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Could the Lifetime Pension Allowance be Abolished?

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

#441848

Postby YoyoJohn » September 13th, 2021, 12:02 pm

hiriskpaul wrote:I just don't see how the LTA "unfairly penalises pot growth". The LTA limits tax relief, albeit in a cack-handed way. Can you provide an example to back up your assertion please?


"A key criticism of the LTA in general is that it is a limit on overall pot size, not contributions. In other words, savers can end up breaching the limit and incur excess charges even if they stop contributing to their pensions, because it all depends on the investment performance of their pot."

moneyweek.com/personal-finance/pensions/602917/what-is-the-pensions-lifetime-allowance-and-should-you-be-worried

hiriskpaul
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Re: Could the Lifetime Pension Allowance be Abolished?

#441856

Postby hiriskpaul » September 13th, 2021, 12:36 pm

YoyoJohn wrote:
hiriskpaul wrote:I just don't see how the LTA "unfairly penalises pot growth". The LTA limits tax relief, albeit in a cack-handed way. Can you provide an example to back up your assertion please?


"A key criticism of the LTA in general is that it is a limit on overall pot size, not contributions. In other words, savers can end up breaching the limit and incur excess charges even if they stop contributing to their pensions, because it all depends on the investment performance of their pot."

moneyweek.com/personal-finance/pensions/602917/what-is-the-pensions-lifetime-allowance-and-should-you-be-worried

All true, but the LTA charge cancels out tax relief, so you are no worse off financially than you would have been had you not made contributions. At least that is the idea behind the LTA. In practice, the outcome varies depending on the amount of up front tax relief, NI relief, employer's contribution and the tax paid on withdrawals. However, most people paying the LTA charge are likely to have been able to claim higher rate tax relief on some of their contributions.

I am likely to pay the LTA charge on the growth in my SIPP at age 75, but I will still be better off than I would have been had I not contributed as much. The calculation is straightforward. For each £100 I am over the LTA, £25 has already been taken as a PCLS. The remaining £75 will be subject to a 25% charge, £18.75. That leaves £56.25. Basic rate tax on that is £11.25, resulting in a total charge+tax of £30, ie 30% of the £100 in the pension. But I received 40% tax relief on my contribution of that £100.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441862

Postby flyer61 » September 13th, 2021, 12:58 pm

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.
Last edited by flyer61 on September 13th, 2021, 1:01 pm, edited 2 times in total.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441863

Postby flyer61 » September 13th, 2021, 12:58 pm

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.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441868

Postby AWOL » September 13th, 2021, 1:24 pm

YoyoJohn wrote:
AWOL wrote:Would that not introduce scope for paying into DB in excess of AA and then transferring into DC schemes whilst continuing to pay into DB?


This is a common misconception about DB schemes. You don't pay into them in any sense of a 'pot of money'. You effectively pay a membership fee. Which has zero relation to your ultimate pension. In the NHS, your monthly 'membership fee' is a % of your gross pay. Whilst there is tax relief on this membership fee, the contribution % is tiered upwards with salary, from 5% to 14.5%, effectively removing tax relief.

And at the end of every tax year, your likely pension is valued, using a formula HRMC created. This has nothing to do with what you have contributed in the year.

And if that assessed pension value is more than 40k more than last year's assessed value, then -> tax charge. Your actual 'contributions' that year might have only been 5-10k, but perhaps you have had a 3% pay rise this year. Or perhaps last year you took some unpaid parental leave. Both of which have artificially inflated the year-to-year 'valuation' of your future pension. -> tax charge. Next year, that valuation might go down again. But there is no such thing as a negative pension input amount.


However you can transfer from DB to DC and the transfer value is often considerably greater than the 20x that the government uses to value the pension for Lifetime Allowance purposes so I'd imagine that it could be very attractive for some final salary scheme holders to be able to escape the LTA by transferring. In my case the multiplier was only x25 so it wasn't worth the loss of certain income but colleagues of mine got 40x from a scheme that had closed to new entrants when I arrived at the company. For them removing the DB LTA would be wonderful!

