[ali k]

Don't let facts get in the way of the narrative though.

[petejh]

But... the tax-free lump sum of 25% of total pension pot that you're allowed to withdraw from your pension has been frozen for the last decade

That is not correct. The lump sum tax free allowance has always been 25%, with no monetary limit; I.e. it was unaffected by inflation given it's a proportion rather than an amount.

The monetary limit is a new restriction implemented only in this budget.

I meant the 25% lump sum as a proportion of the (previously) fixed lifetime allowance has been frozen for the last decade. So there is/was a monetary limit in effect - because nobody would contribute above the lifetime allowance. Meaning the real-terms value of the 25% has been frozen and will continue to be frozen, until at least 2028. The value of that 25% tax free lump sum has been eroding over time due to inflation, not much until now because inflation has been relatively low, but it's still a freeze in real terms.
Now that the 25% has been capped at £268k, the tax-free element will erode further year-on-year with inflation, to the point that the 'tax-free' benefit as a proportion of a pension pot will be much lower for the wealthiest than when it was introduced in 2006(?). This is obviously not a major consideration for the average person with an average pension. It will impact those with the largest pension pots the most, in terms of taxed money versus tax-free money. I'm not saying this is not a very nice issue to have to consider, just pointing out the oversimplification of some misses the nuances.

[Wellsy]

It's still a tax cut

How many times do you have to be told? In real terms. Its still a tax cut. The LTA was a tax, its now gone. If you really want I can show you how you'll pay less tax on a pension of 1.5 million post lta change compared to pre. For the biggest pensions it's literally hundreds of thousands less tax that's being paid.

[ali k]

I'm not saying this is not a very nice issue to have to consider, just pointing out the oversimplification of some misses the nuances.

So what was your point in all this again? What nuances are you explaining? That people with pensions worth millions have to worry about that pot getting eroded a little bit by inflation?

[petejh]

Wellsey, it's not 'just' a tax cut for the wealthy though is it - which is one of the points I'm trying to make here and which started with me remarking about a comment you posted about this pensions shake-up 'pandering to their usual demographic' or something along those lines.
There seems to be a lot of angst about wealthy people benefitting from this policy, which they will, but it appears to be blinding people to the facts that this a really beneficial policy overall for anyone who earns middle income upwards and who wants to contribute to their pension for retirement - that isn't just the tory demographic. Proportionally, those earning a middle to high income will benefit the most from the tax changes - not the very wealthiest who will end up paying more in tax, proportionally. I'm curious to know from those people who think this is a 'bad thing' what they want people on middle incomes to do with their income - pay more in tax?

Is it the best policy I can imagine for all sections of society, no of course it isn't. The world wasn't perfect or fair the last time I looked - a higher tax benefit for low-earners making pension contributions would be a good thing. But it's a beneficial change for a large section of working people, which also simplifies an unnecessarily complicated previous system. A step in the right direction and Labour can change it more again and probably will if they appear credible enough to get into that position next year. 

[Wellsy]

It's only beneficial if you stand likely to have pension benefits outside of the state pension worth over a million quid. Literally about 1% of the population. The idea that it is beneficial for "a large section of working people" is frankly utter bollocks. Bloomberg estimates there are 8,000 people with pension benefits above the LTA, that seems low to me, but even if it was ten times as many that's a v small part of the working pop.

And that's not what you originally said, you said that the wealthy will pay more in tax on their pensions than they otherwise would, which is not true.

[kac]

Seems like you are trying to argue for the sake of it here Pete. Maybe we can all in theory benefit but the reality is that only those at the very top will. The average UK pension pot is £61k. So yes there is a big problem with people not paying enough into pensions and facing retirement poverty. This change won't help this issue at all but it will help those who are the most comfortable be even more comfortable.

[petejh]

Ali - for example the nuances of how to incentivise high-earners in crucial roles to continue working, via attractive pension systems, while trying to make this beneficial for other levels of earners as well, while trying to make all this seem 'fair' (whatever that is) for as many people in work as possible. I'm intrigued how you'd square this circle.

[petejh]

It's only beneficial if you stand likely to have pension benefits outside of the state pension worth over a million quid. Literally about 1% of the population. The idea that it is beneficial for "a large section of working people" is frankly utter bollocks. Bloomberg estimates there are 8,000 people with pension benefits above the LTA, that seems low to me, but even if it was ten times as many that's a v small part of the working pop.

And that's not what you originally said, you said that the wealthy will pay more in tax on their pensions than they otherwise would, which is not true.

