Pension furore

There is talk of cutting pension fund limit to £1m, this would give a pension of £27500pa (on top of the state pension) at todays rates - who knows what they might get in tens years if rates improve.

And, the problem is?

This is still more than the average wage - I have no problem with the taxpayer funding a reasonable amout of pension as it takes a burden off the state, but why should we fund it for people who are more than able to provide for themselves in their dotage? 

I personally thought the old system was better where you were limited to a percentage of earned income, with c/f to help the self-employed smooth out fluctuations in earnings.

Comments
ShirleyM's picture

I agree OGA

ShirleyM | | Permalink

A pension fund of £1m allowable for tax relief is extremely generous, and is not available to the greater majority of working people.

I suppose we should be grateful that there is a limit to the relief available to high earners, otherwise they would really be cashing it in at the expense of lower earning taxpayers.

Steve-EBL's picture

£27.5k

Steve-EBL | | Permalink

You can get £4.5k ish per £100k annuity at 65, so £1m gives £45k p.a.?

 

The lifetime allowance; I take it is on contributions not the fund value?

 

How many wealthy individuals are putting the maximum into their childrens pension pots and getting tax relief?

Fairness all round ...

JC | | Permalink

@Old Greying Acc

Eh! confused - for a start the advantage provided by BR tax relief probably does not make up for the massive restrictions & interference imposed on the pension fund (life & death); just look at the Govt artificial GAD rates for SIPPS. Pension fund saving only becomes worthwhile once the HR rate kicks in, else put funds into an ISA & forget about a pension

On SIPP - reduced from £1.8m to £1.5 & now suggestions of further reductions

But everyone should be in the same boat - for instance how does the following stack up

  • Employee final salary ('Fred Shred' etc.) - 1/40, 1/60 should cease & be replaced with overall cap
  • Doctors £60k+ retirement income - equates to a pot of ???
  • MP final salary £30k after 20 years
  • Civil Service pensions should be addressed - all new entrants placed on same footing as private sector

... and so on the inequalities are huge & no Govt is prepared to address them properly

Surely one cannot keep hitting the private pensions just because they are an easy target with no equivalent reduction in other forms of pension

This whole area is rather like taxing the rich - push it too far and over a certain threshold people will either find another solution or vote with their feet.

Furthermore, trust plays a part and pensions are/should be a long term contract between Govt and taxpayer - unfortunately all Govts (GB etc.) abuse this contract and pension savers end up having a deal they did not sign up to originally, xxx years ago

Frankly if the Govt allowed one to transfer a pension pot to an ISA & repay any tax relief to make this happen then I would jump at the chance

Old Greying Accountant's picture

@ JC ...

Old Greying Acc... | | Permalink

... don't disagree on the fairness, but it is HR tax relief, broadly 20% by direct contribution by the Govt and 20% by less tax collect by HMRC - depends obviously in the way the scheme works.

I also agree on the rules, i have always held as you penssion is a lifetime thing, so any rule changes should not move the goal posts. When PPP's came in, the rules for RAR's continued, but only for exixting schemes - such should be any change.

@ Steve, I was just quoting the figures I heard (maybe they allow for taking £250k tax free and having £750k left for the pension?) I am not knowledgable on these things, I just think a pension pot that would give the average wage based on average annuity rates is Ok, any more than that is excessive. 

 

Intelligent Pensions's picture

Lifetime Allowance    1 thanks

Intelligent Pensions | | Permalink

Lifetime Allowance (LTA) is based on each crystallisation of benefits and for clarity is currently £1.5m and due to reduce to £1.25m in April 2014. The idea of reducing to £1m is a Lib Dem proposal.

An example will help to show the possible tax implications and how pension income from defined benefit schemes is treated against the LTA:

So if you receive a tax free lump sum of £50k and a pension of £10k p.a. starting today you crystallise £50k/£1.5m = 3.33% of LTA + 20x£10k = £200k/£1.5m = 13.33% of LTA, well within the limit.

But if you are a GP or other healthcare professional you probably have a personal pension or S226 retirement annuity taking advantage of Extra Statutory Concession A9, in addition to your NHS Pension. Consider Dr P; he will receive a pension of £50k p.a. and a lump sum of £150k when he retires next year.  In addition he has £300k in a SIPP.

If he retires before 6 April the calculation will be: (£150k/£1.5m = 10%) + (£50k x 20 = £1m/£1.5m = 66.66%).  If he cashes in his SIPP and takes a £75k lump sum and buys an annuity with £225k he will take his total to 96.66% of LTA.

However what happens if he retires on 30 April 2014?  : (£150k/£1.25m = 12%) + £50k x 20 = £1m/£1.25m = 80%.  If he cashes in his SIPP and takes a £75k lump sum and buys an annuity with £225k he will take his total to 116% of LTA and face a big tax bill of 55% x £200,000 = £110,000!!

Should Dr P try to retire before 6 April?  Or should he apply for Fixed Protection 2014?  And should he consider using his SIPP to provide Flexible Drawdown since his NHS Pension is well in excess of the Minimum Income Requirement?

Since 2006 Simplification has meant that any client with a decent pension has to take professional advice from a retirement specialist. In the example above not doing so could cost Dr P £110,000 tax!

Protection from the reducing LTA is available and should be considered for any client who has built up substantial pension investments.  But of course, nothing is simple and there are strings attached!

Hope this is useful.

Steve-EBL's picture

Intelligent Pensions

Steve-EBL | | Permalink

Very useful, I hope I face a similar quandary as Dr P when I come to retire.

Example of unfairness ....

JC | | Permalink

Supposing Mr X has a SIPP that has grown to £1.5m WITHOUT the benefit of any HR tax relief - i.e. all contributions were at Basic Rate

If he ends up in flexible drawdown then he is subject to 55% tax

The Governments reasoning is that this is to compensate for the HR tax relief on original contributions and therefore 55% is the exit penalty for the HR rate entry

However, the Government 'assumes' that everyone has benefitted from the HR entry, even though in this situation, Basic Rate was the only relief on contributions.

Therefore, they are levying an excessive (unfair) exit charge of 55% when under these circumstances it should actually be far less (say 35%)

In any event, how does a limit of £1.5/£1.0m, equitably compare with Mr Fred Goodwins (RBS) £10m+ pension pot?

Why is there one set of rules for those in his position and another for private pension holdings?

http://news.bbc.co.uk/1/hi/business/8106815.stm

 

Intelligent Pensions's picture

To be fair, the chances of    1 thanks

Intelligent Pensions | | Permalink

To be fair, the chances of someone achieving the lifetime allowance without any HR tax relief are minimal.

To clarify, flexible drawdown is only taxable at the individuals marginal rate and phased flexible drawdown is available to mitigate tax.

The 55% tax charge applies to crystallisation events beyond the lifetime allowance.

For Fred Goodwin, he probably would have some protection against the LTA by virtue of  joining his scheme some years ago.

With regards to fairness, Judges and MP's are not caught by the lifetime allowance!!

Pension Calculators

corbinspicer | | Permalink

There are lots of useful tools on the internet that can help you such as this pension calculator website.

 

Other websites let you review your pension

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