Personally I think the current LTA is nothing more than a tax raid. Voters think it's hitting the rich but it's really hitting the middle class. The rich do hide their money in things like farmland which bypass IHT and are likely to be excluded from any future wealth tax. This is the flaw in the wealth tax. For it to be effective it has to be one off, include everything, and be retrospective so it cannot be avoided except by anticipation. However if it includes farmland (and equipment!) this puts at risk food production as farming is low margin but has a lot of capital assets (including stupidly expensive farmland). If it doesn't include farmland then it's a tax on the middle class (which is the largest class in UK society) and excludes the wealthy who invest in farmland, forestry, etc.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441884

Postby hiriskpaul » September 13th, 2021, 2:23 pm

AWOL wrote:
YoyoJohn wrote:
AWOL wrote:Would that not introduce scope for paying into DB in excess of AA and then transferring into DC schemes whilst continuing to pay into DB?


This is a common misconception about DB schemes. You don't pay into them in any sense of a 'pot of money'. You effectively pay a membership fee. Which has zero relation to your ultimate pension. In the NHS, your monthly 'membership fee' is a % of your gross pay. Whilst there is tax relief on this membership fee, the contribution % is tiered upwards with salary, from 5% to 14.5%, effectively removing tax relief.

And at the end of every tax year, your likely pension is valued, using a formula HRMC created. This has nothing to do with what you have contributed in the year.

And if that assessed pension value is more than 40k more than last year's assessed value, then -> tax charge. Your actual 'contributions' that year might have only been 5-10k, but perhaps you have had a 3% pay rise this year. Or perhaps last year you took some unpaid parental leave. Both of which have artificially inflated the year-to-year 'valuation' of your future pension. -> tax charge. Next year, that valuation might go down again. But there is no such thing as a negative pension input amount.


However you can transfer from DB to DC and the transfer value is often considerably greater than the 20x that the government uses to value the pension for Lifetime Allowance purposes so I'd imagine that it could be very attractive for some final salary scheme holders to be able to escape the LTA by transferring. In my case the multiplier was only x25 so it wasn't worth the loss of certain income but colleagues of mine got 40x from a scheme that had closed to new entrants when I arrived at the company. For them removing the DB LTA would be wonderful!

Personally I think the current LTA is nothing more than a tax raid. Voters think it's hitting the rich but it's really hitting the middle class. The rich do hide their money in things like farmland which bypass IHT and are likely to be excluded from any future wealth tax. This is the flaw in the wealth tax. For it to be effective it has to be one off, include everything, and be retrospective so it cannot be avoided except by anticipation. However if it includes farmland (and equipment!) this puts at risk food production as farming is low margin but has a lot of capital assets (including stupidly expensive farmland). If it doesn't include farmland then it's a tax on the middle class (which is the largest class in UK society) and excludes the wealthy who invest in farmland, forestry, etc.

The rich would dump millions into a pension if it were not for the LTA. They would not get up front tax relief on personal contributions (would save CT on company contributions thoygh), but all growth would be tax free, with income tax paid on withdrawals. So like an offshore fund, but with the added advantages of a 25% PCLS and no inheritance tax.

The problem for the chancellor with pensions is that the up front tax relief is very expensive. It would not be so bad if all the tax relief eventually came back, but it doesn't because of the PCLS, tax arbitrage and lost NI.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441907

Postby ursaminortaur » September 13th, 2021, 3:16 pm

AWOL wrote:
YoyoJohn wrote:
AWOL wrote:Would that not introduce scope for paying into DB in excess of AA and then transferring into DC schemes whilst continuing to pay into DB?


This is a common misconception about DB schemes. You don't pay into them in any sense of a 'pot of money'. You effectively pay a membership fee. Which has zero relation to your ultimate pension. In the NHS, your monthly 'membership fee' is a % of your gross pay. Whilst there is tax relief on this membership fee, the contribution % is tiered upwards with salary, from 5% to 14.5%, effectively removing tax relief.

And at the end of every tax year, your likely pension is valued, using a formula HRMC created. This has nothing to do with what you have contributed in the year.

