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What about the tax free lump sum?
There are 2 main benefits to pensions over Investment Trusts etc. predominantly the tax free lump sum whereby only 75% of the pension fund will be taxed at 40%, i.e. 30% tax. In addition, for more modest investors, the lifetime limit is unlikely to be a problem and there may well be a marginal tax benefit. Some of the tax may be only at 22% under current rules (or possibly 33% due to loss of age allowance) as only the wealthiest pensioners in the future will be higher rate tax payers unless annuity yields increase substantially. In addition, many higher rate taxpayers may be able to get 46.7% relief due to child tax credits!
ISAs are a better investment for many, but the amount is limited. I agree that pensions are a poor investment for those not able to invest enough to get them well above the guaranteed pension limit. Those for whom pensions are appropriate are likely to need to invest above the ISA limits for a reasonable retirement, particularly as few save consistently throughout their working life.
You suggest that taxing capital gains on investments as opposed to the entire receipt for pensions is unjust. I would say that this is a reasonable compensation for upfront tax relief on the investment. This means that, assuming constant tax rates, the extra tax paid on exit relative to that received on entry is a tax on the growth (ignoring the 2 benefits above). This seems equivalent to the tax on the gain with no relief for the investment.
Written In Trust; IR & The Pension Industry?
Agree entirely, always have. I dont want your average pensioner paying tax. SIPP's will get the waffle mechants pedaling their lies again, and all the while there is a serious lack of commitment on the part of the individual to take out new pensions or increase premuims. Company pension scandals and poor investment returns, saw to that. SME people with savvy only take the company pension route now as the last resort. ISA's etc are a better bet.
What about that 25% tax free lump sum?
The 25% tax-free lump sum is not a benefit. It is a concession so that you do not lose access to 100% of your pension fund capital. Instead, you loose access to only 75% of it! Additionally, if you don't take the 25% within 3 months of retirement, you loose access to it altogether
With Investment and Unit Trusts you retain 100% of your fund capital until you choose to sell any of it. Then, the maximum CGT is likely to be 24%, so you retain 76% of your fund capital compared to maximum 25% with a pension fund.
After taking the 25%, tax is charged on the subsequent retirement pension, not on the remaining 75% fund capital. Therefore, it is incorrect to say that 'the remaining 75%pension fund will then be taxed at 40% ie 30% tax'. The pension will actually be taxed at income tax rates of 40% or 22%.
It is true most people will not be affected by the lifetime allowance. But the 55% and 70% rate pension taxes can apply even when the lifetime allowance is not exceeded. For example, if you just try to get your original savings back you could lose 55% or 70% in pension tax charges.
If the ISA limit is a problem, the balance is better invested in Investment or Unit Trusts or property rather than a pension fund.
For many it will not be a problem at all. £7,000 a year for say 35 years is £245,000, plus gains could easily result in a fund on retirement of £400,000. That could produce a tax-free income of £24,000 a year which is equivalent to a pension of about £30,000 for a basic rate taxpayer and £40,000 for a higher rate taxpayer.
Additionally, you retain ownership of the fund capital itself (which you lose with a pension, subject to the 25% allowance).
You pay for the upfront tax relief on contributions not by paying the 55% or 75% pension taxes on capital receipts but by paying income tax on pension income. And you pay dearly!
The longer you live and the higher the pension the more income tax you pay. That is why the Treasury and Inland Revenue are so keen on promoting pensions while at the same time penalising access to fund capital so that you are obiged to use it to buy more pension income that generates more tax for them.
Those rates!!
The 55% rate is the FA 2004 s208 unauthorised payments charge of 40% + the s240 scheme sanction charge of (40% - 25%) = 15%: ie total 40% + 15% = 55%.
The 70% rate is as above, plus the s 209 unauthorised payments surcharge of 15%: ie total 55% + 15% = 70%.
not all bad news?
some positives for pensions:
Potential IHT free transfer to children - OK you do have to die before taking benefits!
40% tax relief going in against possible 22% tax liability coming out - after tax free cash.
Anyone who is gong to hit the lifetime limit is likely to have other assets over the IHT limit, so holding assets personally is potential IHT problem.
Having a good pension income in retirement, may mean that a person can afford to give away capital (PETs) free of IHT.
The basic reason for having a pension of any kind is to provide income in retirement - anything that works to that goal has to be a good thing for most people.
other ramblings:
I do get concerned about residential property going into a pension although the 50% borrowing limit will limit the use of this by ordinary punters.
Commissions for pensions are mostly much less than they were some years back - I guess most IFAs etc would welcome clients wanting to invest in ISA's OEICs and the like.
As for commercial property in a SIPP - this used to be a good option - but since the changes to CGT and taper relief, I'm with John on holding it personally wherever possible - it gives freedom to do what you want with your own money.
PS Did you buy that house in Spain, John?
Mis-selling Personal Pensions and SIPPs
Given what Sartoris says, a saver's after-tax position under the new regime from a Personal Pension or SIPP is likely to be worse than if had invested the same amount in one of the alternatives mentioned.
It therefore looks like anyone who sells a Personal Pension or SIPP that will be taxed under the new regime will be seriously exposed to a charge of mis-selling.