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Snugglybear

More Taxes On Pension Pots

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From the Torygraph http://www.telegraph.co.uk/finance/personalfinance/pensions/8062787/Middle-classes-hit-again-with-tax-raid-on-pensions.html

The amount that people can pay into their pension pot every year and still receive tax breaks is to be capped at less than a fifth of its current level.

The maximum size of a pension pot that workers can accrue before high rates of tax apply is also likely to be significantly reduced by the Treasury.

Accountants predict that the changes will hit more than 500,000 people, including middle-class professionals, savers who choose to pay lump sums into pensions to benefit from tax relief and self-employed businessmen. Some will face demands to pay tens of thousands of pounds in tax as a result.

Other allowances, including a scheme that allows people to pay more into their pension during the final year of their working life, may also be scrapped. The changes are likely to take effect next April.

It is the latest move by George Osborne, the Chancellor, designed to target higher earners. It follows the controversial decision to strip child benefit from higher-rate taxpayers and allow a rise in university tuition fees. The threshold at which higher-rate tax is payable is also being reduced.

The Treasury is expected to announce today that the annual limit on payments that people can make into their pension and still receive tax relief will be cut to between £30,000 and £50,000. People can currently save £255,000 a year in their scheme and still receive relief on their contributions at the rate at which they pay income tax.

Ministers are also likely to reduce the total amount that people can save in a pension during their lifetime. It is currently capped at £1.8 million but will be reduced to £1.5 million. Retiring workers will lose 55 per cent of any sum above the limit in a one-off tax. Experts say the changes could save the Treasury more than £8 billion over the next three years. Mr Osborne will stress that the measures are aimed at only the richest Britons. The changes will effect many better-paid professionals and ordinary savers who pay into pensions because of tax relief. Anyone who sells a house or a business as they approach retirement and chooses to pay the money into a pension could also be hit.

Although most Britons save much less than the proposed annual limit into their pension, technical changes to the rules could result in even those on modest salaries in final salary schemes being landed with an unexpected tax charge.

Complicated Treasury rules mean workers on salaries of between £40,000 and £50,000 who receive relatively small pay rises could be pushed above the new tax-free limits and left with tax demands running to several thousand pounds.

The changes come at a particularly bad time for many retiring workers who have to build up bigger pension pots than in the past to compensate for lower annuity rates, which determine how much pensioners earn each year from their savings. They are linked to interest rates and are at historically low levels.

PricewaterhouseCoopers, one of the country's biggest firms of accountants, estimated that the changes would affect more than 500,000 people. "This will affect far more people than anyone imagined," said Marc Hommel, one of its pensions partners.

Tom McPhail, a pensions expert at Hargreaves Lans­down, a wealth manager, said: "Given the tone of the Treasury's thinking, the prospects look even darker for pensioners than initially thought.

"We will certainly see severe restrictions to tax breaks available to pension investors. Particular losers will be middle senior managers in final salary schemes and those people looking to catch up on missed years in pension funding."

Ros Altmann, the director general of the Saga Group, said: “It could hit people on £40,000 a year and they are already being hit by things like child benefit changes. We have to stop targeting that group, the people who just hit the higher tax rate.

“The Government is talking about fairness, but is creating a dangerous cliff edge at this income level. At a higher level, you won’t notice as much, and while £40,000 is higher than average, it is not the very well off.”

Critics say the pension changes will erode the “crumbling foundations” of final salary pension schemes.

The new annual allowance — after which an extra tax charge would be applied — could be exceeded by someone whose pension entitlement in a final salary scheme had risen by just over £2,000 a year.

Calculating the increased value of an individual’s pension pot if they are a member of a defined contribution scheme is relatively straightforward because they are given an annual statement of the value of their pension investments.

But assessing the total value of final-salary schemes is more complicated. It involves a calculation where the rise in someone’s annual pension entitlement is multiplied by 10. For example, an extra £2,000 in annual pension is valued at £20,000.

It means a pay rise — of say, £50,000 to £57,000 — that resulted in increasing someone’s annual pension entitlement by £4,000 would fall within a £40,000 limit.

But the Treasury wants to increase the multiple to 15 or even 20, which would limit the annual pension increase that can take place tax-free.

In this case, the increase of £4,000 in a year would be worth up to £80,000 and lead to a tax rise for the worker of up to £16,000.

The Treasury declined to comment before today’s announcement.

I have to say, for once I'm surprised and impressed. I was convinced the Tories would steamroller the Lib Dems and protect the better off. So kudos for this.