That's simply untrue though isn't it. Just look at the change in the annual pension contributions -  by 50% - from £40k to £60k per year. That allows anyone on a decent middle-to-high income to contribute more to their pension. That isn't the top 1% of holders of wealth in the UK. And the direction of wages is clearly upward. Train drivers are on nearly £60k! (although they're also massively overpaid imo).

And that's not what you originally said, you said that the wealthy will pay more in tax on their pensions than they otherwise would, which is not true.

I think you're incorrect on this too - I said more tax overall, because this is what has to happen when you have an open-ended pot of money, a fixed tax-free element (the 25%), with the fixed tax-free element eroded in value by inflation year-on-year. Look at it again and explain how that cannot be. For someone with £500,000 in their pension they'll pay deferred tax on the remainder of 75% of £500k - i.e. £375k at their marginal rate. For someone who can, since the abolishment of the LTA, now put £10m into their pension they'd in theory now only receive, tax-free, £268k of that - way less than the 25% tax-free element that the person with a smaller pension would receive - and pay tax on that at their marginal rate. Before, they couldn't put more than £1-and-a-bit million into a pension without hitting the LTA, and so would find other contrived investment avenues to avoid the LTA charge. How, all else being equal, is that not paying more (deferred) tax overall?

And it's deferred tax as you know, not tax never paid so it isn't a true tax cut for any of us (except in the current system pensions are sheltered from IHT as you know, so in effect some tax remains never paid, which I expect Labour can and will change to the horror of many).



edit: for clarity on the 25% change.

[Stabbsy]

That's simply untrue though isn't it. Just look at the change in the annual pension contributions -  by 50% - from £40k to £60k per year. That allows anyone on a decent middle-to-high income to contribute more to their pension. That isn't the top 1% of holders of wealth in the UK. And the direction of wages is clearly upward. Train drivers are on nearly £60k! (although they're also massively overpaid imo).

What do you class as middle to high income Pete? A brief bit of googling suggests the 95th percentile for salary in the 2021 Census was c.£80k per annum. I'd call the 95th gentile a high earner, not middle income. Do you seriously think that someone earning £80k per year can afford to pay £40k per year into their pension? The increase from £40k to £60k in pension contributions is going to make fuck all difference to the majority of the population.

[petejh]

It will make big difference to anyone who sells a house and downsizes, receives a windfall, gets a good bonus one year, maybe does well from investing..., there are countless edge cases where it will be beneficial for tens of thousands of people who aren't 'the 1%'. Also the direction of wages is clearly upward which will take more and more people into this zone of being able to benefit. But more than that, why is it not a good thing?

[Wellsy]

The Annual Allowance doesn't work that way. That's a tax on (for DC) the value of your contributions or (for DB) the increase in the value of your benefits within a specific calculation.

So if you have a DC pot and you whacked in 60k to it, you'd pay tax on 20k of that, now you won't. Its not based on your salary, its based on your pension contributions/value.

[petejh]

I think we're talking at cross purposes here - is that a response to my previous post? I'm aware of how the DC pension annual allowance works (and worked).

What do you make of my point that these policy changes mean a pension pot of £10m (which probably would never occured previously because of the LTA charge above £1m) would now pay deferred tax on £10million minus the new 'frozen' £268k tax-free allowance (which will reduce in value with inflation) versus a pension pot of £500k would now pay deferred tax on 25% of £500k?
 
i.e. a tax-free element of 2.68% for the super wealthy, versus a tax-free element of 25% for the person with the £500k pot. That's my point about this potentially being proportionally more taxing for the super rich pensioner.

[seankenny]

It will make big difference to anyone who sells a house and downsizes, receives a windfall, gets a good bonus one year, maybe does well from investing..., there are countless edge cases where it will be beneficial for tens of thousands of people who aren't 'the 1%'. Also the direction of wages is clearly upward which will take more and more people into this zone of being able to benefit. But more than that, why is it not a good thing?

