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Could the Lifetime Pension Allowance be Abolished?

Including Financial Independence and Retiring Early (FIRE)
hiriskpaul
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Re: Could the Lifetime Pension Allowance be Abolished?

#442005

Postby hiriskpaul » September 13th, 2021, 9:39 pm

AWOL wrote:I think the difference is that the LTA should enable defined contribution scheme members to accrue similar pensions to the DB members. I also think the DB valuation factor should be raised from 20 to something more reasonable. I don't think it is wrong for people to have accrued decent final salary pensions. I do think it would be wrong to change the goal posts for people approaching retirement other than through say changing income tax thus sharing the burden across salaried and pensioners. Others doubtless disagree.

I agree, but a fair DB valuation factor would be a moving target, so not really fair on DB pensioners. A simpler solution would be to have a higher LTA for DC pensions.

hiriskpaul
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Re: Could the Lifetime Pension Allowance be Abolished?

#442009

Postby hiriskpaul » September 13th, 2021, 10:11 pm

flyer61 wrote:
hiriskpaul wrote:
flyer61 wrote:Unless I have missed something, that makes little sense to me. Why give up growth just because you don't get to keep all of it? Cutting off your nose to spite your face?


At the time I realised I was near the £1.5M. I could have continued growing, However I decided it was risk off for the two years to ensure at 55 I could access the maximum TFC. My employment situation at the time was precarious to boot. It worked out for me as I achieved substantial TFC at 55 which then allowed me to start to diversify away from the State. The SIPP has grown significantly since then and in fact I have it on a growth tilt and hope to keep it that way for the rest of my life. The natural yield is more than we require so my wife and kids may well have cause to thank me one day.

So your reason for doing this was not really the LTA, although that might have been the catalyst. It was about risk reduction.

TUK020
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Re: Could the Lifetime Pension Allowance be Abolished?

#442045

Postby TUK020 » September 14th, 2021, 8:46 am

hiriskpaul wrote:It isn't the LTA that causes problems for doctors, it is the annual allowance and the interplay with tapering. The LTA is generous for DB pensions as DB pensions are valued using a multiplier of 20. That's like a totally safe SWR of 5% from a DC pension.


It is the whole retrospective clawbacks/withdrawal allowances structure that creates penal marginal rates.

If you earn over 100k, you are onto a marginal tax +NI rate of 62%. This makes it a no-brainer that you shovel everything over 100k into a pension.
Until you hit LTA....
If you have a DB pension, you get to a point of delaying taking it any further means that you would incur Higher Rate tax. If you are also in breach of LTA, this means that you are into a marginal tax rate of 65% on the pension alone. In this case it clearly doesn't make sense to continue working (and paying more tax)

If we had a system that limited the amount of income tax relief (for any purpose, not just pension contributions) to 16k (40% of 40k) per year, abolished LTA, kept personal tax allowances and started the higher rate (45%) band at 100k rather than 150k, then you wouldn't distort behaviour so much, and would raise the total tax take.
It would make the taxation system a bit more transparent, which is possibly the political difficulty with doing that.

TUK020
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Re: Could the Lifetime Pension Allowance be Abolished?

#442046

Postby TUK020 » September 14th, 2021, 8:49 am

I have read that a third of GPs work part time now, also that a third of doctors in the UK intend to retire in the next 5 years.
And we wonder why?
The irony is that if Jeremy Corbyn had been elected, he would have destroyed the NHS. Not by doing something radically different, but by doing more of what the Tory party is doing.

TedSwippet
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Re: Could the Lifetime Pension Allowance be Abolished?

#442047

Postby TedSwippet » September 14th, 2021, 8:51 am

hiriskpaul wrote:You may well be a winner overall even if you did not get any higher rate tax relief, but still pay an LTA charge. It just depends how much over the LTA you are when you crystallise. For an LTA of £1m, someone receiving 20% tax relief, taking a £250k PCLS and paying 20% on the drawdown fund will essentially pay 15% tax, so will have gained £50k (as measured at the time of crystallisation) by using a pension rather than an ISA. The total charge+tax for the amount over the LTA works out at 40% if drawing at basic rate, so if 20% tax relief was given on the way in the break even point would be £250k. In other words, basic rate taxpayers are still gaining compared to putting their money in an ISA provided the excess over the LTA is less than £250k. Slightly higher in fact as the LTA is more than £1m.

