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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.

taken2often
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Re: Could the Lifetime Pension Allowance be Abolished?

#462422

Postby taken2often » December 1st, 2021, 7:23 pm

Late to the party

The 25% lump sum cannot be done away with is it is an essential con to distract you from the fact that you put in 75% and they 25%. You are going to be taxed on 75% for the rest of your life and may be a bit of your partners life.

The ideal way, is when you retire you give the government the 25% of your pot and use the rest tax free like an ISA. They will have made a very good return on their investment in you.

The LTA is one of the most stupid taxes ever thought off. Probably to placate a jealous MOB. To punish success is not bright. It also shows no understanding of how the markets work. If my birthday last year had been in Februay I would have had to pay 35k in LTA. By August my birthday ,due to a fall in the market I had no tax to pay. I am now back and passed where I was in February 2020. Over 75 so no more LTA worries.

So you could pay the tax. Then the maket wipes out what is left by say 20/30% so your pot is worse off than before LTA. They do not give it back. It makes no sense.

An incentive to reduce hours or retire. No sense.

Kantwebefriends
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Re: Could the Lifetime Pension Allowance be Abolished?

#462439

Postby Kantwebefriends » December 1st, 2021, 8:55 pm

UncleEbenezer wrote:Oh, and in my view, the LTA makes a lot more sense than annual contribution limits that just serve to penalise anyone with a lumpy income. I wonder if feminists could be persuaded to take that up, on the grounds that a lumpy lifetime income may be associated with childcare responsibilities?


Rather than a LTA on the value of the pension would it make more sense to have a lifetime allowance for total contributions to the pension? After all, it's the latter that is under the pensioner's control.

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Re: Could the Lifetime Pension Allowance be Abolished?

#462513

Postby TUK020 » December 2nd, 2021, 8:47 am

Kantwebefriends wrote:
UncleEbenezer wrote:Oh, and in my view, the LTA makes a lot more sense than annual contribution limits that just serve to penalise anyone with a lumpy income. I wonder if feminists could be persuaded to take that up, on the grounds that a lumpy lifetime income may be associated with childcare responsibilities?


Rather than a LTA on the value of the pension would it make more sense to have a lifetime allowance for total contributions to the pension? After all, it's the latter that is under the pensioner's control.

In many ways, it would make more sense to limit the amount of tax relief, rather than the pension contributions

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Re: Could the Lifetime Pension Allowance be Abolished?

#462522

Postby scrumpyjack » December 2nd, 2021, 9:13 am

The problem is that the whole pensions and tax relief system has evolved as a complete mess without any planning to start with. The existence of defined benefit schemes make it extremely difficult to have rules and limits that are fair both to them and to defined contribution schemes. Change is difficult because all political parties think pensions are ‘a good thing’.

When I was young, and the top rate of tax on ‘earned’ income was 83% (98% on investment income) (and that kicked in at £2,000 of taxable income as I recall) and there was no limit on contributions it made sense to stuff as much as possible into your pension. Life expectancy post retirement, when state pensions were brought in, was 7 years so that was affordable. Most jobs, not just civil service ones, had defined benefit pensions which the state subsequently and retrospectively ruled had to be inflation protected, thus bankrupting many businesses over the years!

Ideally there should be sufficient tax incentive to save for your pension so you are not a burden to the state but it should not be more than that. So huge indexed linked pensions (whether civil service or private) are not in the wider interests of the country and should not be supported by tax reliefs IMO. But getting to that position from where we are is impossible and the LTA is probably the least bad way of having some limits.

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Re: Could the Lifetime Pension Allowance be Abolished?

#462870

Postby ursaminortaur » December 3rd, 2021, 12:55 pm

scrumpyjack wrote:The problem is that the whole pensions and tax relief system has evolved as a complete mess without any planning to start with. The existence of defined benefit schemes make it extremely difficult to have rules and limits that are fair both to them and to defined contribution schemes. Change is difficult because all political parties think pensions are ‘a good thing’.

When I was young, and the top rate of tax on ‘earned’ income was 83% (98% on investment income) (and that kicked in at £2,000 of taxable income as I recall) and there was no limit on contributions it made sense to stuff as much as possible into your pension. Life expectancy post retirement, when state pensions were brought in, was 7 years so that was affordable. Most jobs, not just civil service ones, had defined benefit pensions which the state subsequently and retrospectively ruled had to be inflation protected, thus bankrupting many businesses over the years!

Ideally there should be sufficient tax incentive to save for your pension so you are not a burden to the state but it should not be more than that. So huge indexed linked pensions (whether civil service or private) are not in the wider interests of the country and should not be supported by tax reliefs IMO. But getting to that position from where we are is impossible and the LTA is probably the least bad way of having some limits.


When it was introduced in 2006 the LTA was £1,500,000 which then rose by 2010 to £1,800,000 and didn't really affect that many people. At that time the annual allowances were much larger £215,000 in 2006 rising to £250,0000 in 2010 so there was a good case for stopping the really rich from getting lots of tax relief by putting those really large amounts in each year and building up multi-million pound pensions which is why the LTA was introduced.

The Coalition and Conservative governments cut the annual allowance drastically and even , for larger earners, introduced a taper to cut it even further. Which although it introduced some problems, particularly with the taper, didn't cause most people too many problems. However they got greedy and cut the lifetime allowance as well in what was purely a revenue raising exercise. There really wan't any need, apart from raising revenue, for them to cut the LTA limit if it was working when people were allowed to put in £250,000 per year it would still have worked when people were restricted to putting in £40,000 a year. Even with £40,000 a year annual allowance I can still see a need for some lifetime limit but it would simplify things a lot if it was raised back to £1,800,000 (which then rose by inflation each year). It would hit far fewer people solving a lot of the problems with doctors etc retiring early because of the limit and get rid of all the complications caused by the various protections provided as the LTA was lowered. Of course the government would lose all the extra revenue they gain from having a really low LTA - which is probably why it won't happen.

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Re: Could the Lifetime Pension Allowance be Abolished?

#462932

Postby Adamski » December 3rd, 2021, 4:47 pm

We got doctors and GP's working less and retiring early cause of pension tax charges vs. Public sector pensions being unaffordable, and growing gap between rich and poor.

If you've got over £1.1m pension pot (more than that as multiple of x20 too little), probably also got a million pound house, savings, and maybe a second home. You'll be in the top 1% £2m+ category. I dont really have too much sympathy if thats the case, and over the LTA. How many luxury homes, luxury cars and electronic gadgets does one need?

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Re: Could the Lifetime Pension Allowance be Abolished?

#462941

Postby scrumpyjack » December 3rd, 2021, 5:07 pm

Perhaps an alternative approach would be to abolish the lifetime allowance but to tax pension income over a certain level at a higher rate. That way there would not be the disincentive to doctors etc of marginal rates over 100% in some circumstance. There would need to be limits on the 25% TFLS and on the ability to hand your pension fund to your children. Perhaps a 60% tax rate on pension income over 50k?

I suppose the problem with this is that it would then make sense for anyone with a very large pension fund to emigrate when they retire to a country which does not have that surcharge.


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