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I think a lot of people will think about retiring between now and next April.

I think this is a great idea, but won't this have the effect of driving more money toward property as long term investments?

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I think this is a great idea, but won't this have the effect of driving more money toward property as long term investments?

I reckon you're right. So it becomes even more important to persuade the Government to also get rid of tax relief on BTL mortgage interest and to tax second homes.

I've been laughing at people who thought this was a possibility, but it would be great if it could be done, and I'd stop taking the mick immediately if not sooner.

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I think a lot of people will think about retiring between now and next April.

Good. Room at the top.

Hopefully the govt. will legislate to make it illegal to take consultancy work in the same field that they have 'retired' from which has been a widespread scam.

"The changes will effect many better-paid professionals and ordinary savers"

Err, someone busting a £40k annual savings limit is not an ordinary saver.

Ordinary savers are lucky to save that much in a lifetime.

Non-story affecting <1% who clearly have too much money.

On a personal level, this will stop me from banging £50k into my pension just before retiring and immediately taking approx. 33% of it back tax free.

Good, I don't deserve it.

Edited by xux42

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I reckon you're right. So it becomes even more important to persuade the Government to also get rid of tax relief on BTL mortgage interest and to tax second homes.

I've been laughing at people who thought this was a possibility, but it would be great if it could be done, and I'd stop taking the mick immediately if not sooner.

How do you think the best way to achieve that would be?

Also if anyone can be bothered I would be interested to know exactly how that tax break works. I am PAYE so don't totally understand.

Thanks

S

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How do you think the best way to achieve that would be?

Also if anyone can be bothered I would be interested to know exactly how that tax break works. I am PAYE so don't totally understand.

Thanks

S

Presently you can save "tax free" the lower of your annual net relevant earnings (salary and or business profits if a sole trader/partner) or £255k into an approved pension.

E.g If I earn £30k the maximum I can pay into my pension is £30k gross. This includes any contributions my employer might make as well.

So if I have a generous employee defined contribution pension in which I can pay in 5% that is matched by my employer - each year £3k is paid to my pension pot.

If I suddenly win the lottery and decide to top up my pension in the year the maximum I can pay in is £27k gross because I am capped at the lower of my "earnings" or £255k.

The new rules sound like they will reduce the £255k down to £40k - which is still a lot of money. However for some self employed people who spend the majority of their working lives ploughing all spare money back into the business to the detriment of retirement planning it will make it tougher to build up a decent pension pot when they start making contributions towards the end of their working life

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The report I read said this doesn't' actually raise any new money as the government are at the same time scrapping the last government's planned pension tax relief restrictions on those earning over £150K.

If true it means these measues will raise the same amount of money but from lower earners

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I dont understand this:

Complicated Treasury rules mean workers on salaries of between £40,000 and £50,000 who receive relatively small pay rises could be pushed above the new tax-free limits and left with tax demands running to several thousand pounds.

First its about pension contributions and now its talking about gross salaries. Can someone please explain in prole-ese?

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I think this is a great idea, but won't this have the effect of driving more money toward property as long term investments?

It's all part of the plan to get people spend it rather than save it.

Annoying that the BOE statement admitting this being their policy was completely ignored by the MSM during the Labour conference.

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If I suddenly win the lottery and decide to top up my pension in the year the maximum I can pay in is £27k gross because I am capped at the lower of my "earnings" or £255k.

Or if you're made redundant and get a big payout perhaps ?

Could this be the government making the redundancy payouts recycle back into the economy ?

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so if it's being taxed 40% on the way in will they stop taxing it on the way out?

Encouraging us to save for out future on one hand, but bringing in laws that will encourage the exact opposite?

As others have said, surely this is only going to increase the property as pension mentality?

This country is shite, just another reason to leave.

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so if it's being taxed 40% on the way in will they stop taxing it on the way out?

Encouraging us to save for out future on one hand, but bringing in laws that will encourage the exact opposite?

As others have said, surely this is only going to increase the property as pension mentality?

This country is shite, just another reason to leave.

Won't this reform just bring more pensions into line with other investments? A traditional property investment is taxed on the way in and on the way out, it's the same with savings accounts and shares etc etc.

A lot of pension fund money ends up in property anyway, so the net effect will on house prices will be negligeable.

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This country is shite, just another reason to leave.

Yes it is at the moment. Maybe leaving is the best way.

£40k a year is plenty to build up a decent pension though.

Anyone who can afford more can afford to pay the tax.

What is the social value in providing a tax avoidance mechanism for people who can spare more than £40k or so a year in pension contributions?