And if that assessed pension value is more than 40k more than last year's assessed value, then -> tax charge. Your actual 'contributions' that year might have only been 5-10k, but perhaps you have had a 3% pay rise this year. Or perhaps last year you took some unpaid parental leave. Both of which have artificially inflated the year-to-year 'valuation' of your future pension. -> tax charge. Next year, that valuation might go down again. But there is no such thing as a negative pension input amount.


However you can transfer from DB to DC and the transfer value is often considerably greater than the 20x that the government uses to value the pension for Lifetime Allowance purposes so I'd imagine that it could be very attractive for some final salary scheme holders to be able to escape the LTA by transferring.


Nowadays such DB to DC transfers can only be done with difficulty if the transfer value is more than £30,000. Advice has to be taken from an authorised financial advisor and although you can insist on the transfer taking place even if the advice is not to transfer many DC providers are now refusing to take transfers from such insistent clients. Also such transfers are forbidden for unfunded public sector schemes. Transfers from the few funded public sector DB schemes such as the LGPS are allowed but subject to the same conditions as private DB schemes if the transfer value is greater than £30,000.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/transfer-pension-scheme/

From April 2015 members of unfunded public sector pension schemes (including pensions for teachers, the civil service, the armed forces, and the police and fire services) are no longer able to transfer out, although some transfers to other unfunded public sector schemes may still be permitted. For example, the Local Government Pension Scheme (LGPS) is a funded arrangement so transfers from this scheme are still permitted.
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To protect consumers who might otherwise lose valuable Defined Benefits, or some other types of guarantees (safeguarded benefits), the Government introduced a requirement that the ceding pension scheme must ensure individual scheme members have taken advice from an adviser authorised by the Financial Conduct Authority (FCA), before a transfer (or conversion) is allowed to proceed. But only where the value of benefits being given up is over £30,000.

For the avoidance of doubt, although the Department for Work and Pensions states that under £30,000 a ceding scheme does not have to ensure that a member has received advice, the FCA has no such ruling. Where an adviser is involved with the transfer or conversion of a pension they need to be appropriately authorised and qualified, irrespective of the value of the pension.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441917

Postby ayshfm1 » September 13th, 2021, 3:45 pm

I'm rather unsure how the LTA is supposed to have impacted the rich dumping millions into their pensions. Currently one can chuck 40K a year max into one, this is not going to allow millions to dumped in.

Back in the day the input limits were a lot higher it WAS possible for the rich to dump millions in over time, though there were rules about how much could contributed IIRC even then, the LTA was brought in hit those oversized pots, either directly or because it caused them to be ring fenced.

As of right now even building a pot with millions (ie more than 2) in it is quite hard simply because of the input limit. So today the LTA's original purpose is not really a valid use case, which just leaves the undesirable collateral consequences which are going to be more and more marked as the next few years unfold.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441920

Postby pje16 » September 13th, 2021, 3:53 pm

You can pay in MORE than 40k pa but you get no tax relief on the excess

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Re: Could the Lifetime Pension Allowance be Abolished?

#441928

Postby AWOL » September 13th, 2021, 4:19 pm

hiriskpaul wrote:The rich would dump millions into a pension if it were not for the LTA. They would not get up front tax relief on personal contributions (would save CT on company contributions thoygh), but all growth would be tax free, with income tax paid on withdrawals. So like an offshore fund, but with the added advantages of a 25% PCLS and no inheritance tax.

The problem for the chancellor with pensions is that the up front tax relief is very expensive. It would not be so bad if all the tax relief eventually came back, but it doesn't because of the PCLS, tax arbitrage and lost NI.


You make some very good points although I should state that I am not against the LTA, I just think the current level where it hits people of modest means who have lived a frugal life (I am thinking of people like myself here :lol: ) is too low. I haven't breached it myself but there's a fair chance that growth alone over the next 4 years to 55 will take me very close.

I think the public debate is overlooking the fact that pensions are meant to be attractive and incentivised. The uncertainty and constant rule changes are making them anything but. I've also heard a couple of comments from politicians about the "windfalls" in people's ISAs and the desirability of taxing the "unearned gains" that have escaped the recent tax increase. It makes retirement and tax planning very difficult for the average person.