I think we're just using different definitions of "punitive".

Yours is, it seems: average tax over the life of the entire pension is higher than it would be outside a pension. Mine is: marginal tax on pension amounts above the LTA is higher than it would be if that money had not been paid into a pension, so that the LTA (and especially its reductions) retroactively draws previously tax-efficient money into a tax-inefficient region of income.

hiriskpaul
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Re: Could the Lifetime Pension Allowance be Abolished?

#442088

Postby hiriskpaul » September 14th, 2021, 11:08 am

TUK020 wrote:
hiriskpaul wrote:It isn't the LTA that causes problems for doctors, it is the annual allowance and the interplay with tapering. The LTA is generous for DB pensions as DB pensions are valued using a multiplier of 20. That's like a totally safe SWR of 5% from a DC pension.


It is the whole retrospective clawbacks/withdrawal allowances structure that creates penal marginal rates.

Yes, that is what I meant by tapering. For doctors it is the tapering away of the pension annual allowance when "adjusted income" goes over £150k that causes the problem rather than the LTA. The BMA have called for the annual allowance to be scrapped, not the LTA.

If you earn over 100k, you are onto a marginal tax +NI rate of 62%. This makes it a no-brainer that you shovel everything over 100k into a pension.
Until you hit LTA....

It is still a no-brainer even if you hit the LTA!

If you have a DB pension, you get to a point of delaying taking it any further means that you would incur Higher Rate tax. If you are also in breach of LTA, this means that you are into a marginal tax rate of 65% on the pension alone. In this case it clearly doesn't make sense to continue working (and paying more tax)

Again, it is not the LTA that is the problem here, it is the annual allowance.

If we had a system that limited the amount of income tax relief (for any purpose, not just pension contributions) to 16k (40% of 40k) per year, abolished LTA, kept personal tax allowances and started the higher rate (45%) band at 100k rather than 150k, then you wouldn't distort behaviour so much, and would raise the total tax take.
It would make the taxation system a bit more transparent, which is possibly the political difficulty with doing that.

Yes the tapering (all tapering) is a complete and unnecessary nonsense.

If the LTA was abolished, they would need to restrict company pension contributions in some way to prevent the system from being abused.

hiriskpaul
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Re: Could the Lifetime Pension Allowance be Abolished?

#442090

Postby hiriskpaul » September 14th, 2021, 11:17 am

TedSwippet wrote:
hiriskpaul wrote:You may well be a winner overall even if you did not get any higher rate tax relief, but still pay an LTA charge. It just depends how much over the LTA you are when you crystallise. For an LTA of £1m, someone receiving 20% tax relief, taking a £250k PCLS and paying 20% on the drawdown fund will essentially pay 15% tax, so will have gained £50k (as measured at the time of crystallisation) by using a pension rather than an ISA. The total charge+tax for the amount over the LTA works out at 40% if drawing at basic rate, so if 20% tax relief was given on the way in the break even point would be £250k. In other words, basic rate taxpayers are still gaining compared to putting their money in an ISA provided the excess over the LTA is less than £250k. Slightly higher in fact as the LTA is more than £1m.

I think we're just using different definitions of "punitive".

Yours is, it seems: average tax over the life of the entire pension is higher than it would be outside a pension. Mine is: marginal tax on pension amounts above the LTA is higher than it would be if that money had not been paid into a pension, so that the LTA (and especially its reductions) retroactively draws previously tax-efficient money into a tax-inefficient region of income.

Yes, I see what you mean. Every reduction or freeze in the LTA risks putting more money over the LTA, which is annoying. I have Fixed Protection 2012, so at least my LTA cannot be reduced in nominal terms, but rising inflation and/or a falling pound, which may be stoked by inept government policy, gradually pushes more of my pension pot over the LTA.


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