"Unsecured" pensions

Milarky

cheerfulcat wrote:

No. If you read the article again you'll see that the whole point of "recycling" is that you are using the £25 lump sum plus the £18 tax rebate to make another contribution, at which point you get another lot of tax relief.

Hmm, that may be the purpose of the article, but what is the difference between taking a 'tax free' lump sum available at retirement [that you get currently] and 'recycling' it then and recycling the 25% element of individual contributions when you make them? I think that it can only benefit you by the flexibilty it offers to effectively 'spend' the 25% on buying additional pension fund over time, rather than in one go, because this might not be possible due to annual limits on contributions. [I've replicated my above reasoning on the neighbouring thread: Gain for over 5os - too good to be true?]

You still don't generate any more pension fund at the end of the day, as I believe I have shown, than you could were you to 'fully vest' the lump sum. The lump sum is 'tax free', and may therefore attract further tax relief, but that is not 'news'..

Also, the Telegraph says that you have to have paid tax to get tax relief on these larger annual pension contributions. AFAIAA, everyone gets basic rate relief on all pension contributions they make regardless of whether they have paid that amount in tax - it is 'tax relief at source' [just as MIRAS used to be]. Perhaps someone can correct me if that is wrong. Basic rate taxpayers wouldn't be claiming any additional relief to this, anyway, so they don't need to have paid the tax to go with it. Possibly the Telegraph is alluding to the amount of higher rate tax having to be paid in order to be recoverable at 18% later [that sounds more like it], but then why did they mention a figure of '£19,000' annual earnings for basic rate taxpayers?

cheerfulcat

Hmm, that may be the purpose of the article, but what is the difference between taking a 'tax free' lump sum available at retirement [that you get currently] and 'recycling' it then and recycling the 25% element of individual contributions when you make them?

I suppose the difference is that you couldn't recycle the lump sum on retirement as easily - assuming that your pension fund has done well, the 25% could be far more than one year's taxable earned income ( the maximum contribution for tax relief purposes AIUI ).

Also, the Telegraph says that you have to have paid tax to get tax relief on these larger annual pension contributions. AFAIAA, everyone gets basic rate relief on all pension contributions they make regardless of whether they have paid that amount in tax - it is 'tax relief at source'

No, you can only get tax relief up to the tax you have paid. The basic rate tax relief available to everyone regardless of tax paid is restricted to the £3600 gross contribution allowance.

Edit:

Meant to add -

You still don't generate any more pension fund at the end of the day, as I believe I have shown, than you could were you to 'fully vest' the lump sum. The lump sum is 'tax free', and may therefore attract further tax relief, but that is not 'news'..

I think the "news" part is that the tax free lump sum is available without having to vest the pension.

EdInvestor

I think the "news" part is that the tax free lump sum is available without having to vest the pension.

I think Milarkey's right: possibly the original Telgraph article writer thought that if the pension was unvested, you could get tax relief over and over again on the whole fund.

It's unclear to me that the fund will actually be unvested if you take the entire 25% TFC though. Vesting means taking benefits.The 25% TFC is part of the benefits.The other part is the income.Just because you don't have to take a minimum income any more under the new regulations doesn't necessarily mean the fund is unvested, does it?

With phased drawdown, available now, your fund is divided into segments which can be separately vested. So say you have a fund worth 100k,with 100 sements of 1k each: you can vest 5 of them and get TFC of 1,250. But if you pay in more money it would go into a newly created segment which, if you then took TFC, would then be deemed vested. At present if vested you'd have to take a (taxable) income from the segment, but after A day, you won't.

I suspect this is just terminological confusion.

dunstonh

Also, the Telegraph says that you have to have paid tax to get tax relief on these larger annual pension contributions. AFAIAA, everyone gets basic rate relief on all pension contributions they make regardless of whether they have paid that amount in tax - it is 'tax relief at source' [just as MIRAS used to be]. Perhaps someone can correct me if that is wrong. Basic rate taxpayers wouldn't be claiming any additional relief to this, anyway, so they don't need to have paid the tax to go with it. Possibly the Telegraph is alluding to the amount of higher rate tax having to be paid in order to be recoverable at 18% later [that sounds more like it], but then why did they mention a figure of '£19,000' annual earnings for basic rate taxpayers?

