Big Changes To Pensions

[Habeas Domus]

The problem with using a lump sum for BTL is that whether paying off an existing mortgage or buying a new BTL outright, you would then be liable for income tax on all the rent.

The tax efficient method would be taking out a new loan, but are the banks going to issue new loans to 80 year olds?

[Eddie_George]

Isn't 55 midlife crisis time? Perhaps they'll spunk it all on the latest Maserati.

[porca misèria]

(assuming you are 55+ and in the 40% bracket)

1. Dump all earnings in 40% band into pension via salary sacrifice scheme

2. No employee NI to pay (save 2%)

3. Employer donates their NI (save 12%). This costs them nothing.

4. Take money out again.

5. 25% is tax-free, the rest is at your marginal rate.

5. Pay your 40% on the taxable bit but there is no NI to pay.

You have just reduced your marginal rate from 54% to 30%. I wonder when the government will notice this is just too good.

AIUI that won't work: there are existing rules that say you can't go on paying new money in (at least, not with the tax breaks) while also cashing in an existing pension.

If I'm wrong, I'm not far short of an age to benefit . So that clinches it: those of us born in the first half of the '60s (but after 6/4/60) have never, ever been on the right side of any of the age-sensitive financial rules. Now we're firmly scapegoated as the charlatan Willetts lumped us in with his own much-more-favoured generation in the public mind, what chance that could ever change?

[porca misèria]

"Pension expert" on radio Leeds just said this is good for property. Apparently people will use the pension wrapper to save a lump sum and then use this to clear the capital on an IO mortgage when they retire.

Nothing new there. I've had that scheme in mind ever since I started my pension saving, nearly six years ago, and posted about it several times here.

[porca misèria]

Once over 55, become unemployed or unwell/unable to work,

... you already have access to pension capital under the old rules. Any evidence to suggest the rules on means-testing before state pension age will change?

[porca misèria]

Another point is that quite a lot of people who have recently implemented annuities might well be very aggrieved with the scale of the proposed changes being made with little or no warning and might be looking for some retrospective action to be taken. Usually there's more notice of impending changes. There could be quite a few lost votes there.

Not so many there: only those who were forced to take annuities after the collapse but before Osborne's first budget.

Osborne made it clear he was changing the rules, and raised the compulsory-annuity-or-equivalent age as a stopgap so those who hit 75 between 2010 and now could postpone that annuity until after the scrapping of the old rules.

[billybong]

HM Treasury publication.

Budget 2014: greater choice in pensions explained

https://

www.gov.uk/government/uploads/system/uploads/attachment_data/file/293743/budget_2014_greater_choice_in_pensions_explained.pdf.

Who will benefit

The changes coming into effect on 27 March will mean around 400,000 more people will have the option to access their savings more flexibly in the financial year 2014-15.

From April 2015, the 320,000 people who retire each year with defined contribution pensions will have complete choice over how they access their pension.

I don't think that Osborne made the scale of the changes that clear previously. Hence the collapse of annuity providers' shares today.

Edited March 20, 2014 by billybong

[spyguy]

I'm not sure about the number of people retiring with big annuities. I think we are talking about s.d all.

Remember most retirees (and the for the next 10 years) will be either in public sector PAYG or private sector DC schemes i.e. the pension pot is not accessible.

[Ash4781]

Please recycle your winnings back into the Ponzi scheme... I think this must be what Cam and Oz mean when they talk about 'doing the right thing'.

I don't want to see hpi going up to say 20% year on year as these pensioners with lump sums decide to chase capital gains rather than steady incomes while the boe remains vigilant as pound strengthens. True the economy would be become so unbalanced and then another meltdown in the banking system would probably follow. A test of the fscs I guess. I remember an interview with a lady in the Northern Rock bank run queue said she had £700k on deposit.

Edited March 20, 2014 by Ash4781

[Bootsox]

(assuming you are 55+ and in the 40% bracket)

1. Dump all earnings in 40% band into pension via salary sacrifice scheme

2. No employee NI to pay (save 2%)

3. Employer donates their NI (save 12%). This costs them nothing.

4. Take money out again.

5. 25% is tax-free, the rest is at your marginal rate.

5. Pay your 40% on the taxable bit but there is no NI to pay.

You have just reduced your marginal rate from 54% to 30%. I wonder when the government will notice this is just too good.

Pretty much summarises my current strategy (although I will delay taking the pension bit until 55/56).

I already have a +£20k final salary pension coming in so I am not sure if the new rules benefit me directly (option of existing flexible drawdown arrangements), except that it sounds like it might open some form of "drawdown strategy" to a wider cross section of the populace and hence increase the number of service providers/reduce costs/increase t'internet debate.