I imagine Labour will hit people with a Wealth Tax which will deal with ISA, Pension, and all other kinds of income. Although I think they'll be surprised by all the special cases that are raised for exemptions.

To me the pattern is for chancellors to raid away as they see fit and then say that "now we will have a period of stability" which lasts until the next chancellor. I guess I am just old and tired of constant change!

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Re: Could the Lifetime Pension Allowance be Abolished?

#441935

Postby hiriskpaul » September 13th, 2021, 4:35 pm

pje16 wrote:You can pay in MORE than 40k pa but you get no tax relief on the excess

No personal tax relief. Company contributions are considered a business expense and so pension contributions are a good way of getting money out of a company without paying corporation tax on it first. Not hard to arrange for the rich.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441937

Postby hiriskpaul » September 13th, 2021, 4:40 pm

AWOL wrote:
hiriskpaul wrote:The rich would dump millions into a pension if it were not for the LTA. They would not get up front tax relief on personal contributions (would save CT on company contributions thoygh), but all growth would be tax free, with income tax paid on withdrawals. So like an offshore fund, but with the added advantages of a 25% PCLS and no inheritance tax.

The problem for the chancellor with pensions is that the up front tax relief is very expensive. It would not be so bad if all the tax relief eventually came back, but it doesn't because of the PCLS, tax arbitrage and lost NI.


You make some very good points although I should state that I am not against the LTA, I just think the current level where it hits people of modest means who have lived a frugal life (I am thinking of people like myself here :lol: ) is too low. I haven't breached it myself but there's a fair chance that growth alone over the next 4 years to 55 will take me very close.

I think the public debate is overlooking the fact that pensions are meant to be attractive and incentivised. The uncertainty and constant rule changes are making them anything but. I've also heard a couple of comments from politicians about the "windfalls" in people's ISAs and the desirability of taxing the "unearned gains" that have escaped the recent tax increase. It makes retirement and tax planning very difficult for the average person.

I imagine Labour will hit people with a Wealth Tax which will deal with ISA, Pension, and all other kinds of income. Although I think they'll be surprised by all the special cases that are raised for exemptions.

To me the pattern is for chancellors to raid away as they see fit and then say that "now we will have a period of stability" which lasts until the next chancellor. I guess I am just old and tired of constant change!

A £1m a pension, drawn at a prudent 3% provides £30,000 per year. 25% of which is tax free. Should a higher limit be available? If so what should be taxed instead?

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Re: Could the Lifetime Pension Allowance be Abolished?

#441939

Postby scrumpyjack » September 13th, 2021, 4:43 pm

AWOL wrote:I imagine Labour will hit people with a Wealth Tax which will deal with ISA, Pension, and all other kinds of income. Although I think they'll be surprised by all the special cases that are raised for exemptions.


No doubt one of the exemptions would be MPs pensions. I recall many years ago Denis Skinner (aka the Beast of Bolsover) was making a speech in Parliament about the obscene size of some director's pension fund. Another MP pointed out that the actuarial value of Mr Skinner's MP's pensions was higher than that of the man he was attacking! He suddenly became unusually quiet. :D

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Re: Could the Lifetime Pension Allowance be Abolished?

#441940

Postby TedSwippet » September 13th, 2021, 4:45 pm

hiriskpaul wrote:All true, but the LTA charge cancels out tax relief, so you are no worse off financially than you would have been had you not made contributions. At least that is the idea behind the LTA. In practice, the outcome varies depending on the amount of up front tax relief, NI relief, employer's contribution and the tax paid on withdrawals. However, most people paying the LTA charge are likely to have been able to claim higher rate tax relief on some of their contributions.

You're right on "cancels out", but only for the the one set of assumptions you are working to: higher rate tax that covers all contributions, and lower (or zero) rate tax in retirement. These may or may not apply to "most people", but the LTA charge can certainly be punitive if you fall outside these limited criteria; for example if you could be a higher rate taxpayer in retirement, or if you made pension contributions while in basic rate tax.

I fall into both these latter camps (the LTA didn't exist at all for much of my pension saving time). For me then, it's definitely punitive. If hit by the LTA, I would have been better off not making those pension contributions when I did. But they cannot be undone.