As it stands with tax relief, the same £3600 limit will apply unless you have earnings which will allow you to go up to 100% of your earnings and get tax relief on your contributions. However, if you contribute above 100% of your earnings, you will not get tax relief on the amount above.

So, a non tax payer can pay in £10,000 into a pension but only £3600 of it will get tax relief.

I havent seen anything on the 22%/40% relief to suggest that a higher rate tax payer will get 40% on all their contribution. Just the amount that is applicable on their higher rate earnings (as it is currently).

I am very wary of articles by journalists on this subject because many of the rules are just not in place yet. Between now and January, we are going to see identified loopholes closed and clarification on who can and cannot do what.

Personally, i cant see pensions being able to have the tax free lump sum made available without vesting the rest without some form of drawdown (or one of the incoming alternatives/versions).

Milarky

dunstonh wrote:

As it stands with tax relief, the same £3600 limit will apply unless you have earnings which will allow you to go up to 100% of your earnings and get tax relief on your contributions. However, if you contribute above 100% of your earnings, you will not get tax relief on the amount above.

So, a non tax payer can pay in £10,000 into a pension but only £3600 of it will get tax relief).

Sorry, this is going a bit off topic now, but the two things are not wholly recocilable: If your going £1 over £3,600 on contributions in a year means you have to have paid tax of 22% on the whole amount [since that is the value of tax relief claimed thereon] then how can you contribute 100% of 'earnings' and expect get tax relief on all of this? The allowances against tax received by everyone mean that whatever a person earns they can't have paid tax on all their 'earned income' can they? Take the example of 'higher rate' contributions - These are presumably set against the segment of income charged at 40%, yes? When contributions made fully offset this slice then subsequent contributions 'take-up' the segment of income at the basic rate I assume. Carrying on 'down', the rate would drop to 10% for a bit before falling to zero - when contributions totalled gross income - £4895.

Sorry if I am getting pedantic about this, but assuming one earned £50,000 - and so was a HR taxpayer- and contributed the 'maximum' of £50,000 to their pension scheme are we saying that the tax relief on this will be just as much [and no more] than the actual amount of tax collected in the first instance? Does this tax relief follow all the tax bands down to zero - or does it stop at 22% on the final £3600 contributed? [I'll stop there, before I have reduced this query to imbecility]

Thanks

dunstonh

Sorry, this is going a bit off topic now, but the two things are not wholly recocilable: If your going £1 over £3,600 on contributions in a year means you have to have paid tax of 22% on the whole amount [since that is the value of tax relief claimed thereon] then how can you contribute 100% of 'earnings' and expect get tax relief on all of this? The allowances against tax received by everyone mean that whatever a person earns they can't have paid tax on all their 'earned income' can they? Take the example of 'higher rate' contributions - These are presumably set against the segment of income charged at 40%, yes? When contributions made fully offset this slice then subsequent contributions 'take-up' the segment of income at the basic rate I assume. Carrying on 'down', the rate would drop to 10% for a bit before falling to zero - when contributions totalled gross income - £4895.

Part of the problem here is that we do not know how its going to be done. We have been told that people can pay in upto 100% of the salary and get tax relief. Any more paid in above that will not get tax relief. The £3600 limit applies still where applicable. So, we know the figures but we do not know how that will be applied in the real world. The 10% band has always been ignored. No indication that it will be changed.

Sorry if I am getting pedantic about this, but assuming one earned £50,000 - and so was a HR taxpayer- and contributed the 'maximum' of £50,000 to their pension scheme are we saying that the tax relief on this will be just as much [and no more] than the actual amount of tax collected in the first instance? Does this tax relief follow all the tax bands down to zero - or does it stop at 22% on the final £3600 contributed? [I'll stop there, before I have reduced this query to imbecility]

Someone earning 50k will get part 40% tax relief as they do now and the rest at basic rate. Only the 22/40% bands apply.

I will add again that the workings of how it will be done have yet to be published. They may choose to alter the 22/40% tax relief methods. Nothing issued to date to suggest that though.

isasmurf

dunstonh wrote:

I will add again that the workings of how it will be done have yet to be published.