Otherwise, I have a deep suspicion that the treasury is moving towards a strategy of charging NI on pension income.

Edited March 20, 2014 by Bootsox

[spyguy]

Pretty much summarises my current strategy (although I will delay taking the pension bit until 55/56).

I already have a +£20k final salary pension coming in so I am not sure if the new rules benefit me directly (option of existing flexible drawdown arrangements), except that it sounds like it might open some form of "drawdown strategy" to a wider cross section of the populace and hence increase the number of service providers/reduce costs/increase t'internet debate.

Otherwise, I have a deep suspicion that the treasury is moving towards a strategy of charging NI on pension income.

I thought pension income was already taxed?

Contributions are tax free.

[kjw]

He needs to boost the economy so he encourages savings, to take money out of the economy. Then he gives more tax cuts which boosts the economy, but reduces the tax take and increases his deficit which he keeps insisting he'll reduce (4years, Osborne, you haven't succeeded yet). Then he does the amazing pension trick, which throws the markets into chaos ('got annuities, sell, sell, sell'). Doesn't he know how crucial pensions are to his beloved market?? But the pensions thing is a last ditch attempt to relieve people of their money. He can't get homeowners to do any more equity release, they're broke, so he gets the pensioners to liberate their capital instead. The man's a genius. Can we send him on a one manned flight to Mars, please? Distance might give him some perspective.

[SHERWICK]

He needs to boost the economy so he encourages savings, to take money out of the economy. Then he gives more tax cuts which boosts the economy, but reduces the tax take and increases his deficit which he keeps insisting he'll reduce (4years, Osborne, you haven't succeeded yet). Then he does the amazing pension trick, which throws the markets into chaos ('got annuities, sell, sell, sell'). Doesn't he know how crucial pensions are to his beloved market?? But the pensions thing is a last ditch attempt to relieve people of their money. He can't get homeowners to do any more equity release, they're broke, so he gets the pensioners to liberate their capital instead. The man's a genius. Can we send him on a one manned flight to Mars, please? Distance might give him some perspective.

But the deficit has been reduced. Are you getting deficit and debt mixed up?

[billybong]

Another question is what effect this is going to have on overall pension fund/annuity provider finances. Their shares went down today so is Osborne hoping that the new rules will encourage an inflow into pension funds to balance the outflows and prevent insolvency. Haven't pension funds got a responsibility to purchase government stuff and isn't their funding a bit ponzi like most other stuff these days.

It all seems a bit risky and edgey.

Wild side economics and for pension funds - for sure he'll have done all the calculations and it's just not policy done on the hoof and solely for short term electioneering purposes

Edited March 20, 2014 by billybong

[winkie]

I'm not sure about the number of people retiring with big annuities. I think we are talking about s.d all.

Remember most retirees (and the for the next 10 years) will be either in public sector PAYG or private sector DC schemes i.e. the pension pot is not accessible.

I think you are probably right....few bits and pieces here and there, and if put in an annuity would have only paid a small amount each month, enough to possibly pay a few monthly utility bills.......if fixed would pay less and less over 30 odd years of potential retirement, many would still have to continue to work to live.......so people knowing they have more control over their savings is a good thing, they might like to use the isa wrapper, cash up to bank guarantee or into a low cost S&S tracker, or choose their own preferences.....it might encourage people to save more knowing they have better control, choices and flexibility......what people need is more education so that they can make informed decisions for themselves....cutting out the many middle men who are happy to take a cut for what an individual could do for themselves with a bit of research using their own hard worked for money......and no, a person who cares about and plans for their and their families future is very unlikely to blow it all on fast cars and expensive holidays, the plebs are not all stupid and without restraint.....or all play bingo.

[slacker]

It all seems a bit risky and edgey.

Wild side economics and for pension funds - I'm sure he'll have done all the calculations

It's all about GDP now, propping up the property ponzi and keeping 55+ voters happy.

This mess will continue until people under 40 start voting.

[billybong]

For sure it'll not just be policy done on the hoof and solely for short term electioneering purposes

Isn't it a bit like Brown's attack on pension funds in his early days - in hindsight apparently to divert money into housing. Will they still be able to provide reasonable returns on pension savings over the next few years/decades. Will they still be investing in equities/bonds to the same extent.

Is it the harbinger of yet another Equitable Life style (and all the others) debacle/scandal.

