4 Feb 2016, 9:46am
personal finance:
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  • In praise of the pensions lifetime allowance

    The deal with pensions is this. In return for saving money for when you get old, you get to save before tax is taken off. There aren’t many legal ways of avoiding tax, but that’s one of them. The downside is that you don’t get your sweaty paws on the money until you are 55 1. And even then, if you want to preserve the tax-free status of that lump you are rate-limited on the amount you can draw, which is also fitting IMO. My pension savings are worth nowhere near the lifetime allowance, I will still be a taxpayer as a pensioner in a few years.

    It costs money to run a civil society, and that money comes from taxation. There are issues in that running that society seems to get dearer and dearer and more and more complex with time, but that is a different fight. Nobody likes paying tax. Nevertheless, that civil society would have to support you when you are old, so easing back on the tax early in your life in return for you being less of a burden later on is the rationale for that deal.

    I’m not going to be popular for saying this, since many people affected by the lifetime allowance (LTA) are dedicated followers of Ayn Rand, who feel they have the resources to be entirely self-sufficient and apart from the rest of us lowly scum, but the reason that this tax bung is there is to encourage people to do something they otherwise wouldn’t do. It only needs encouraging up to a point, and that point is okay at  £1,000,000. The retired colonels of the Torygraph continually spit bricks about how unfair this limit is because it stops them saving more money into a pension, but I don’t see what the problem is, on two counts.

    • If you can save a million pounds then you are ‘king rich by British standards 2. It’s not like they point a gun at your head as say you can’t save any more, they simply take the tax break off you for any further savings. So save somewhere else, chump. And pay your tax, you aren’t Google, though by all means plan to pay as little as possible, legally. If you can’t manage the concept and you really don’t like it then there’s a whole world out there…
    • You can buy an annuity with that £1m of £28,000 p.a. for life rising at 3% p.a (presumably retiring at 65), which is more than the average UK household income for working sorts.

    That’s a pretty reasonable limit – we will give you a tax break to save enough until you reach the average UK household working income. Where I do think they are wrong is placing an annual limit of £40k. There shouldn’t be a limit IMO – the £1M LTA one is good enough to define the ambition of what this is designed to do. If you want more, then save more but end of the tax break for you. It doesn’t matter if you earned that £1M in three frenetic years as a young finance wallah or you plodded away for forty years. It’s about how much of an income that will buy you. I’m not that exercised about limiting the tax advantage to 20% either. There’s no big deal in having the rich get there faster, as long as the total tax break is limited by the LTA. Good luck to them – the rich still get old like everybody else 😉 I wouldn’t even limit contributions to earned income, your pension would be a much better place for your inheritance than going into jacking up the price of houses for everybody else.

    Yes, it doesn’t greatly favour FI/RE because you need more if you are going to pack it in at 30. But in the end exceptional results need exceptional efforts, and until the robots really do come for everybody’s jobs then there isn’t a huge case for incentivising people to retire early. Contrary to much of the bitching about the LTA if you happen to have saved more than the LTA historically when they dropped the limits from the original £1.8m then you can apply for LTA protection to protect your large pension savings from tax. The deal is then that you don’t take the piss by adding to them. Again, this is fair enough – you aren’t retrospectively shorn of your tax-advantaged hoard. You are already rich enough and don’t need any additional incentive to save for your old age. Celebrate your good fortune and knock it off  😉 Obviously if you survey your domain and decide you did build all that and want to live in Galt’s Gulch, well, er, go and knock yourself out. It appears that the perpetrators of this Randian paradise on earth haven’t solved some of the fundamental requirements of a government, such as defence of the realm

    Contrary to much of the commentary on the LTA you are not stopped from saving on reaching it. You are stopped from saving into a pension scheme and benefiting from advantageous tax treatment on your contributions. So save somewhere else FFS.

    Notes:

    1. this age is a movable feast drifting upwards with longevity over the years to come, intended to keep 10 years before state pension age
    2. To qualify this, you are in the top wealth 5% if your household has £900,000 in assets from all sources including home equity, so if you are bothered by a £1m pension limit you are embedded firmly in that top 5%

    The problem with the LTA is that it penalises successful investing, and generates uncertainty, so people hold back from investing at all.

    Its generous enough now, and is promised to rise with inflation (a fact Torygraph articles forget), but those promises seem hollow. Like IHT, it might well stall until an election bribe bumps it up.

    The ideal would be a lifetime allowance on contributions, not outcome, but I can see how that’s hard to define in a world with inflation.

    The £40k annual with 3 year rolling window helps with smoothing, but is about all that can be done, as how can we, or the government, compare £1 at 25 and £1 at 55. (I suppose you could have a tracking limit on contributions that rises by £20k a year, is index-linked, and that you could invest up to at any time, but it would be very hard to introduce across all cohorts)

    I did wonder about that part of the Torygraph argument, but there’s also an argument that if you want the tax privilege then one of the strings that comes with it is you become more careful as the limit is reached, even if you are 25 at the time 😉

    I do agree that the LTA does need to track up with inflation. Or perhaps with that average household income.