The culprit in this case is less the existence of the LTA than it is its repeated large-scale reductions. The idea behind the LTA is one thing; its actualisation is another.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441941

Postby pje16 » September 13th, 2021, 4:48 pm

scrumpyjack wrote:I recall many years ago Denis Skinner (aka the Beast of Bolsover) was making a speech in Parliament about the obscene size of some director's pension fund. Another MP pointed out that the actuarial value of Mr Skinner's MP's pensions was higher than that of the man he was attacking! He suddenly became unusually quiet. :D

Aaah an early runner for todays template
Do as I say NOT as I do :lol: :lol:

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Re: Could the Lifetime Pension Allowance be Abolished?

#441958

Postby AWOL » September 13th, 2021, 6:06 pm

hiriskpaul wrote:A £1m a pension, drawn at a prudent 3% provides £30,000 per year. 25% of which is tax free. Should a higher limit be available? If so what should be taxed instead?


At current valuations 3% withdrawal rate is not safe if one intends to leave a similar amount of capital to support a disabled child (and Lord alone knows what I can afford for the other child!). I and other people I know find ourselves in the situation where the state support for the disabled is inadequate and unpredictable (subject to judgements by people with no expertise of the specific conditions). 2% is low risk although with current valuations their are arguments for lower than this. Unfortunately the cost of reducing risk doesn't scale in a linear fashion and the historic data is limited at equity valuations such as we have now and non-existent if combined with the bond valuations. I cannot consume more than the amount I am prepared to let my child live on.

The problem with taxing pensions, and wealth taxes too have this issue, is that in taxing pensioners you are hitting people who lack the ability to increase their hours/find a new employer/get promoted and make up the difference.

Rather than tax, personally I think that the chancellor should have borrowed more as I don't believe we are at inflationary levels of money supply and if we were, well financial repression works wonders! However if we have to tax then I'd recommend income tax over NI, I'd also recommend that the NI rate is flattened with the upper limit removed with a view to transitioning away from NI to a combined income tax model with pension entitlement based on years of income tax paid. I don't know enough about the private rental sector to know if I agree with Labour that they have it coming. I do know that politicians love this stuff because they can unite people against common enemies ("the leaches in society") and it's an old playbook. If they actually target the leaches then I suspect that would be turkeys voting for Xmas.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441974

Postby scrumpyjack » September 13th, 2021, 7:32 pm

AWOL wrote:
hiriskpaul wrote:A £1m a pension, drawn at a prudent 3% provides £30,000 per year. 25% of which is tax free. Should a higher limit be available? If so what should be taxed instead?


At current valuations 3% withdrawal rate is not safe if one intends to leave a similar amount of capital to support a disabled child (and Lord alone knows what I can afford for the other child!). I and other people I know find ourselves in the situation where the state support for the disabled is inadequate and unpredictable (subject to judgements by people with no expertise of the specific conditions). 2% is low risk although with current valuations their are arguments for lower than this. Unfortunately the cost of reducing risk doesn't scale in a linear fashion and the historic data is limited at equity valuations such as we have now and non-existent if combined with the bond valuations. I cannot consume more than the amount I am prepared to let my child live on.

The problem with taxing pensions, and wealth taxes too have this issue, is that in taxing pensioners you are hitting people who lack the ability to increase their hours/find a new employer/get promoted and make up the difference.

Rather than tax, personally I think that the chancellor should have borrowed more as I don't believe we are at inflationary levels of money supply and if we were, well financial repression works wonders! However if we have to tax then I'd recommend income tax over NI, I'd also recommend that the NI rate is flattened with the upper limit removed with a view to transitioning away from NI to a combined income tax model with pension entitlement based on years of income tax paid. I don't know enough about the private rental sector to know if I agree with Labour that they have it coming. I do know that politicians love this stuff because they can unite people against common enemies ("the leaches in society") and it's an old playbook. If they actually target the leaches then I suspect that would be turkeys voting for Xmas.