Edited March 20, 2014 by billybong

[fluffy666]

Wild side economics and for pension funds - for sure he'll have done all the calculations and it's just not policy done on the hoof and solely for short term electioneering purposes

There may be a combination.

Annuity providers have been taking the p1ss in recent years - a lot of people would see less money out than they put in.

But whilst it's clear hat they know this will shift money out of pension funds and into spending, I don't know if they thought about the tax avoidance bit.

[winkie]

For sure it'll not just be policy done on the hoof and solely for short term electioneering purposes

Isn't it a bit like Brown's attack on pension funds in his early days - in hindsight apparently to divert money into housing. Will they still be able to provide reasonable returns on savings over the next few years/decades. Will they still be investing in equities/bonds to the same extent.

....more to the point will they be able to provide reasonable returns on rents over the next few years/decades....property has many costs related to it, it needs people to have the free earned money to pay the rents, it is very illiquid....very hard to hide and very easy to tax....one property should be enough to manage surely.

[spyguy]

....more to the point will they be able to provide reasonable returns on rents over the next few years/decades....property has many costs related to it, it needs people to have the free earned money to pay the rents, it is very illiquid....very hard to hide and very easy to tax....one property should be enough to manage surely.

And very limited geographical diversification - you can walk round it in a few seconds.

Imagine investing in BTL in Wakefield just before the pits shut.

[VeryMeanReversion]

AIUI that won't work: there are existing rules that say you can't go on paying new money in (at least, not with the tax breaks) while also cashing in an existing pension.

Possibly, you may thinking of the anti-recycling rules and the flexible drawdown limits.

From some reports, the flexible drawdown limits are being reduced then removed. Whether this includes the restriction on contributing and withdrawing at the same time is anybodies guess for now.

For the anti-recycling rules, my understanding from last time I read them was that you could build up a history of contributions and as long as that was maintained and not substantially increased, you could withdraw and contribute in the same year.

[porca misèria]

Possibly, you may thinking of the anti-recycling rules and the flexible drawdown limits.

From some reports, the flexible drawdown limits are being reduced then removed. Whether this includes the restriction on contributing and withdrawing at the same time is anybodies guess for now.

For the anti-recycling rules, my understanding from last time I read them was that you could build up a history of contributions and as long as that was maintained and not substantially increased, you could withdraw and contribute in the same year.

Hmmm, maybe something to look into.

Nevertheless, withdrawing while still working would seem perverse, pushing your pension income up the tax bands! And the fees involved in switching a pension from paying in to taking out would appear to negate any tax benefits I could see. Might some of the platforms introduce a different fee structure specifically for this kind of thing? If so, how long before HMRC stamps on it?

[billybong]

....more to the point will they be able to provide reasonable returns on rents over the next few years/decades....property has many costs related to it, it needs people to have the free earned money to pay the rents, it is very illiquid....very hard to hide and very easy to tax....one property should be enough to manage surely.

There is that as well and likely a lot of the increased lump sum money from small pot pension savings etc will be going to help to pay rents. When it's gone it's gone.

Maybe it'll also help the new Rent Backed Derivatives they're apparently introducing.

The whole thing seems to be getting more and more chock full of risk with not much return wherever you look - except for the regular free money bailouts.

Edited March 20, 2014 by billybong

[SpectrumFX]

Pretty much summarises my current strategy (although I will delay taking the pension bit until 55/56).

I already have a +£20k final salary pension coming in so I am not sure if the new rules benefit me directly (option of existing flexible drawdown arrangements), except that it sounds like it might open some form of "drawdown strategy" to a wider cross section of the populace and hence increase the number of service providers/reduce costs/increase t'internet debate.

Otherwise, I have a deep suspicion that the treasury is moving towards a strategy of charging NI on pension income.

I think they`re likely to scrap it, and increase the income tax basic rate to compensate. This would put an end to NI avoidance through salary sacrifice schemes, and increase the tax take from pensioners - who are pretty much going to be the people with all the money.

The hikes in the personal allowance will make it sellable, as they`ll argue that the change won`t effect the vast majority of pensioners because the personal allowance is so high. Then they`ll let fiscal drag pull the personal allowance down so that everyone`s paying the new higher basic rate of income tax.

After killing NI they can start scaling back all the benefits that were supposed to be linked to it, like the state pension.

[porca misèria]

The whole thing seems to be getting more and more chock full of risk with not much return wherever you look - except for the regular free money bailouts.

No risk at all to the majority of pensioners: the non-means-tested state pension is the ultimate fallback. And the fact it's being raised above the level of means-tested benefits takes away risk to the taxpayer too.

Not everything is bad!