Osbourne's tax relief changes in the March budget

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  • robin61 wrote: »
    As one of the others was saying the uncertainty is a worry especially if you are close to retirement. All we can do is wait and then adapt plans accordingly.

    Check out / watch the WASPI threads. Arguably, any change to pensions should come with sufficient notice. I wouldn't be surprised if people near retirment are protected from the impacts (e.g. Abolish 25% tax free) while younger people get the brunt of the impact.

    I think the they are at risk of making pensions unattractive if they keep meddling so soon after each change, people are already dubious of pensions by reputation, the constant changing of goal posts makes them less enticing (even if I was a 20% tax payer who may get 30%). Most people I know do not trust pensions since Gordon Browns tax raid. You will just get people putting in the employer match, but if you do the sums this rarely actually gives anywhere near enough cash for retirement (DC scheme) that old DB schemes did.
  • chiefie
    chiefie Posts: 406
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    I wonder if anyone out there working pensions IT and has been asked to review their systems ? It makes sense that it should be a fairly easy change and to test but surely companies will have been consulted ?
  • atush
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    The telegraph also said, the country is in a pension crisis, with too many not having enough provision.

    anything likely to hinder pension savings is 100% unlikely IMHO for this reason. so only HRTpayers should be very afraid.
  • MDMD
    MDMD Posts: 1,419
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    edited 2 January 2016 at 10:52PM
    a consequence of scrapping tax relief could be that companies reduce the employer contributions to the bare minimum under the workplace pension rules. They would then just factor the money into general wages packages. This wouldn't do much for the problem we have with people not paying enough in.

    The article in the telegraph today says that the PLSA (the body that represents pension companies) have been lobbying the government over recent weeks as this clearly is worrying them from a business perspective if the large proportion of contributions come from HR and AR taxpayers
  • kidmugsy
    kidmugsy Posts: 12,709
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    In the next tax year you will be able to get your first £1k of savings interest taxed at 0% (£500 if a HRT payer) and £5k of dividend income. These two rules probably make pensions less essential for many people.
    Free the dunston one next time too.
  • hugheskevi
    hugheskevi Posts: 3,784
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    edited 3 January 2016 at 1:26AM
    I wonder if anyone out there working pensions IT and has been asked to review their systems ? It makes sense that it should be a fairly easy change and to test but surely companies will have been consulted ?

    It is a trivial change for Defined Contribution pensions, and a nightmare for Defined Benefit pensions.

    For a Defined Contribution scheme, just treat employer and employee pension contributions as salary (so they are eligible for income tax and national insurance), and then apply relief-at-source with 30% added to the combined employer and employee contribution and reclaimed by the provider from HMRC. That is all pretty trivial stuff, some payroll changes needed, but nothing too difficult. Not something that would happen overnight, but an April 2017 start date should be achievable.

    But for Defined Benefit schemes the situation is completely different. The employee pension contribution is known, but the employer contribution is to the scheme as a whole, not the individual member. So you couldn't simply take a similar approach. Instead, you would need to value how much the employer contribution is worth to an individual's pension accrual on an individual basis. This is what the Annual Allowance and Lifetime Allowance currently do, taking a very simple approach of multiplying annual pension accrual by 16 and 20 respectively. The result is extremely inaccurate, but only affects a small number of people (who may pay far too much or far too little, depending on their age, their scheme normal pension age, their age at pension commencement and other factors compared to what they would owe if the value was calculated accurately).

    So, it is necessary to accurately value the pension accrual of all Defined Benefit scheme members. This has to be done for other reasons, in particular transfers and divorce. A similar approach could be used, but the scale is completely different - administrators would only usually have to calculate a handful of CETVs each month, whereas under this approach they would have to be done for the entire active membership. That is a new major annual exercise. Some schemes would find it fairly straightforward (larger schemes with modern administration and actuarial support in particular) but the world of Defined Benefit can be extremely antiquated, and small and medium-sized older schemes can have very basic administration.

    Assume a system has been set up to accurately value the pension accrual, and no changes have been made to the pension scheme (both huge assumptions). Now higher and additional rate tax-payers need to have a pension debit applied, whilst lower and nil rate payers need a pension credit applied. Again, these are existing processes, but on a completely different scale, and all taking place at the same time. Plus, to know an individual's tax status a link between the scheme and HMRC will be needed for schemes to apply the correct pension adjustment.

