Jump to content
House Price Crash Forum
fru-gal

Will You Still Pay Into A Pension If They Reduce Tax Relief For Higher Earners?

Recommended Posts

It is almost certain that the Government will reduce pension tax relief for higher earners in the next budget. If you were/are a higher earner (ie 40% tax payer) would you still pay into a pension if you could only get 25 or 33% (these are the figures that are being quoted in the press). Apparently the idea is that basic rate taxpayers will be incentivised to pay in as they will get more relief for their contribution whilst higher rate taxpayers will be penalised but it will level the playing field.

Share this post


Link to post
Share on other sites

Been looking at this. Currently max out pension contributions in the 40% tax band. Would be tempted to cut my hours if this was introduced, don't see point of working for the taxman.

Share this post


Link to post
Share on other sites

It is almost certain that the Government will reduce pension tax relief for higher earners in the next budget. If you were/are a higher earner (ie 40% tax payer) would you still pay into a pension if you could only get 25 or 33% (these are the figures that are being quoted in the press). Apparently the idea is that basic rate taxpayers will be incentivised to pay in as they will get more relief for their contribution whilst higher rate taxpayers will be penalised but it will level the playing field.

There have been many changes in very recent times that have had me rethinking the whole pension thing. I recently wrote quite a lengthy post on the topic including some simulations.

So where am I sitting. This tax year I'll finish with about £40k invested. Total amount currently in pension is £380k. The changes you are describing (IMHO) won't be able to be implemented by the pensions industry between budget day and the 06 April 16. I'm therefore betting that I'll get full relief for tax year 16/17. The 'risk' is Osborne puts some sort of additional contribution limits in for tax year 16/17 however my plan will be to use carry forward if this occurs (unless of course he cancels that as well but I'm betting he won't) to bank another £40k or so. In 17/18 with a fair wind I'll only have 3 months until FIRE so I'd chuck in £10k even if it's 25%. Reason is that it's only a small amount of money that I'm locking up and if I head to somewhere like Cyprus I'll only be taxed on it at 5% on the way out.

Edited by wish I could afford one

Share this post


Link to post
Share on other sites

I've been part of various employer schemes (including a DB once) over the years. But I've done this more for the employer contributions (which have been pretty big) than for tax reasons.

I've never maxed out on SIPPs etc - because I've never trusted the government sufficiently to lock up my money for half a century on the back of their promises. The bait-and-switch trickery and continual rule changing of recent years has confirmed my suspicions. As a 40% payer generally with occasional forays higher, this has no doubt cost me. But at least I control and can access everything that I have. In fact, when doing my "how far is FIRE?" calculations, I've either ignored or heavily risk-weighted the capital sums locked up in pensions.

Which brings me to another angle. My aim for many years has been FIRE. Therefore I need the money now and not at age 50, 55, or whatever number the government thinks up next. The divis from 60% of a saving lump - but being paid this very day - are worth more to me than the divis on a tax dodged 100% but paid at some indiscernible point in the distant future. Retiring at 60 may well be tax efficient but that's never been my aim.

So in answer to the OP; nope I won't be a paying into a pension under new rules but, then, I never really have done previously.

Share this post


Link to post
Share on other sites

20% tax payer here, base salary plus bonus, just skims the nether regions of the 40% tax band, and my current pension contributions take me well under it to be on the safe side. Likely that I'm about to start a low risk/cash SIPP this year to front run taking my work pension, so if George announces a level playing field of tax relief above 20% then I'm happy and will keep piling in. Good news for the majority surely. Also aiming for FIRE, but in exchange for the tax relief I'm prepared to lock the cash away for another 8ish years as part of that plan.

Edited by Starla

Share this post


Link to post
Share on other sites

If there is a 29 style stock market crash there will probably be very little of the current pension system left.

Maybe there will be a 29 style crash some time in the future, maybe there won't. There will definitely be crashes... I believe I have those covered with my planning.

