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    • Former MSE Paloma
    • By Former MSE Paloma 18th Mar 15, 1:06 PM
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    Former MSE Paloma
    MSE News: Budget 2015: Pension lifetime allowance to fall to £1m
    • #1
    • 18th Mar 15, 1:06 PM
    MSE News: Budget 2015: Pension lifetime allowance to fall to £1m 18th Mar 15 at 1:06 PM
    The amount savers can put into a pension over their lifetime will fall from next year from £1.25m milion to £1m...

    Read the full story:

    Budget 2015: Pension lifetime allowance to fall to £1m'




    Click reply below to discuss. If you havenít already, join the forum to reply. If you arenít sure how it all works, read our New to Forum? Intro Guide.

Page 1
    • SnowMan
    • By SnowMan 18th Mar 15, 1:15 PM
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    SnowMan
    • #2
    • 18th Mar 15, 1:15 PM
    • #2
    • 18th Mar 15, 1:15 PM
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414106/OOTLAR_2015.pdf


    2.35 Pensions - lifetime allowance
    Legislation will be introduced in the new Parliament to reduce the pensions lifetime allowance to £1million. Fixed and individual protection regimes will be introduced alongside the reduction in the lifetime allowance to protect savers who think they may be affected by this change. This change will have effect from 6 April 2016. Legislation will also provide for increases of the allowance in line with the consumer prices index I from 2018
    I came, I saw, I melted
  • jamesd
    • #3
    • 18th Mar 15, 1:51 PM
    • #3
    • 18th Mar 15, 1:51 PM
    The £1 million would today buy a 65 year old an RPI-linked annuity of £33,070. I don't think that it is reasonable to be calling people "wealthy" at that level of income, not even when topped up to around £41,000 by say £8,000 of state pensions. For context, around 10% of the UK population are millionaires. It doesn't seem sensible to me to effectively declare that 10% of the population are wealthy either. Well off potentially, certainly, but not wealthy.

    These sorts of amount look big to someone just starting work with a lifetime of earnings and saving ahead of them but not so big to someone living in the south east who has to provide an income for the rest of their life when retiring.

    The Budget 2015 announcement itself:

    "1.232 It is important that the UK’s pensions tax system remains fair, affordable and sustainable for the future. In 2013-14, Income Tax relief for pension savings cost the government around £34.3 billion, up from £30.8 billion in 2009-10, with around two-thirds of this relief going to higher or additional rate taxpayers.103 To protect the public finances from this growing cost, the government will therefore reduce the lifetime allowance for pension contributions that benefit from tax relief from £1.25 million to £1 million. This will be effective from 6 April 2016. The lifetime allowance will be indexed to increase annually by CPI from 6 April 2018. Over 96% of individuals currently approaching retirement have a pension pot worth less than £1 million, so this change will affect only the wealthiest pension savers."
    Last edited by jamesd; 18-03-2015 at 2:01 PM.
    • Triumph13
    • By Triumph13 18th Mar 15, 2:02 PM
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    Triumph13
    • #4
    • 18th Mar 15, 2:02 PM
    • #4
    • 18th Mar 15, 2:02 PM
    I think it's hard to argue that being in the top 4% makes you anything other than 'wealthy' - despite most people's definition of wealthy being "someone significantly richer than me"
  • jamesd
    • #5
    • 18th Mar 15, 2:23 PM
    • #5
    • 18th Mar 15, 2:23 PM
    A million Pounds only puts you in the top 10% of the country, not the top 4%. It's only the top 4% of pension pot sizes. Having the terms used for such large percentages of the population just doesn't seem reasonable or sensible.
    • VT82
    • By VT82 18th Mar 15, 2:30 PM
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    VT82
    • #6
    • 18th Mar 15, 2:30 PM
    • #6
    • 18th Mar 15, 2:30 PM
    I'm not really up to speed on pensions. Is £1m the new limit to how big the pot can be, or just how much of the pot can have come from your own and your employers' contributions (as opposed to growth)? If it's the latter, you'd hope people hitting the threshold would have a pot nearer £2m by retirement, and hence be pretty wealthy.
    • Triumph13
    • By Triumph13 18th Mar 15, 2:33 PM
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    Triumph13
    • #7
    • 18th Mar 15, 2:33 PM
    • #7
    • 18th Mar 15, 2:33 PM
    I'm not really up to speed on pensions. Is £1m the new limit to how big the pot can be, or just how much of the pot can have come from your own and your employers' contributions (as opposed to growth)? If it's the latter, you'd hope people hitting the threshold would have a pot nearer £2m by retirement, and hence be pretty wealthy.
    Originally posted by VT82
    It's the former I'm afraid - which means you have to guess carefully about how much growth you'll have if you're going to come near it!
    • Triumph13
    • By Triumph13 18th Mar 15, 2:42 PM
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    Triumph13
    • #8
    • 18th Mar 15, 2:42 PM
    • #8
    • 18th Mar 15, 2:42 PM
    A million Pounds only puts you in the top 10% of the country, not the top 4%. It's only the top 4% of pension pot sizes. Having the terms used for such large percentages of the population just doesn't seem reasonable or sensible.
    Originally posted by jamesd
    That all depends on where you are standing. If you are in the bottom 10% of UK incomes then I think you're perfectly justified in calling anyone in the top 10% 'wealthy'. If you are in some third world countries then you can equally call just about anyone in the UK wealthy.