Pension tax breaks should be there to encourage the less well off to provide for their old age, not provide a wealth protection mechanism for a electorally insignificant minority.

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Some will face demands to pay tens of thousands of pounds in tax as a result.

Putting aside the fairness or otherwise of all this I do wish they wouldn't twist so much - wording it as if the proposals are retrospective.

What they seem to mean is if these proposals go ahead some will not be able to take advantage of tax relief on some pension contributions and will have to pay all the tax otherwise due.

Or if it is retrospective they should make that clearer much clearer in the article.

Edited by billybong

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Won't this reform just bring more pensions into line with other investments? A traditional property investment is taxed on the way in and on the way out, it's the same with savings accounts and shares etc etc.

Except that for many people you can't touch your pension until a certain age, and that must be paid into an annuity or something, so now pensions have all the financial penalties on the way in and the way out as standard investments, but ALSO have other restrictions and burdens.

I'd love to pay into a pension (well I do have 3 pension pots but stopped paying into them) and let "the experts" look after my future fund, but it seems like financial suicide.

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Except that for many people you can't touch your pension until a certain age, and that must be paid into an annuity or something, so now pensions have all the financial penalties on the way in and the way out as standard investments, but ALSO have other restrictions and burdens.

I'd love to pay into a pension (well I do have 3 pension pots but stopped paying into them) and let "the experts" look after my future fund, but it seems like financial suicide.

Good point, although a £40k pa limit still leaves plenty of room for most contributors.

Like with the child benefit fiasco opponents of this are trying to cast it as some sort of plot to rob the middle classes, when in fact it's just a removal their privileged tax status. It does seem fairer to me, but it's a tinker around the edges rather than a full blooded reform.

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I dont understand this:

First its about pension contributions and now its talking about gross salaries. Can someone please explain in prole-ese?

Badly explained but I think I get it now. For example.

2010, your salary is £50K and you have 30 years service on a 1/80th final salary scheme. Your presnet pension value is 30/80 * 50000 = 18750 p.a.

2011, your salary rises to £57K and you now have 31 years service on a 1/80th final salary scheme. Your presnet pension value is 31/80 * 57000 = 22088 p.a.

Increase in pension over the year is £3338

the government apply a factor to this (exisitng is 10, 16 is mooted) giving you £53403 (3338 * 16)

If they set the limit at new £50,000 (as mooted) then you will lose the tax relief on the extra £3403. At 40% thats a £1363 tax bill (or you pay less into your pension and you lose out but don't see the tax hit). I think that's how it works anyway.

You can play tunes with all those numbers but I think the premise is that only people with long service in a final salary scheme are likely to get hit by the tax issue from this.

Edited by daiking

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Badly explained but I think I get it now. For example.

2010, your salary is £50K and you have 30 years service on a 1/80th final salary scheme. Your presnet pension value is 30/80 * 50000 = 18750 p.a.

2011, your salary rises to £57K and you now have 31 years service on a 1/80th final salary scheme. Your presnet pension value is 31/80 * 57000 = 22088 p.a.

Increase in pension over the year is £3338

the government apply a factor to this (exisitng is 10, 16 is mooted) giving you £53403 (3338 * 16)

If they set the limit at new £50,000 (as mooted) then you will lose the tax relief on the extra £3403. At 40% thats a £1363 tax bill (or you pay less into your pension and you lose out but don't see the tax hit). I think that's how it works anyway.

You can play tunes with all those numbers but I think the premise is that only people with long service in a final salary scheme are likely to get hit by the tax issue from this.

And who gets long service final salary pensions these days?

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Badly explained but I think I get it now. For example.

2010, your salary is £50K and you have 30 years service on a 1/80th final salary scheme. Your presnet pension value is 30/80 * 50000 = 18750 p.a.

2011, your salary rises to £57K and you now have 31 years service on a 1/80th final salary scheme. Your presnet pension value is 31/80 * 57000 = 22088 p.a.

Increase in pension over the year is £3338

the government apply a factor to this (exisitng is 10, 16 is mooted) giving you £53403 (3338 * 16)

If they set the limit at new £50,000 (as mooted) then you will lose the tax relief on the extra £3403. At 40% thats a £1363 tax bill (or you pay less into your pension and you lose out but don't see the tax hit). I think that's how it works anyway.

You can play tunes with all those numbers but I think the premise is that only people with long service in a final salary scheme are likely to get hit by the tax issue from this.

Many thanks! Just another case of not having anything to lose in the first place. (in this instance no final salary pension)

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  • 195 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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