    4 Feb 2016, 10:10am
    by The Rhino

    reply

    I’m interested to see if march sees a move to a flat rate return for pensions that is greater than the basic rate of income tax.

    I’m holding off for that off-chance too 😉 of course it might all go the other way in which case I’m SOL …

    I think there’s a case for a Lifetime Allowance, as it’s not really the place of the State to give multi-millionaires limitless tax shelters.

    The trouble with the current one is it’s far too low. As has been regularly pointed out, retire in the next few years and you could hit your LTA and yet only have a secure income of about £30K to show for it. Fine, nice money, but not the aspirational daydreams that capitalism was built on.

    As John B says contribution limits may make more sense, too. One or two Warren Buffetts aren’t going to break such a system.

    >nice money, but not the aspirational daydreams that capitalism was built on.

    You’re not forbidden to save elsewhere on hitting the LTA! Heck, I have ISA savings precisely because my inner Ayn Rand wants to keep the taxman off the proceeds. In many ways ISAs and unwrapped are where those aspirational daydreams should be going. When a saver is individually in the top 5% of wealth he doesn’t actually need a leg-up to save more, IMO.

    The LTA is a tax shelter for an honest bedrock of pension savings, a little way like the personal allowance shelters nearly the NMW of earnings. Sadly many people won’t get anywhere near the LTA by 65!

    Yes, fair point, with ISAs not so bad — as long as you start saving early and using your allowances as you go, rather than leaving it for the last 5-10 years! 😉

    5 Feb 2016, 3:48pm
    by goldghost

    reply

    I agree. The emphasis needs to be on helping those on average incomes save for retirement as effectively as possible. Those on high incomes should be capable of saving enough without excessively generous tax breaks.

    4 Feb 2016, 11:08am
    by The Rhino

    reply

    I agree it does seem a bit low, keeping the original limit of 1.5m would give you an income of ~45k using the same annuity rates. This being on the HRT threshold would seem to me to be a more reasonable position.

    You really nailed the point with this article, fair enough. Those of Neoliberal bent often ignore in their whining rants that they too are benefiting in many hidden ways from the rest of the same society they profess to not want to live alongside. As such, they get to have their cake & eat it too – most of the time; so at the end of the day, they’re just too hypocritical to admit that they are just plain selfish. I actually believe that in a civilised society that should also be an optional democratic choice for those individuals, but just call the spade a spade in that case.

    The argument is for the most part academic for them anyway, since paying tax is largely optional given their access via having more …..to such creative ‘highly professional’ accountancy. So their public blethering via their media outlets is just to top up the brainwashing for the masses …..window dressing if you will.

    I really don’t know why they bother, they’ve already won this whole game 6-love anyway, even the middle classes whether they are aware of it or not are drifting downwards. Like a feather dropped from high, it may be a slow descent, it may not be a straight path down, there may even be bounces, but gravity always wins out in the end.

    I should have H/T that Obama fellow for the pithy callout 😉 Mind you, the Salon article on Galt’s Gulch Chile gave me a laugh as to what happens to folk who believed they did build all that – punters

    who went looking for “the motor of the world” and got the shaft instead.

    You always have to be careful around powerful rotating machinery…

    4 Feb 2016, 10:58am
    by John Kingham

    reply

    2 pence:

    1) Why give incentives to save at all? Because it reduces the burden of those at the bottom on the state when they get old. So the incentive should be for those at the bottom to save at least something, rather than encouraging those in the middle or the top to save more than they already do.

    2) People should pay all the tax due on their incomes today (I don’t like the tax rebate at all and it’s not like middle and high earners aren’t going to save without it just to spite the government).

    3) Use a pension ISA system that has an annual savings cap, allows tax free income and capital gains and then tax free withdrawal, just like normal ISAs. The only difference is it locks in your savings until you’re 55 in order to stop people from splurging it before they get old.

    4) That’s it.

    Whether or not there is a £1m pension limit is of approximately zero relevance to the people that the state should really be trying to nudge towards saving.

    Interesting idea of a pension ISA system over and above the existing one.It’s still one for the richer in society though – after all saving £15k a year into a regular ISA is a big ask of most people!

    Interestingly I believe the Pension ISA is one of the options under consideration, so you may get that proposal.

    If we’re asking folk to pay tax due on their incomes, perhaps it’s time to scrap NI and put income tax up 13% in its place? Pensioners are disproportionately heavy users of state services so why give them a discount? 😉 I personally favour a flat rate tax with the same hefty tax-free allowance for all. Simple and fair.