Why would that collapse a Defined Contribution scheme? ...or are you thinking Defined Benefit?

Share this post


Link to post
Share on other sites

I'm basic rate at the moment, but still max it out even at 20% relief, because in reality it's more like a 70% bonus on my money after sal sacrifice NI and employers contribution are added. I give up 1k of income now for 1660 in the pension every month.

If I was higher rate, I'd still do it if he cuts all the way to 20%, as 20% is better than nowt but as someone else astutely pointed out, the best solution for me at least is not to be higher rate in the first place. Thus a 3 day week.

Share this post


Link to post
Share on other sites

Recent news puts pension relief at a cost to UK Gov of £50 Billion - £70 Billion, a year. More than the defence budget.

Which countries have the most generous tax-relief on pensions, I wonder. I don't know the wider picture for tax-relief for investors in other countries, and their monies, some of which will be redirected to UK stockmarkets, and the other way. How is it going to affect UK markets? Better value ahead with less money going in?

My pension position isn't so hot. Don't really think about it. Need to get a boost on for the future. Still considering a SIPP but going to hold off until know more about changes to tax-relief.

I'm mostly in cash. Just about maxing out my ISAs (including Shares ISAs) but holding only a small position in shares. (Also gifting multiple £3Ks a year to younger family, wider family, and their ISAs). - That is who I am, not just a rent-forever loser. Mostly sat on account though. I just want the banks at value. Go the banks when they turn on the smug BTLers and smug forever HPIers, followed by fresh lending in volume, for decades, at level prices. Although I am aware/privy another complexity for many banks to get through, if the victim squad get hold of it.

Share this post


Link to post
Share on other sites

It doesn't inspire confidence in the pension system if the Govt keeps changing the rules.

There will be a small number of people with sufficient savings (both inside and outside a pension wrapper) to be higher rate tax payers in retirement, having been higher rate payers during their working life. They will have got 33% tax relief putting money into the pension, but will pay 40% tax on withdrawal - so the effective rate on their earnings is c.47%. Not a sensible deal for them.

Share this post


Link to post
Share on other sites

IMO money is money and all hard earned.....all tax relief should be at the same rate for everyone...else the rich working become richer retired.....there is a glass ceiling for many where there will never be enough time in a day for them to ever catch up. ;)

Share this post


Link to post
Share on other sites

IMO money is money and all hard earned.....all tax relief should be at the same rate for everyone...else the rich working become richer retired.....there is a glass ceiling for many where there will never be enough time in a day for them to ever catch up. ;)

Except it's not tax relief but tax deferral...

Share this post


Link to post
Share on other sites

I'm basic rate at the moment, but still max it out even at 20% relief, because in reality it's more like a 70% bonus on my money after sal sacrifice NI and employers contribution are added. I give up 1k of income now for 1660 in the pension every month.

If I was higher rate, I'd still do it if he cuts all the way to 20%, as 20% is better than nowt but as someone else astutely pointed out, the best solution for me at least is not to be higher rate in the first place. Thus a 3 day week.

And this is why I despair with work colleagues who could easily avoid 40% tax by making additional (any) contributions to their pension, and then moan when their annual bonus/wages are eaten up by 20% more tax than they needed to be. If you can avoid 40% tax by making use of pensions tax relief, do it. Or drop your working hours. Hat tip.

Share this post


Link to post
Share on other sites

Recent news puts pension relief at a cost to UK Gov of £50 Billion - £70 Billion, a year. More than the defence budget.

OK ... huh. When put into that context I can now see why he may br proposing the flat rate for everyone 25-33%. I still think he shouldn't meddle - being a fan of personal responsibility and fairness across the board, but I can see why he's doing it.

Finger in the air time. Guesstimate 20 million working people in a position to contribute to a pension. It would require the government to be handing out 3k to each of them in relief, which would require a contribution of 15k gross for a basic rate tax payer (ignoring NI) - of which I'm guessing there's me and about 2 others in this entire country doing.