Summary of impacts of the pension changes from the IFS:

Impact on work decisions could go either way:
People might work more to take advantage of pension tax breaks May be able to reach savings goal quicker and so work less
OBR thinks former will be bigger, increasing workforce by 15,000
Benefits those rich enough to save >£1.07 million in a pension or more than £40k in a single year
Although annual allowance still reduced above £260k of income Giving people the freedom to save more in a pension is good
Giving rich people subsidies to save even more in a pension is not
Tax-free 25% still limited to first £1.07 million of pension saving
But no NICs on employer contributions and exemption from inheritance tax remain


At a time of really tight public finances with any number of extremely serious challenges facing the country, I simply fail to see how subsidising the pensions of the very well off is something we should be doing. The jobs impact of the policy looks really minimal to me and even if it is as estimated (which it might not be) it’s not going to make any serious headway in dealing with a tight labour market, skills shortage, etc. If the government were at least partially elected on a manifesto of levelling up then it’s clear this policy is not advancing their own stated aims.

There really are lots of reasons why this is a terrible idea.

[ali k]

Ali - for example the nuances of how to incentivise high-earners in crucial roles to continue working, via attractive pension systems, while trying to make this beneficial for other levels of earners as well, while trying to make all this seem 'fair' (whatever that is) for as many people in work as possible. I'm intrigued how you'd square this circle.

Well good job I'm not a policy maker, but I'd say this is a pretty expensive way to try and get a small number of GPs and hospital consultants to work on a few extra years, which has been the stated aim.

Re: making it 'fair' for as many working people as possible. You do realise the average salary is £33k/yr? So that person is likely to be able to afford to put, say £0 to £10k(?) annually into their pension at most. Increasing the tax-free pension allowance to £60k, almost double the entire average salary, seems to fail on the fairness point if you want to target middle incomes.

[petejh]

I simply fail to see how subsidising the pensions of the very well off is something we should be doing.
..

There really are lots of reasons why this is a terrible idea.

Why is it a terrible idea to incentivise some of the people we need to remain in work - if those people happen to be high-earners?

And how do you propose to incentivise those people differently Sean - if not by trying to make it financially worthwhile to remain working versus retiring?

And Ali - I distinctly remember replying in context of a point about this - supposedly - only benefitting 'the 1%'. You're now talking about the average wage. The truth clearly is somewhere inbetween. I reckon a good proportion of the silent lurkers on here will benefit.

[Wellsy]

I think that your assessment of how much money people have to throw into pension pots is madly out of touch. This isn't incentivising savings its a tax break for the highest earners

Your exact comment re. The AA was "That allows anyone on a decent middle-to-high income to contribute more to their pension" which is only true if you assume someone on a decent middle to high salary earning enough to pay more than 40K into their pension a year. "Oh but windfalls!" Well you get a 3 year unused allowance carry forward and did before so you were already protected there.

You've jumped around massively on this one. First it was a stealth tax increase that's trying to get doctors back to work, now its because people with ten million quid will put their money in pensions rather than other tax avoiding strategies that they couof use before but now apparently can't. Firstly good I should bloody well hope people with pensions worth ten million play plenty of tax! Secondly it's still a tax cut because if they had that before the LTA got taken away they'd pay more than their tax bracket because on almost all of that they'd pay that bracket plus an additional LTA charge.

You're just defending tax breaks for the wealthy in a time of squeezed public finances and decrying criticism as tribal rhetoric, well how about this, you're factually wrong, completely out of touch on what constitutes and ordinary financial situation, and your suggestions are less about incentivising ordinary people to work hard and save and more about carefully checking to see if the poor old millionaires are able to take their massive pensions without getting a big bill. Boo fucking hoo.

[ali k]

My point being the same as Stabbsy's upthread - how much would you realistically need to be earning to be able to afford to put £60k/yr into your pension? And where does that put you in terms of income distribution? To say that this is anything like 'fair' or benefits anyone but the highest earners seems delusional to me. It's in the same league as that guy off Question Time refusing to admit £80k/yr put him in the top 5% of earners.

[abarro81]

+1 to those arguing that the ability to dump >£40k per year into your pension is not a common trait amongst those who I would consider "middle income"! If I downsize, inherit, or get a big bonus the hardship of loading it into my pension over the course of a few years is unlikely to be significant!

For the docs: couldn't they just introduce an exemption for NHS pension schemes, or modify the NHS pension contribution system slightly (e.g. allow you to stop contributing once you hit 1m) without having to give a tax break to the bankers. Though what really baffles me is why anyone with a £1m pension pot wouldn't have already retired long ago!

[kac]

To be fair to that guy on question time he's probably miles away from being rich enough to benefit from this change. I can't quite work out if Pete is trolling, doesn't understand the changes or is just completely out of touch.

[ali k]

For the docs: couldn't they just introduce an exemption for NHS pension schemes, or modify the NHS pension contribution system slightly (e.g. allow you to stop contributing once you hit 1m) without having to give a tax break to the bankers.