    Point 3 is an odd position – who would lock money away until 55 (58, 60…75?) and expose it to all sorts of governmental jiggery-pokery when a bog-standard ISA will do the same job without the access restriction?

    I already factor in a ~30% tax rate in my future calculations. I would be surprised if this NI and tax integrations doesn’t happen in the next 10 years.

    There is something to be said for the pension ISA because pension savings are off-limits for creditors making an individual bankrupt, and also don’t count as a capital offset for benefits. To me the 55 age limit seems a reasonable quid pro quo for that ringfence against the slings and arrows that can hit someone in their working life?

    Don’t pin your hopes on even those protections remaining for long.

    In one’s dotage, the family home counts as an asset to be sold to pay for care. Why not, in this brave new world Osborne is building, insist on an asset poor, pension rich elderly person “taking advantage” of the new freedoms to sell their juicy annuity on the secondary market (at a honking great anti-selection driven capital loss) and then draw down that dosh to pay the care bills?

    NI is a rare thing in taxation, in theory it pays for JSA, state pension and the NHS. Now pensioners use the latter more, but not the former, and their state pension is based on contributions already made. I like the idea of accepting that NI is just tax, and let it be rolled into income tax, but the grey voting lobby won’t let it happen.

    I’m waiting keenly to see how the budget changes salary sacrifice, where pensions and NI meet, and pensions win.

    I make a very decent living from pensions and complexity is just more grist to the mill. However, we’re rapidly moving beyond the point where complexity was a corporate problem to be addressed by HR functions and payroll to being one that falls directly into the unwilling lap of scheme members. Unfortunately, it’s simply too difficult for many people and the result will be that pensions saving becomes non-viable.

    I appreciate your point that the government has to balance the books, and that Sutton’s Law means that the richer amongst us must foot more of the bill for a civilised society, but the perverse consequences of Osborne’s putting his hand in the till will be played out over the coming years and even decades as sub-standard retirements for many and yet more reliance on the state.

    If it were my hand on the tiller, I’d draw a clear distinction between DB and DC pensions. DB = no annual allowances, just a simple overall cap on pension in payment of say £40k per year (about what’s protected by the Pension Protection Fund for schemes that go belly up) rising with inflation. DC = no LTA, but an inflation-linked cap of say £25k pa of relief available, with unlimited carry-forward to catch up on missed years.

    It’s not unreasonable to target a pension of up to the point where HRT kicks in (and no more) with a leg-up from the state, but subsidising higher-rate pensions for the wealthy is taking the proverbial in my view when many have next to nothing.

    tl;dr – Certain limits on tax-efficient savings make sense. Osborne’s meddling makes an already poor framework worse.

    The largest problem is not the existence of an LTA. Rather, it is its continual, repeated, and short notice erosion.

    Anyone with pension savings at £1m today is 25% short of the LTA, superficially a comfortable buffer with which to plan for growth and new contributions. Sixty two days from now, this same person will be over the LTA, and their planning door will have slammed shut.

    These sort of repeated step changes are massively damaging. Nobody can plan around this. The inevitable result is disengagement.

    I’d say the problem is that the LTA, even if inflation linked, is not investment return linked. So if I have £950k now, no new contributions, but can’t claim protection, I’d expect it to return 3% over inflation, and be caught in the future, as my pot overtakes an inflation linked LTA.

    The big worry for FIRE is you might be safe for access at 55, but the rug could be pulled from under you with a rise to 60. No access for 5 years, and harsh taxation while you wait.

    4 Feb 2016, 12:32pm
    by The Rhino

    reply

    @John B – very good point. Only sensible thing is to aim to get nowhere near the LTA, but then your wasting a valuable wrapper. Very very difficult to plan against, getting harder the younger you happen to be. At one extreme of the spectrum, where do you stop contributing for a junior SIPP with 60 years to run?

    > where do you stop contributing for a junior SIPP with 60 years to run?

    Isn’t the whole point of doing that so far ahead of time that it’s a lot cheaper? 100k by the time they are 18 and then leave it be. Saving for a pension is a problem they just won’t have. Tell them to focus any savings on an ISA. Win all round?

    4 Feb 2016, 2:24pm
    by The Rhino

    reply

    my point being is that when you’re a long way out, tiny differences in return have a huge impact on the final value, hence planning is effectively impossible. as FvL says, even 10-15 years out is still very tricky to call, let alone 47 years for our lucky 18 year old, 100k could easily be too much..

    He would then lifestyle his savings along the equities – bonds axis to the bonds direction, like people used to do before retirement? Or take fixed protection and be disallowed from using a pension for saving? Isn’t getting into the top 5% of Brits by wealth a really great problem to have, and perhaps time to know what enough looks like?

    As it is the makimum you can give a child for a pension by the time he’s 18 is £64800 (18×3600) so it’s a moot point as to giving them more.

