast majority. It would be a classic divisive policy to split opposition and push through a reform that would fairly rapidly lead to the end of the Triple Lock given all those over about age 75 would be protected and within a decade or so a goodly proportion of the cohort would be deceased. 

sheramber

Cobbler_tone said:

As for state pensions falling into taxable territory. Maybe that mitigates the triple lock a bit eventually. Either that or it’ll be a two tier system for those at SPA. Not forgetting many already pay tax on their state pension who opted out.

There used to be Age Allowance for those over 65 and a further increase for those over 75. 

They were  phased out from 2013/14.