Don't forget that in addition to the 30k from a personal pension, you get the state pension and also ISAs provide another tax advantaged savings mechanism. I really don't think the state needs to do more to achieve the objective of ensuring the pensioner is not a burden on the welfare system but the big problem is DB pensions and the huge value a high earner may have built up in that. Politically impossible to take away existing DB pension arrangements for high earners like doctors, some civil servants and MPs. Hence the mess that the LTA system creates.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441996

Postby AWOL » September 13th, 2021, 9:18 pm

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.

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Re: Could the Lifetime Pension Allowance be Abolished?

#441997

Postby hiriskpaul » September 13th, 2021, 9:22 pm

TedSwippet wrote:
hiriskpaul wrote:All true, but the LTA charge cancels out tax relief, so you are no worse off financially than you would have been had you not made contributions. At least that is the idea behind the LTA. In practice, the outcome varies depending on the amount of up front tax relief, NI relief, employer's contribution and the tax paid on withdrawals. However, most people paying the LTA charge are likely to have been able to claim higher rate tax relief on some of their contributions.

You're right on "cancels out", but only for the the one set of assumptions you are working to: higher rate tax that covers all contributions, and lower (or zero) rate tax in retirement. These may or may not apply to "most people", but the LTA charge can certainly be punitive if you fall outside these limited criteria; for example if you could be a higher rate taxpayer in retirement, or if you made pension contributions while in basic rate tax.

I fall into both these latter camps (the LTA didn't exist at all for much of my pension saving time). For me then, it's definitely punitive. If hit by the LTA, I would have been better off not making those pension contributions when I did. But they cannot be undone.

The culprit in this case is less the existence of the LTA than it is its repeated large-scale reductions. The idea behind the LTA is one thing; its actualisation is another.

I am not assuming that higher rate tax relief was given for all contributions. Just on sufficient to cover the amount in excess of the LTA when the pension is crystallised.

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.

With a DC pension, paying higher rate tax on drawings is entirely optional. I choose not to pay tax at 40%, even though that will very likely mean breaching the LTA when I am 75.

hiriskpaul
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Re: Could the Lifetime Pension Allowance be Abolished?

#441999

Postby hiriskpaul » September 13th, 2021, 9:29 pm

scrumpyjack wrote:
AWOL wrote:
hiriskpaul wrote:A £1m a pension, drawn at a prudent 3% provides £30,000 per year. 25% of which is tax free. Should a higher limit be available? If so what should be taxed instead?


At current valuations 3% withdrawal rate is not safe if one intends to leave a similar amount of capital to support a disabled child (and Lord alone knows what I can afford for the other child!). I and other people I know find ourselves in the situation where the state support for the disabled is inadequate and unpredictable (subject to judgements by people with no expertise of the specific conditions). 2% is low risk although with current valuations their are arguments for lower than this. Unfortunately the cost of reducing risk doesn't scale in a linear fashion and the historic data is limited at equity valuations such as we have now and non-existent if combined with the bond valuations. I cannot consume more than the amount I am prepared to let my child live on.

The problem with taxing pensions, and wealth taxes too have this issue, is that in taxing pensioners you are hitting people who lack the ability to increase their hours/find a new employer/get promoted and make up the difference.

Rather than tax, personally I think that the chancellor should have borrowed more as I don't believe we are at inflationary levels of money supply and if we were, well financial repression works wonders! However if we have to tax then I'd recommend income tax over NI, I'd also recommend that the NI rate is flattened with the upper limit removed with a view to transitioning away from NI to a combined income tax model with pension entitlement based on years of income tax paid. I don't know enough about the private rental sector to know if I agree with Labour that they have it coming. I do know that politicians love this stuff because they can unite people against common enemies ("the leaches in society") and it's an old playbook. If they actually target the leaches then I suspect that would be turkeys voting for Xmas.


Don't forget that in addition to the 30k from a personal pension, you get the state pension and also ISAs provide another tax advantaged savings mechanism. I really don't think the state needs to do more to achieve the objective of ensuring the pensioner is not a burden on the welfare system but the big problem is DB pensions and the huge value a high earner may have built up in that. Politically impossible to take away existing DB pension arrangements for high earners like doctors, some civil servants and MPs. Hence the mess that the LTA system creates.

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.


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