    4 Feb 2016, 3:16pm
    by The Rhino


    good point – I’d forgotten that although you can’t take it out you can always monkey around with whats in there. That is the solution! Good, SIPPs aren’t so bad after all, what a relief.

    @JohnB, right. I’m sitting at just under £1m now, but investment growth alone will fill today’s remaining £250k. To avoid punitive tax on that growth I must take fixed protection. That means no more pension contributions. As a result I forfeit 12% of my annual salary, as my employer does not offer cash in lieu of employer pension matching.

    So out of the latest LTA reduction — note, not the LTA itself, but rather just the *reduction* — I face an effective 20% cut in overall annual compensation. 12% from direct salary cut, the remaining 8% from the lowering of the LTA. I could swallow the latter, but not both together.

    Please don’t take this the wrong way, but you are already a very rich fellow by British standards. Your employer will have to change their policy as a result of this, otherwise they will presumably lose people from your stratum because of this, and that policy change is within their control. If you look at the tables of pension wealth from the ONS, you will find the LTA is a stupendous amount which doesn’t even appear in their stats. Congratulations are of course due for being as good as you are at what you do to have this problem, but I do venture that perhaps you don’t need tax breaks to save any more 😉

    When viewed — as it should be — not as a capital asset but as an assured income stream for life, an LTA-limited pension savings pot buys at best a median income in retirement.

    Median income is hardly penury. But neither is it riches beyond the dream of avarice.

    Mumble – “That means no more pension contributions. As a result I forfeit 12% of my annual salary, as my employer does not offer cash in lieu of employer pension matching.” – My employer just changed the rules on this, I think offering the cash in lieu will become more common in future across more employers. The downside of course is that a lot of people may just take the cash, so worsening the pension situation.

    Well said, ermine.
    But what do you say to the argument that a pot limit penalises better investments (and luckier investments, natch?).
    Or to the argument that it jolly tricky 10-15 years’ out to know whether you’re going to hit the LTA? In fourteen years your pot doubles at 5%pa but quadruples at 10%pa.

    Someone running into the LTA is a very, very rich person by UK standards – well into the highest decile by capital wealth if the FT is right. And they aren’t debarred from saving more at all, they just don’t get a tax break on it 😉

    There’s also some case to be made that as you approach the intended limit perhaps you need to shift the balance towards more pedestrian but less volatile asset classes. If you don’t like that implication, maybe give up some of the tax break and go the ISA route. The best way could well be a mix of ISA and pensions. 30 years of ISA contributions are now worth nearly half the LTA, and a respectable home for your racier stuff. Other countries seem to have this distinction – the US has the Roth and the Trad IRA. f’rinstance.

    If you go over the LTA the tax on the excess is 25% (it’s 55% if taken as a lump sum). I’m swayed by the earlier commenters who say the target should be the HRT threshold. But in the end this is for Osborne to determine. I’ve just never been convinced of the argument that stopping the tax break for people who are well into the wealthiest 5% of people is such a terrible violation of their human rights. As with anything with thresholds, there will always be edge cases and arguments to be had about the details.

    “Someone running into the LTA is a very, very rich person by UK standards” – depends, if you were to look at net asset position, and compare those with a house and little pension against someone with no house and a large pension it doesn’t wash quite the same way, the renter with a large pension would be much less further up the wealth scale, certainly not a very, very rich person. Hardly a surprise given all incentives these days are skewed to ensure you buy into the housing/debt madness, but to be fair, the net asset position of an individual really should be taken into account.

    While I wouldn’t say they are equally wealthy I would still say someone renting and a LTA pension equivalent to individually commanding the median household income is a very rich person by British standards.

    I do wonder if readers living in London project the city on the rest of the UK. London really is a different country. With 28k individually (and possibly double that for a couple if the theory of assortative mating holds) could do very well for themselves in most parts of the UK, being of independent means they are free to prefer natural beauty over availability of employment, they can afford to travel in reasonable style.

    Indeed the £1m LTA pensioner is in some ways very differently weatlhy from the old woman in a £1m house she has lived in since 1965 but has no liquid cash to her name,. The £1m LTA pensioner has more options, I would say they are perhaps richer.

    £1M is a lot of money. It is more money than someone on the UK median wage will earn in an entire 40 year working life, even if they saved every penny after tax and lived on thin air under the railway arches. I think that is a fair definition of very rich. I am surprised that people who are that rich don’t feel it. What is the point of getting that well off if you don’t get the commensurate buzz from it?

    5 Feb 2016, 8:37pm
    by Mumble


    I don’t see how you conclude that the LTA pensioner is “richer” than the property owner.

    The £1m pensioner may pay up to £300k in tax on crystallizing the pension. The £1m property owner can receive the full £1m on selling the house, so perhaps 43% higher than the sum realized by his pensioner counterpart.