Apparently it’s so complicated it takes more than 13 years to come up with this kind of targeted scheme, which is why they’re having to rush through the blanket tax break. #paraphrasinghunt

[spidermonkey09]

For the docs: couldn't they just introduce an exemption for NHS pension schemes, or modify the NHS pension contribution system slightly (e.g. allow you to stop contributing once you hit 1m) without having to give a tax break to the bankers. Though what really baffles me is why anyone with a £1m pension pot wouldn't have already retired long ago!

Yes, they could. Something similar already exists for judges. Hunt said it would take too long and this way would be quicker. Described as 'a sledgehammer to crack a tiny nut' by the Institute for Fiscal Studies. https://twitter.com/PJTheEconomist

[petejh]

Though what really baffles me is why anyone with a £1m pension pot wouldn't have already retired long ago!

I mean yes I entirely agree with this point. But plenty of people are addicted to chasing the coin, and/or end up in relationships with partners who have developed a taste for expensive lifestyles - careful how well you end up doing as it may become self-fulfilling. So it's hard to judge. The financial incentive is pretty obviously the most strong incentive for most people doing most work. Plenty of other incentives - saving the world, ego, charity, pure love of the task, etc.  As per my question to Sean, can you come up with a better way to incentivise these people?


As for the slight straw man of how much people can or can't contribute contribute - I haven't made the point that this is fair, in fact I've made the point that it isn't. And I noted that a fairer system would provide a greater (say 30%) pensions tax-break to lower earners and those on benefits (up to a point). I have argued that the benefits of this aren't restricted to the fabled '1%' as some claim - I'd counter this potentially benefits much more of society than that and this number will only grow over time with wage inflation - Alex get back to us in 10 years and let us know how you're doing.

My point remains, why is people having more flexibility to contribute more into their pensions because they have more spare money than you, even if you personally can't, necessarily a bad thing in principle? Especially when as pointed out it's a tax deferral scheme not an absolute tax break, and the tax advantage is proportionally much less for the '1%' than for the 'high-earner done well', as I pointed out above to Wellsey who hasn't come up with a reply.

[seankenny]

I simply fail to see how subsidising the pensions of the very well off is something we should be doing.
..

There really are lots of reasons why this is a terrible idea.

Why is it a terrible idea to incentivise some of the people we need to remain in work - if those people happen to be high-earners?

And how do you propose to incentivise those people differently Sean - if not by trying to make it financially worthwhile to remain working versus retiring?

I don’t think incentivising a very small group of workers to stay in the labour market is a priority for the state at the moment. It’s basically a straight up transfer to the wealthy or their descendants, whereas I believe a progressive tax system that is used to fund things the market can’t or won’t provide is the purpose of the modern state. This is straight up pork barrel politics to a client group that frankly doesn’t need the money. This won’t help us do any of the things we need to do, it’s a waste of money at a time when we have far bigger challenges.

We do have a problem with public sector retention and that can be easily targeted via the pension system if we wish, as other posters have pointed out. We could even spend that money making the NHS or CJS nicer places to work, perish the thought.

[abarro81]

As per my question to Sean, can you come up with a better way to incentivise these people?

For doctors this is fine. I'm happy for the turnover rate in the banking industry to remain high if it currently is, and for others to be promoted in the place of those retiring. As I understand it, places like legal firms with partnership models like a good bit of turnover as it makes it seem more achievable to make partner, thereby incentivizing the suckers who are earning all the fees.

I have argued that the benefits of this aren't restricted to the fabled '1%' as some claim

Yeah, but it sounds like maybe 2% or 3%. That's obviously a big increase vs 1% in some ways, but still a very small minority of the country

My point remains, why is people having more flexibility to contribute more into their pensions because they have more spare money than you, even if you personally can't, necessarily a bad thing in principle? Especially when as pointed out it's a tax deferral scheme not an absolute tax break

This isn't something I've spent much time pondering, but presumably because it is partly an absolute break, given
- that 25% is tax free
- the fact that for the upper (but not super rich) earners it's a way to defer your income to a point when it's likely to be in a lower tax bracket
- stuff about inheritance tax that I've not really looked into but may be relevant
I.e. basically probably 3 of the 4 core reasons why someone earning 100k might want to shuffle 60k into their pot instead of 40k! (the 4th being getting more money in earlier to take advantage of any growth, but I think that one doesn't disadvantage the tax man, at least not in a way that leaps out to me)