For a higher rate tax payer, that same 3k relief would be coming of a gross contribution of 7.5k - of which a *lot* of higher rate tax payers are probably doing - especially those earning 60k with a kid who lose child benefit.

Basically if you earn 60k with a kid, you have a massive current incentive to whack 10k into your sipp. He's partially doing away with that.

If you earn 30k you probably can't do it unless you are a very odd person like me. But you'll certainly have more incentive to do so and hypothetically be marginally less costly for the country in retirement. And your slightly more expensive contribution will be counterbalanced by the large drop from higher rate payers doing it. Win win for George.

Share this post


Link to post
Share on other sites

And this is why I despair with work colleagues who could easily avoid 40% tax by making additional (any) contributions to their pension, and then moan when their annual bonus/wages are eaten up by 20% more tax than they needed to be. If you can avoid 40% tax by making use of pensions tax relief, do it. Or drop your working hours. Hat tip.

Agreed, although I've not done myself any favours in years gone by either.

More despairing when you know people who decline to participate in great company pensions. (Although far and away from final salary glory pensions.. including that guy who was drawing £50K a year aged 50 on one pension, continued to work for another company, big pay, new pension with them, home owned outright at £850K posing smiley for camera.)

Talked a few relatives into signing up for their company pension schemes in recent years, including one which offers more than Boeing below.

Don’t make the mistake that cost Boeing employees $98 million

Published: Nov 28, 2014 5:00 a.m. ET

[...]However when workers pass up an offer of essentially free money with no strings attached, it's hard to identify a scapegoat other than those workers.

I recently learned that more than 56,000 Boeing employees fall into that category. Apparently they’d rather give billions of dollars to Boeing BA, +1.80% shareholders than keep the money for themselves.

Mighty generous.

I came across a notice to Boeing employees informing them that they collectively left $98 million on the table in 2013 by not taking advantage of matching funds in the company's 401(k) plan.

It's startling to realize that about a third of all Boeing employees are voluntarily taking less pay than the company wants them to have. To receive the full company match, employees would only need to contribute 8% of their base pay.

Boeing matches those contributions at the rate of an extra 75 cents on the dollar. In other words, set aside $1 and get an instant one-time-only return of 75%.

..I think it's a safe bet that by and large Boeing hires brighter-than-average workers. (Anyone who flies across the continent or across the ocean had better hope so!)

However, I think many of these employees have failed to do some simple math.

..An employee with a base pay of $60,000 is eligible to earn a 75% match on up to $400 a month. The monthly match, $300, amounts to a raise in pay of $3,600 a year. That's the equivalent of a 6% raise — something I doubt employees would turn down if it were offered to them in those terms.

http://www.marketwatch.com/story/boeing-employees-push-away-98-million-in-401k-match-2014-11-12

Agreed Frugal Git - except I think he should meddle, and agree with the reasons for doing it.. same reasons you can see why he's doing it.

Share this post


Link to post
Share on other sites

Recent news puts pension relief at a cost to UK Gov of £50 Billion - £70 Billion, a year. More than the defence budget.

Except that the reason for the mismatch is that the government spends too much - not that it takes too little.

Share this post


Link to post
Share on other sites

For anyone on a salary sacrifice arrangement with their employer pension this is a bad move and basically a tax grab, regardless of being basic rate or higher rate, assuming the government stops salary sacrifice. If they don't then little point in bringing in the change as it is easily avoided.

At the moment basic rate taxpayers pay the following in tax at a marginal rate of

20% income tax

12% employee NI

13.8% employer NI

Under salary sacrifice the employee and the employer together get relief at:

(20% + 12% + 13.8%) / (1 + 13.8%) = 40.2% relief.

If the new relief is lower than this then both basic and higher rate taxpayers lose out. Under a SIPP type arrangement then it's a different matter and basic rate taxpayers gain at expense of higher rate.