    @Mumble > I don’t see how you conclude that the LTA pensioner is “richer” than the property owner.

    ‘Tis an absolutely fair cop, guv. I don’t swim in these waters, so I am out of my depth and failed to think of the wider situation. I’ve seen the old biddy stuck in her house worth megabucks and sweet FA in the bank, but I’ve never personally met somebody with £1M of investible assets. I’ll take either problem, if it’s on offer natch 😉

    I never thought having a million sods in the bank would be the source of such concern to people. Kind of reminds me of Kurt Vonnegut reporting the wisdom of Joe Heller at some flash shindig:

    I said, “Joe, how does it make you feel
    to know that our host only yesterday
    may have made more money
    than your novel ‘Catch-22’
    has earned in its entire history?”
    And Joe said, “I’ve got something he can never have.”
    And I said, “What on earth could that be, Joe?”
    And Joe said, “The knowledge that I’ve got enough.”

    Each to their own. I wandered into town to have lunch and a drink with an old pal from working days, then listened ot the birds and smelled the flowers in the park on the way back. I owe nobody anything. I don’t have anything like the LTA. But I’m with Joe Heller 😉

    In a way any tax system is designed to an extent to redistribute luck, granted some work harder than others for their money, but there is always a significant element of luck (parents, education, choice of job, right boss etc etc) involved in what you earn. I certainly work less hard and earn more than some people, as I am sure there are many others that earn more than me and do even less. So I don’t see any inconsistency in the LTA taxing investment luck\skill.
    If the investor lucks out (or works hard, or both) and gets close to the LTA (well done!) then it can all be switched into very low risk\return investments to minimse the above LTA tax whilst the investor sits back and looks forward to a guaranteed very comfy retirement. This seems a reasonable state of affairs.

    Huge differences in the way our RRSP works in Canada. First of all, you can’t contribute if you don’t work and have no previous headroom in your plan. Second, you are limited to contribute 18% of your earnings up to $25K per annum (and this is reduced if you have any sort of employer sponsored plan.) Your headroom increases if you don’t contribute so you can catch up later on if your income allows it.
    There’s tax fee compounding till age 71 and no lifetime limit, but boy you will get taxed at your marginal rate when you withdraw the funds after that. You can pass on the amount to a spouse after you die, but when both parties are dead the whole remaining amount is taxable in one lump before any heirs get their hands on it.
    We have another plan TFSA that anyone can contribute to after taxes and it grows tax free after that. However you can only put in $5500 per year because the morons we elected lately reduced the annual amount from $10K to $5500. Their reasoning was that most Canadians were too stupid to make use of the full amount and only a few intelligent folks were benefiting from it. And so it goes in the land of real estate craziness and over leverage.

    Wow – presumably Canadian government basic state pension is higher, because those look like some very tough limits. Your max pension ceiling is less than our ISA contribution, and I don’t see how it would be possible to build a private pension that’s enough even for someone who was saving at the 25k limit!

    Well assuming both you and your wife retire at 65 and both of you qualify for the maximum Canada Pension Plan (cumpulsory state contributory pension) you’ll each get:
    Canada Pension 13,000
    Old Age Security 7000
    So a couple gets ca 40K per year, and in fact the average household pension income in Canada is almost exactly that. If you want to live on that, good luck especially if you’re in a high cost area or have debts. The tax system is structured so you won’t pay any income taxes on that sum.
    Most folks would want to supplement that with:
    Employer sponsored pension – at one time DB but increasingly DC now.
    RRSP – the 18% up to 25K but this is reduced significantly if you have a DB employer pension.
    TFSA – 5500 per year
    The only totally tax free part of this is the TFSA and that has to be paid in after tax money. When you draw your pension from the employer, the state and your RRSP it’s all taxable at your marginal rate.
    My wife and I retired early and took a discount on the CPP and in my case a discount on my DB pension, but all things considered we are doing OK – thanks to her getting a full DB pension payout.

    the CAD 40k is more generous than our SP (would be £16k which is about CAD32k under the same assumptions). You’re certainly much mroe limited in topping up than here, the folks distressed with the LTA aren’t going to be moving to Canada to fix that. 😉

    Actually went over the £1m LTA this year, but, had such a good run on the build up of my pot – effectively receiving 40-45% tax credit on the whole lot. I think it is pretty fair to tax the additional amount over the LTA. Yeah of course I would prefer to keep it, but looking at it sensibly, I’ve already been given a £400k+ boost which is probably more than most people’s pension pots. If you really feel hard done by having a bit of tax taken on additional savings above £1m then you probably need to sit down with a large glass of wine and have a long hard think about where you have gone wrong in life.

    4 Feb 2016, 6:23pm
    by John Kingham

    reply

    A most excellent final sentence.

