Savings and Investments thread

bobmunro said:

Dippenhall said:

Rachel in Accounts is keen to tell us how generous the Government is paying away £27bn in pensions tax relief on contributions. This sound bite is no doubt to justify ending the anomaly of salary sacrifice avoiding NI contributions. 

But what Rachel and the general public seem uneducated about is that pensions tax relief is tax DEFERRAL. You pay income tax not only on the original contribution but all the investment growth you accrue as well as the invested tax relief - as and when you draw your pot as income in retirement. You can produce numbers showing many will pay more income tax on their pension than received in tax relief.

So when you hear the sob story about excessive tax giveaways for pension savers, I suggest you contact Rachel and ask how much tax HMRC collect from pensions in payments. I have been fobbed off in the past when asking this question.

It’s a classic case of Govt misrepresenting the facts and solving short term cash flow problems with decisions that increase today’s tax revenue at the expense of tomorrow’s tax revenue while reducing savings and pensioner prosperity.

Higher rate tax relief on contributions is also not a giveaway for the same reason - the tax relief is invested and taxed when paid out as part of the higher pension it produces. The more the higher paid are encouraged to save the bigger their pensions and more likely to be taxed at the higher rate. The policies of penalising tax relief for higher earners is lunacy in terms of encouraging savings and its wider and long term negative impact. 

Some of that I agree with.

However, most 45% tax payers will not max out on pension contributions as in reality with the tapering the max that really high earners can put in now is £10k a year. They will use other financial instruments e.g. they will likely have pretty big investments in ISAs between a couple. In retirement they will draw on those other tax free investments and restrict drawings from DC pensions so that their taxable income in retirement stays below or not much above c£50k and pay tax at 20(22)% or certainly the bulk of it at basic rate, yet all of their pension contributions, especially prior to tapering came in, attracted 45% relief. So not all tax deferral!

Dippenhall said:

bobmunro said:

Dippenhall said:

Rachel in Accounts is keen to tell us how generous the Government is paying away £27bn in pensions tax relief on contributions. This sound bite is no doubt to justify ending the anomaly of salary sacrifice avoiding NI contributions. 

But what Rachel and the general public seem uneducated about is that pensions tax relief is tax DEFERRAL. You pay income tax not only on the original contribution but all the investment growth you accrue as well as the invested tax relief - as and when you draw your pot as income in retirement. You can produce numbers showing many will pay more income tax on their pension than received in tax relief.

So when you hear the sob story about excessive tax giveaways for pension savers, I suggest you contact Rachel and ask how much tax HMRC collect from pensions in payments. I have been fobbed off in the past when asking this question.

It’s a classic case of Govt misrepresenting the facts and solving short term cash flow problems with decisions that increase today’s tax revenue at the expense of tomorrow’s tax revenue while reducing savings and pensioner prosperity.

Higher rate tax relief on contributions is also not a giveaway for the same reason - the tax relief is invested and taxed when paid out as part of the higher pension it produces. The more the higher paid are encouraged to save the bigger their pensions and more likely to be taxed at the higher rate. The policies of penalising tax relief for higher earners is lunacy in terms of encouraging savings and its wider and long term negative impact. 

Some of that I agree with.

However, most 45% tax payers will not max out on pension contributions as in reality with the tapering the max that really high earners can put in now is £10k a year. They will use other financial instruments e.g. they will likely have pretty big investments in ISAs between a couple. In retirement they will draw on those other tax free investments and restrict drawings from DC pensions so that their taxable income in retirement stays below or not much above c£50k and pay tax at 20(22)% or certainly the bulk of it at basic rate, yet all of their pension contributions, especially prior to tapering came in, attracted 45% relief. So not all tax deferral!

The fact is, that at macro level, DC pensions in payment deliver minuscule tax revenue to the Exchequer. Current pensions in payment are, I would guess, 90% paid by the public sector and legacy corporate final salary schemes.

So there is a lag between Govt giving the tax relief and receiving tax on pension payments. My point is that this lag allows tax relief to be seen as a one-off tax giveaway. Regardless of the level of tax mitigation through planning, it is a tax deferral system, not a tax giveaway system - say like the company bike schemes.

My point is that the correlation between (1) the cost of PAST tax reliefs on PAST contributions and (2) the tax revenues when those contributions emerge as taxable income, should inform the view on what is a fair pension tax relief policy, not the Govt’s short term budget constraints. In the past, the benefit to society by encouraging pension saving with tax incentives was well understood, and the salary sacrifice loop hole only exists I think as a nod to the idea of increasing pensions saving. But pensions are now a political football and so salary sacrifice is now in the game.

Instead of suppressing tax reliefs to reduce short-term Exchequer outflows, the system needs simplification. It would provide a boost to genuine pensions savings, and reduce State pension dependency, by having no limit on pension funding, save a nominal monetary limit as was introduced with the first tax “simplification” (£240,000?). In return, remove potential arbitrage by applying 20% tax relief for all tax payers. Tax on pensions could be a stand-alone rate of 20% in this scenario.

In my view, the 25% tax free lump sum benefit is illogical, it encourages people to make a decision based solely on avoiding tax, not financial needs. Its origins lay in the Public Sector, where it was an add-on benefit to a pension, not an option between cash and a pension and would not object at all to its removal to permit simplification.

golfaddick said:

valleynick66 said:

So do we think the upcoming budget will have some meaningful elements that reward some and penalise others or is the constant  speculation and ‘kite flying’ just that ?

In the absence  (it seems) of rumours being more consistent to soften the blow when landing  I fear it will just be another round of tweaks and twiddles only. 

I would hazard a guess at a bit more than just tweaks & twiddles. 

Cant see too many winners & a lot more losers.