Edited by martymcfly

Share this post


Link to post
Share on other sites

Also if the government no longer treats pension contributions (both employee and employer) at full relief then the employer will have a higher NI bill on any company contributions. Unlikely to go down well and likely to lead to either reductions in company contributions, or reduction in salary increases in the short term.

Share this post


Link to post
Share on other sites

I am just not comfortable locking money away where the government have more control over it than I do. The only thing I currently pay into is a help to buy ISA for an easy life from the missus.

I believe the time will come when they just help themselves to these pension pots over a certain amount, they will not be able to resist.

Share this post


Link to post
Share on other sites

I will pay as much in as I can before the end of the tax year. I should be getting a modest bonus and that will be going straight in. Fortunately I have a work non-contributory bonus which will not be affected.

Overall, this will be a big disincentive to save towards a pension for higher rate tax payers.

And we all know what the popular alternative to real pensions is, don't we?

:(

Share this post


Link to post
Share on other sites

Since I'm now back to working for my own company, I can comfortably plan to avoid 40% tax. This year, if I make enough to go above the basic rate band in PAYE (govt living wage) + dividends, I would plan to pay the surplus above that directly from my company into the SIPP up to the £40k limit.

Which begs the question: if he buggers about with the rules, how do employer contributions get treated? Either he introduces a whole new layer of complexity to tax them, or they become another loophole (just as they already are for NI).

If in future I find myself back in regular employment, I'll just have to re-evaluate the rules as they are at the time.

Share this post


Link to post
Share on other sites

If they set a 30% flat rate I think it will be a good thing.

Doesn't seem like a very Tory thing to do though, unless it's just a way to increase Tax Revenues. Maybe a way to get the lower earners to save more so it can be robbed by the Government next time they're in trouble.

The Polish Government seized a lot significant amount of private pension funds to support itself. [1]

They could maybe go about it in a different way and limit the 40% limit to 10K a year.

The Wail [2] is up in arms about it. Awful inaccurate article, but they're in uproar in the comments.

[1] http://www.institutionalinvestor.com/article/3336830/investors-pensions/can-polands-private-pension-funds-survive-governments-bond-grab.html#/.Vq5UaLKLSUk

[2] http://www.dailymail.co.uk/news/article-3404091/George-Osborne-s-plans-savers-lose-pension-tax-changes.html

Share this post


Link to post
Share on other sites

I will pay as much in as I can before the end of the tax year. I should be getting a modest bonus and that will be going straight in. Fortunately I have a work non-contributory bonus which will not be affected.

Overall, this will be a big disincentive to save towards a pension for higher rate tax payers.

And we all know what the popular alternative to real pensions is, don't we?

:(

Already ballooned in value, and we know the upcoming less generous perk tax regime. And a little bit of tilting back towards tenant rights with latest regulations, and more regulation for BTLers to get their heads around. Risks of more tax perks to be stripped away in future, and more regulation.

The 'investment' where your losses can far exceed your 'investment' in a supply and affordability bubble - their own homes on the line. In a world where some don't think the money ever runs out.. as oil prices plummet, Tesco hits multi-year lows (against 'dead money worthless cash' etc), banks looking fair(ish) value. Deflationary cascade, and banks stress tested to take it.

Share this post


Link to post
Share on other sites

Which begs the question: if he buggers about with the rules, how do employer contributions get treated? Either he introduces a whole new layer of complexity to tax them, or they become another loophole (just as they already are for NI).

This part of the changes is key - haven't seen any detail yet but if the changes mess around with employer contributions, could be a minefield of complexity and unintended consequences.

Share this post


Link to post
Share on other sites

The other way to look at this is that they are taking from our shitty private sector money purchase pensions to keep paying the bloated public sector final salary pensions. Kick a man when he is down.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Recently Browsing   0 members

    No registered users viewing this page.

  • Next General Election   92 members have voted

    1. 1. When do you predict the next general election will be held?


      • 2019
      • 2020
      • 2021
      • 2022

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.