    5 Feb 2016, 7:54am
    by Neverland

    reply

    Reading the millionaires whining about not getting more tax breaks on this thread is truly instructive about human nature

    I have an unpleasant mental image of a coterie of Mr Burns’ hunched over their key boards venting their spleen in the Daily Telegraph personal finance comments section at some taxation change that inconveniences their accumulation of more zeros in their accounts

    There are only 34 million people out of 7 billion in the world who are worth more than $1m, which is considerably less £1m

    http://fortune.com/2015/10/14/1-percent-global-wealth-credit-suisse/

    I don’t begrudge anyone who’s saved a million+ for their retirement – why not, if you can?

    Although I find it all interesting, the debate about the LTA does wash over me a little, especially as the pension you would get from a £1m pot is probably not far off my current salary and if I could retire on that, I would consider myself very rich!

    The issue in my mind with the LTA is that it is changed far too often. Trying to manage a DC pot within the LTA is virtually impossible when throwing in the vagaries of investment performance; retirement age changing; differing contributions from future employers; politicians whims on the LTA or taxation inside a pension

    For a savings vehicle that can have a 45 year life the LTA appears totally inappropriate.

    Harsh limits on annual contributions would appear a better way to restrict the “benefit” of deferring tax on pension savings

    5 Feb 2016, 3:41pm
    by Neverland

    reply

    up until the early 2000s harsh limits on individual contributions to personal pensions were in force up until you hit the age of 45

    The system was changed because everyone complained about the harsh limits to contributions on individual contributions to personal pensions before the age of 45

    plus ca change plus ca meme chose

    5 Feb 2016, 4:01pm
    by goldghost

    reply

    Yes. I remember saving the maximum 17.5% of my salary into my pension. The problem was that 17.5% of very little was…………bugger all! It worked out that if I saved that amount for my whole working life at a 7% rate of return I would get a pension at 67 of 7000 quid a year. Yippee!

    Out of interest what roughly were the rules pre-2000? (googles not yielding much info on this)

    N’mind, eventually found the pre-2006 limits here if you’re interested-> http://www.pruadviser.co.uk/content/nav/about/26674/pghome/49880/52677/52680/52806/

    A bit of an eye opener, only 17.5% allowed until age 35, 20% till age 45. Looks like the last decade will be viewed as somewhat of a golden period for pension contributions.

    I’d agree that in its ten year life the LTA has been tinkered with a lot, to be honest I don’t think it hugely matters between £1M or £1.8M, it is defining the ambition that matters, somewhere between the median UK wage and the HRT threshold os OK. The fiddling is tedious and doesn’t build trust.

    An argument I find compelling against limits on annual contributions is that modern careers are very contrasty, people often get much faster career progression early on but then burn out. A lot of people who get to within spitting distance of the LTA before 50 should perhaps look around their office – if a normal working life is 25-65 then by rights about a third of the people in your office should be over 50. If that isn’t the case then you need to be contributing at a higher rate in the first half of your career, because the fade rate is high, and harsh limits pre-45 discriminate against this sort of earnings pattern. I had a traditional career path, leaving at the high-water mark of earnings, but this doesn’t seem to be a reasonable assumption nowadays.

    But the earlier you contribute the longer you have to benefit from tax free income and capital gains, so having no annual limit is effectively a bonus to the wealthy at the expense of everyone else (even if it was somehow capped at annual salary there would be ways to work around this, the simplest being to live off the wealth whilst putting all your salary in a pension).

    > the simplest being to live off the wealth whilst putting all your salary in a pension

    BTDT – well down to the national minimum wage – it’s called salary sacrifice 🙂

    I see your point, but in the end pretty much all tax-breaks for pension saving is a bung to the better-off than average. According to MSE fewer than one in three UK adults are contributing to a pension. I figure that one third are the better off. Because there is a benefit to society it’s worth sponsoring this to at least get some people off its back. To me the LTA is a better way of matching the tax break to the value of the pension income achieved, and stopping the tax break once it’s enough. Clearly from this thread the definition of enough seems to vary widely 😉 Targeting roughly the median income available from 65 seems fair enough. Deciding that people have to save it in a steady-Eddie fashion in a world of greater income and employment variability than in the past seems capricious to me, although pension savings are in fact limited to total annual earnings for people earning less than £40k

    5 Feb 2016, 2:56pm
    by Neverland

    reply

    I would point those who complain about the lifetime allowance into the grotesque mirror into greed that is the Daily Telegraph personal finance section

    By way of introduction a retired IFA couple worth £4m (wow, thats a a lot of mis-sold high commission products then) plot not to pay any inheritance tax and gives their grandkids a £4m leg up over everyone else – accompanied by a picture of Slippery Jim Slater (RIP) for bonus greed points:

    http://www.telegraph.co.uk/finance/personalfinance/investing/shares/12138512/We-put-500000-into-Aim-shares-to-avoid-inheritance-tax.html

    Natch the DT paints these people as plucky “middle class” strivers

    Non-sequitur and/or straw man. One couple’s reluctance to pay inheritance tax has no relevance to pension allowances.