    I don't think anyone can really complain about losing pension tax breaks if their tax-assisted pension income is 1.5x the average working income. If they want to save more without benefit of additional tax breaks then good on them.
    • kidmugsy
    • By kidmugsy 18th Mar 15, 2:48 PM
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    kidmugsy
    • #9
    • 18th Mar 15, 2:48 PM
    • #9
    • 18th Mar 15, 2:48 PM

    I don't think anyone can really complain about losing pension tax breaks if their tax-assisted pension income is 1.5x the average working income.
    Originally posted by Triumph13
    Yes, but I think they can reasonably complain that the Lifetime Allowance is a peculiarly clumsy way to do it. Maybe there's little alternative, but I'd say there's a chance here for Balls to come up with a more intelligent way. Except that he wanted to use this blunt axe too. Crafty Osborne.
    • DesG
    • By DesG 18th Mar 15, 2:59 PM
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    DesG
    The fact that it is index linked is actually a big win, in the future, it will be higher than the current £1.25M.
  • jamesd
    That all depends on where you are standing.
    Originally posted by Triumph13
    It's the nature of wealth that people do tend to make it a relative measure, with around twice their current income being a particularly common definition.

    If you are in the bottom 10% of UK incomes then I think you're perfectly justified in calling anyone in the top 10% 'wealthy'.
    Originally posted by Triumph13
    I don't think it's justified, I think it shows a lack of knowledge and understanding of the UK population as a whole and of how much money it takes to produce an income in retirement or even to own a home in the SE of England.

    I don't think a person in the bottom 10% could justifiably call someone with around £267,000 wealthy either. Maybe that person in the bottom 10% might. Then I'd point out to them that that is how much it would cost to buy an annuity paying as much as the flat rate state pension would pay, so they are themselves wealthy by that definition. Even more so once the value of the NHS and other state benefits that they might receive are added in to their total wealth.

    If you are in some third world countries then you can equally call just about anyone in the UK wealthy.
    Originally posted by Triumph13
    We all are relatively wealthy compared to many.

    I don't think anyone can really complain about losing pension tax breaks if their tax-assisted pension income is 1.5x the average working income. If they want to save more without benefit of additional tax breaks then good on them.
    Originally posted by Triumph13
    That isn't how the lifetime allowance works. It isn't a cap on tax-assisted pension income, the tax assistance for which is provided in large part by the tax relief on the way in. It's a 55% tax on the value of a pension pot above the limit, including simply inflation as well as any investment growth.

    Just to show how silly it is, pay in gross £20,693 at age 20 and receive just £4,138.60 of tax relief on the way in. Now get 9% growth over the following 45 years, a little more than the long term growth of the UK stock market, 5% plus inflation. The pension pot value at the end? £1,000,036.

    I do think that such a person could complain about being told that they have to pay 55% tax on say half a million Pounds if instead of paying in £20,693 they paid in £31,000.
    • Triumph13
    • By Triumph13 18th Mar 15, 3:16 PM
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    Triumph13
    I would agree that definitions of 'wealthy' based on asset values are unhelpful which is why I was talking about income.


    The LTA limit only translates to a big tax charge if you put too much in. Transitional reliefs mean that in most cases you have protection and just aren't allowed to make any more tax advantaged contributions.