    Hopefully that gives a bit of insight into the nightmare that the policy would be for Defined Benefit schemes, if Treasury decide to have the same system for both Defined Benefit and Defined Contribution schemes. Certainly not deliverable overnight, and April 2017 would seem very optimistic. There are many different possible approaches, the above is only one possible way, but all of them run into significant issues, especially if there is a desire for individuals to have the same take-home pay but just accrue a different amount of pension...Defined Contribution members can easily tweak contribution rates to achieve this, but Defined Benefit schemes will find it very difficult.
  • RickyB2000
    RickyB2000 Posts: 321
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    Wouldnt it be easier overall to just reduce the annual allowance again. Most lower rate tax payers will not contribute £40k a year. The only people who are probably doing this are people earning close to the taper or older people who don't need to spend the money anymore putting it all into a pension to retire earlier. They have had a window to do that.

    I could see it dropping down to £20k. After all, if £1m is lifetime allowance (assume based on a reasonable max retirment income that should be subsidised) then 25 years at 6% and £20k will have amassed a £1m pot. For a 1/80 DB scheme, this would be the same as £1250 increase or a £100k salary. So won't impact most people (or schemes) but closes off the ability of wealthier people getting near the tapper (or with lots of capital gains etc) to just push a load in for tax purposes.

    They could also start the tapering at the HRT threshold. Earn less than HRT and you can put in £40k. Earn more and you can put in £20k (or £20k and £10k). Obviously not as effecient as many HRT will be no where near the limit, but ensures people who can max the allowance only get the equivalent of a flat rate of tax relief.
  • EdSwippet
    EdSwippet Posts: 1,584
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    RickyB2000 wrote: »
    Wouldn't it be easier overall to just reduce the annual allowance again. ... I could see it dropping down to £20k.
    It probably would be easier. It solves the 'hit the successful' part of the government's "strategy", but does nothing to encourage pension saving in basic rate taxpayers.

    You need carrot to balance stick. Flat rate relief is assumed to provide that carrot. But for it to work relies on taking benefit from one group to give to another. The first group might adjust -- work less, save in VCTs or pension alternatives, retire early -- so that the carrot cannot be funded.
    RickyB2000 wrote: »
    They could also start the tapering at the HRT threshold.
    The tapered allowance on incomes over £150k is going to be a nightmare for those affected. Without really good projections and a functional crystal ball they won't know how much they could have contributed into a pension until it is too late to actually contribute it. A considerable number of employers are already reported to be scaling back their pension scheme frameworks for higher earners because of all of this, and it has not yet even taken effect.

    But... nearly all the complexity falls on the individual through tax self assessment. So I can't see either government or pension schemes resisting too much if the taper breakpoint is lowered in future.
    RickyB2000 wrote: »
    After all, if £1m is lifetime allowance (assume based on a reasonable max retirment income that should be subsidised)...
    I would take issue here with 'subsidised'. Pension withdrawals are taxed, just later on. Deferred compensation therefore deferred taxation. And because it is taxed later there is more of it to tax.

    The government likes to bandy around large numbers as a 'cost' of pension tax 'relief', but for political reasons those numbers rarely take into account the tax being collected from today's retirees who are yesterday's pension savers.
  • hugheskevi
    hugheskevi Posts: 3,784
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    edited 3 January 2016 at 10:00AM
    Wouldnt it be easier overall to just reduce the annual allowance again. The only people who are probably doing this are people earning close to the taper or older people who don't need to spend the money anymore putting it all into a pension to retire earlier.

    You start making the new public service pension schemes unviable if you do that.

    A £20,000 Annual Allowance would see all Civil Servants earning over £54,000 breach each year, and all Local Govt members (choosing full accrual) earning over £61,250 breach every year. There would be more too, as many will have final salary linked service would could lead to a pension input if salary increases by more than CPI even though they earn less than the amounts above. Should point out that the reason for the breach is because of the simplistic nature of the Annual Allowance calculation (which uses factor 16, which is based on a 47 year old taking their pension at age 59), not because the pension benefits are actually worth the amount HMRC calculates them to be.

    If even a fairly small proportion of those affected opt-out of the scheme, the Exchequer loses their employee pension contribution, and the annual cost of funding pensions increases (there is of course a long-run saving from opt-outs, but the way Government accounting works largely ignores the long-term cost of pensions). Hence in terms of contributing to deficit reduction, the policy would probably be counter-productive as the lost employee contributions would be greater than the extra revenue generated from charges.
  • MDMD
    MDMD Posts: 1,419
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    It will be interesting how he deals with the impact on DB pensions, particularly public sector ones. If he is seen to give a 'light touch' to the tax due on the employer contributions for PS DB pensions, it would be a political nightmare, but if he taxes them in full he could find a load of strikes on his hands.

    Unless, of course, this is just another poorly thought through measure that will be impossible to achieve.

    As the above poster mentions it would be a technical minefield, with complexities and unfairness everywhere. It's also possible the 'cost' in the final year of relief increases by a huge amount as people pay massive contributions in.....
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