    5 Feb 2016, 8:15pm
    by hosimpson

    reply

    If you own your house then the £28k annuity is certainly enough to live on, even in London. Not so much if you rent. One could argue that houses are bought with after tax profits and pensions and a three-quarters-tax-deferred / one-quarter-tax-free proposition, but I’ve heard rents have outpaced the CPI for some years now.
    The £1m cap is designed for a typical household in the proverbial property-owning democracy, it doesn’t quite suit everyone, but I agree with your point about the retired colonels.

    I was born in London, grew up there and went to university there. But if you are of independent means you aren’t tied to the Great Wen for employment, and while I do agree the entertainment’s probably second to none it is easy enough to get to from the provinces. You can get some bloody great hotel deals in London too if you are flexible on time. One of the fantastic things about being retired is you can choose to live somewhere else from the place you earned your fortune.

    > One could argue that houses are bought with after tax profits

    I bought mine with purely post tax income, by the pedestrian approach of paying the mortgage and a little bit of capital for 20 years.

    Houses really aren’t that dear if you go elsewhere, well, not for a fellow with a million pounds.

    Take the £250m PCLS and you can get a decent house if you go halfway up North, and the scenery and the hillwaking is better, choose a decent medium-sized city and you still have a fair wedge, and it will go further. And I haven’t even started on the opportunities abroad, although I do think that people should ask themselves some serious questions emigrating in their 50s about what they will do in their 80s in a different culture – but younger FI/RE folk, have at it.

    Dr Johnson was only right up to a point. And the whole reason for socking away £1M into a SIPP isn’t to sit there with steam coming out of your ears if you have to pay tax on any more. It’s to live a good life, whatever that means to you. If that means you have to pay the tax, well, take the good life and pay the tax, ‘cos it’s not a rehearsal.

    “Someone running into the LTA is a very, very rich person … And they aren’t debarred from saving more at all, they just don’t get a tax break on it”

    Quite right, they’ll just bung the extra into housing, and that won’t do any harm at all. Not in the slightest.

    I’m retiring in sept at the age of just under 52.

    The UKs median income after tax/NI/pension contribution is about £1730 a month. Some families have to live on this level of income, raise kids, pay a mortgage etc.

    I have raised the kids and paid off the mortgage. My hobbies are cycling, gardening and boardgaming. I have 4 bikes, a big garden, a ridiculous number of boardgames and a wonderful wife. I love reading – we have a library where I can reserve any book I want. I can listen to any music I fancy on Spotify. I don’t need any more stuff.

    If I cannot live off the this median income and be happy then to be quite honest I need shooting.

    My wife and I have a family motto which is:

    “Happiness is a lack of want”

    I don’t want to tell anyone how to live their life but I so agree with Ermine that if you have a million in a pension the you are doing OK. If you want more then use the ISA system and the dividend unwrapped tax break (£5000 per year). I would, gently, put it to anyone who cannot be happy in your life with that amount of wealth then you have your priorities a bit wonky.

    I hope I have not offended anybody by my rant And if I have I would like to apologise in advance.

    My best wishes to Ermine and everyone who is reading this.

    Matt

    8 Feb 2016, 12:13pm
    by The Rhino

    reply

    That 5k dividend thing looks surprisingly like a tax hike rather than a tax break to me. Only the 1k on cash looks like a genuine break

    The iniquity (again) is in the treatment of defined benefit vs defined contribution pensions. You say: “You can buy an annuity with that £1m of £28,000 p.a. for life rising at 3% p.a” but you can get a defined benefit pension of £50,000 p.a for life rising by inflation without breaching the £1M LTA.

    Crikey, what is it with whenever rich people see someone doing better than them they pick on a detail and saying ‘snot fair? My mother told me that life isn’t fair when I was still in short trousers. Here we have people who have savings of more than the median British household could save if they lived on thin air all their working lives, bemoaning the fact that some people are better off than themselves and grouching on the iniquity of it all? It’s almost as bad as the keening noise about the child benefit coming off people earning twice the median wage.

    Some Brits rattle along on minimum wage for 40 years, that’s also an iniquity in some ways. It’s also an iniquity that CEO pay has skyrocketed over the last 20 years while company profits going to the company owners haven’t increased by any commensurate amount.

    Disclosure – I have DB pension but won’t be anything like £28k ,and the combined valuation of that and my DC savings and my ISA aren’t anywhere near the LTA. So I’m not cock of the rock looking down at all the poor rich people stuck on the LTA 😉 I’m with Matt and Joe Heller though. I never realised that having more than a million pounds made people so pissed off with their lot.