They have been published. I've been reading them over the weekend. I must get myself some friends :rotfl:

You can find information on contributions and the 3 different methods of tax relief here (It is quite technical, unfortunately the part of the manual for members which will hopefully be less technical has yet to be published.)

isasmurf

Milarky wrote:

Sorry if I am getting pedantic about this, but assuming one earned £50,000 - and so was a HR taxpayer- and contributed the 'maximum' of £50,000 to their pension scheme are we saying that the tax relief on this will be just as much [and no more] than the actual amount of tax collected in the first instance? Does this tax relief follow all the tax bands down to zero - or does it stop at 22% on the final £3600 contributed? [I'll stop there, before I have reduced this query to imbecility]

It should work as it does now and will be dependent on the type of pension scheme you are in. If you are in an occupational scheme it will be deducted from gross pay (bizarrely HMRC are calling this net pay relief???), in Personal pensions the pension manager will claim basic rate relief on all the contribution and you claim higher rate through your self assessment return which results in your basic rate band being extended by whatever contribution you made.

This does beg the question though, how are HMRC going to police this? If you make a contribution into an occupational pension then make a large contribution to a Personal pension how do they know if you have contributed more than 100% of your earnings? As far as I know there is no requirement to submit occupational pension contributions to the taxman as there is for Personal Pensions.

Pal

isasmurf wrote:

This does beg the question though, how are HMRC going to police this? If you make a contribution into an occupational pension then make a large contribution to a Personal pension how do they know if you have contributed more than 100% of your earnings? As far as I know there is no requirement to submit occupational pension contributions to the taxman as there is for Personal Pensions.

Possibly they are not going to police it except through tax returns.

When paying into an occupational scheme your contributions are deducted from payroll. As a result you cannot possibly contribute more than you earn.

As you say, if you contributed 100% of your employed earnings to an occupational scheme, you could then contribute additional amounts to a personal pension from any savings that you have, automatically gaining 22% tax relief on it. However if you were a higher rate taxpayer, in order to gain the extra 18% relief, you need to submit a tax return, which is where you would get caught out for investing more than 100% of your earnings. This is allowed but you would not get tax relief on the amount over the annual limit.

If you were a basic rate taxpayer then you would be viewed as having complex tax issues and would be required to voluntarily complete a return anyway. I.e. you have something to declare to the revenue.

But assuming you were ignorant of those rules (no excuse but hey ho) you could get away with this, however I doubt that the Revenue is worried that droves of basic rate taxpayers are going to have sufficient savings that they can afford to invest 100% of their earnings for a year plus some of their savings into a pension while still having enough money to live on.

It might be possible for someone with a wealthy partner to make use of this, but in practice they are more likely to want to use the wealthy partner's tax allowances so that they can claim 40% tax relief on the savings rather than basic rate tax. It is, I guess, possible that some people might find loopholes in this i.e. investing an inheritance for immediate 22% tax relief, even if your earnings do not justify the contribution, but I doubt it will be a major tax avoidance problem.

In practice the only reason for the annual contribution limit is to restrict the growth of fat cat defined benefit pensions.

Milarky

What about income from savings and investments? Not possible to offset pension contributions against these because they are not included in the 'relevant UK earnings' definition?

The HMRC guide helpfully says that where relevant income 'chargeable' is less that £3600 then tax relief it is still paid on the amount upto £3600 provided the contribution is on a 'relief at source' [RAS] basis:

The maximum amount of contributions on which a member can claim relief in any tax year is the greater of

the ‘basic amount’ – currently £3600, and
the amount of the individual’s relevant UK earnings that are chargeable to income tax for the tax year.
Where a member’s relevant UK earnings chargeable to tax are less than £3,600, tax relief on the amount of any contribution over the level of their earnings up to the £3,600 limit can only be given if the contribution is paid to a pension scheme that operates the relief at source (RAS) system
http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM05101120.htm

This doesn't say what happens when they go £1 over, however. If you pay £3600 into a personal pension [which operates RSA] and stop and THEN pay in something additional I assume you have to have £3600+ "earnings chargeable to tax"? Fine - but the way the tax system works "chargeable" can be at '0%', '10%' and '22%' can't it? To get the higher rate relief you definitely have to have paid 40% on this slice of earnied income [as dunstonh makes plain], but to get the basic rate tax relief up to £3600 you don't have to have paid any tax.

So to clarify, any basic rate taxpayer paying between £3600 and their annual earnings limit by the RAS method can claim 22% on ALL of their contribution even though they will not actually have been taxed at 22% on all of their earnings in the first place? [and tax on saxings etc is not relevant to this question, as I understand it?]

Thanks