    And as for someone getting a return of 9% above CPI for 45 years! A more realistic 5% real return less 0.5% charges gets you to £145k not £1m.
    Last edited by Triumph13; 18-03-2015 at 3:20 PM.
    • EdSwippet
    • By EdSwippet 18th Mar 15, 3:21 PM
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    EdSwippet
    ...The LTA limit only translates to a big tax charge if you put too much in.
    Originally posted by Triumph13
    Nope. It also translates to a big tax charge if you put in only a modest amount but shepherd it wisely.
  • jamesd
    I didn't use 9% above CPI, I used 9% total. With 5% the after RPI inflation growth of the UK stock market the nominal growth has been well over 9%, varying with inflation. If you want to assume that the LTA grows with CPI then the amount of money paid in to get to the LTA at 6% after CPI inflation growth is £72,650. 6% because RPI is about 1% higher than CPI, so I allowed for that in the historic growth rate. But I don't think that the LTA is really going to increase with inflation long term for all of those 45 years, certainly not based on the large decrease history it's had so far.

    I think that wealth has to be based on both asset values and income but that in the pension case, the purpose of a pension is to provide income, so the income basis is the one that makes most sense. At say £100,000 of income I wouldn't consider someone to be wealthy because I also want them to have very substantial assets as well. For context here, the income it takes to be in the top 1% of incomes in the UK is about £140,000.

    If we were to say start to use "wealthy" for those who are in both the top 1% of incomes and top 1% of assets then we might be on to something, though that threshold is too low for what I'd want to use for "rich", which I'd be inclined to use at no lower than 0.1% of both, possibly higher.
    Last edited by jamesd; 18-03-2015 at 3:30 PM.
    • DaveMcG
    • By DaveMcG 18th Mar 15, 3:33 PM
    • 134 Posts
    • 66 Thanks
    DaveMcG
    The fact that it is index linked is actually a big win, in the future, it will be higher than the current £1.25M.
    Originally posted by DesG
    It was index linked and £1.8m when Osborne took office.
    • Triumph13
    • By Triumph13 18th Mar 15, 3:35 PM
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    Triumph13
    If we were to say start to use "wealthy" for those who are in both the top 1% of incomes and top 1% of assets then we might be on to something, though that threshold is too low for what I'd want to use for "rich", which I'd be inclined to use at no lower than 0.1% of both, possibly higher.
    Originally posted by jamesd
    I think if you were to do a representative poll of the population, it would be interesting to see what qualifiers the average person thought you needed in front of your adjectives at those levels. I suspect it would be quite a way past 'very'.
  • jamesd
    I think that you're right about that poll because I know that it is common for people to think of those with twice their own income as being wealthy or even rich and I know the distribution of incomes in the UK. I also know it's common to completely disregard things like the value of the state pension, NHS, benefits and many other things that the person expressing the opinion has when making such comparisons.

    I prefer to use measures that have some hope of not just having better off than me as the working definition.
    • Triumph13
    • By Triumph13 18th Mar 15, 4:07 PM
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    Triumph13
    I'll admit that before I discovered Mr Money Mustache my definition of 'wealthy' would probably have been nearer to yours. By moving the bar down a few notches so that it includes me it's amazing how much happier I am!
    • Orwell
    • By Orwell 18th Mar 15, 4:30 PM
    • 96 Posts
    • 44 Thanks
    Orwell
    It's another limit - introduced to stop abuse of pensions by the seriously rich (e.g. board level directors of PLCs) - now gradually affecting the middle-class.

    It hits DC pensions harder than DB, because in reality you only get abound 2.8% annuity if RPI linked with spouses pension (assuming 5 year younger spouse).

    So the fat cat public sector on index (uncapped) linked DB pensions can get £50k p.a. (20 x income) before hitting the limit - whereas the taxpayer with a money DC scheme can get only a max of £28k p.a. (not much when between two as is often the case).
    • TheTracker
    • By TheTracker 18th Mar 15, 5:27 PM
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    TheTracker
    The fact that it is index linked is actually a big win, in the future, it will be higher than the current £1.25M.
    Originally posted by DesG
    Not really, it was index linked before he took it away. Either way, index linking is dumb. Investments should return considerably more than R/CPI so it's a weird thing to link it to. Ideally pensions, like ISAs, should be constrained by contribution not value. OR make it LTA and not contribution. Doing both is confusing.
    Last edited by TheTracker; 18-03-2015 at 5:30 PM.
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