    Yes, the DC/DB discrepancy is wrong. Maybe they’ll get round to addressing that. But there soon won’t be any DB pension schemes left in the UK. And let’s get this into perspective – in 2013 the average amount used to buy an annuity was less than £30,000. Now that, to me, sounds like a more important iniquity than someone with 33 times that amount paying more tax under certain circumstances than someone with a different type of pension.

    I don’t disagree with any of that but, as you say, the DC/DB discrepancy is wrong, which was my point. I take the point that there are many other things in the world that are more wrong although I’m not sure that they are all relevant to a discussion of the LTA.

    I think there should be either a limit on the LTA or a limit on yearly contributions but not both.

    I was worried about the idea of a pension ISA because this would mean paying tax at both ends when I retire abroad. It’s bad enough France will tax interest on ISAs without them taxing an ISA pension too.

    Would it be possible to set up a DB pension for a small Ltd company instead of using a SIPP?

    9 Feb 2016, 4:22pm
    by Clive Candy

    reply

    Retired Colonels seem to be getting a bit of a kicking here so in their defence (I do not have that honour by the way) I plugged in a few numbers here: http://www.mod-pc.co.uk/
    With a few assumptions someone born in April ’61 who joined at 18 will hit retirement in Apr ’16. It seems the max they would get (full colonel, 9 years seniority) is a lump sum of £134,415 and an annuity of £44,805 on their final salary of £92,381. So yes they would hit the LTA and HRT on their income but contributors to this site seem to be resorting to post WWII clichés. With a 30+ year career spent around the world developing a variety of cultural and sporting interests and a drive and determination which has probably led to 2nd careers or charitable interests; the Telegraph Money section probably spends more time drying out running shoes than being frothed over. In my experience these are generally the kind of characters who are too busy enjoying their retirement on what they are paid to worry about how much is going to the taxman.

    FWIW the LTA to me seems a reasonable way to plug some of the looming budget chasm. Pay off the mortgage before retirement and £28,800 should cover day to day; concentrate on building an ISA for extras and don’t risk your blood pressure worrying about the tax. Retired Colonels certainly aren’t.

    They’d only just take a LTA hit because of the different treatment of DB pensions that Lewis commented on. The amount would be 20*44805 + 134415, so they would be about £30,500 over the top.

    So yes, they’d be chilled and good luck to them!

    If they have the option of not taking the lump sum and increasing their pension, they could probably avoid the LTA completely.

    I don’t object to the principle of an LTA, but I do think the mucking about has been foolish. It comes close to retrospective legislation, and undermines attempts to be rational about contributions and investments.

    I saw someone suggest that a more sensible system would be an annual allowance for money purchase pensions, and an LTA for DB pensions. If the latter were accompanied by a more rational multiplier for converting annual pension into equivalent capital value, then there’s quite an attractive case for doing that, though again it carries a whiff of the retrospective. But then you’d want succeeding governments to leave it alone for a generation, and there’s no obvious way for the population to become confident of that.

    Now, what size of LTA does everyone think should be introduced for ISAs?

    […] it. I shall leave arcane forex shenanigans to the truly wealthy, like people bumping up against the lifetime allowance and the brave, like ERG. I haven’t got brains or balls enough for raw forex. Sometimes you […]

    I’m not really convinced of the benefits to the taxpayer in the long run of the LTA and reduced tax relief for higher rate taxpayers. When you die aren’t any funds left in the pension wrapper taxed heavily, and then have IHT taken off. If you have a 1M+ in it then the annual income you can\will draw from it it going to be taxed at higher or additional rate anyway.

    Reducing tax relief and having an LTA will increase the tax take in the short term as people realize more income and government reduces its top up of SIPPs etc, but this will be at balanced out with less tax in future.

    Lets say Bob was put in £20,000 from net income in 1 year with 40% relief, the government contributes £13,333. Bob decides he are a little close to the LTA so stop contributing and the govt saves £13,333. But in 20 years time Bob retires and the £20,000+£13,333 he put in to his pension one year has grown to £88,443 (5% real term growth), which he then draws out at 4% pa £3,530, paying £1,415 at 40% tax every year, so HMRC gets a 10.6% return. His £88k holds its value for 20 years until he dies, paying a total of £28,300, and then a final tax of ?45%? £39,800. In my little example the short term saving to the taxpayer of £13,333 is much less than the reduction in the tax take on the pension of £68,100, once its been allowed to grow. Fundamentally HMRC are going to get a larger total return if they tax the money after its grown instead of before.

    Unless I’m missing something, which is quite possible as I’ve never learned the rules in depth as I’m far enough from retirement age to allow a few dozen more “reforms”.

    The you have the usual unintended effects, that some productive people in their 50s will decide to retire a little earlier as their total compensation is less, and the economy then losing that output.

     

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