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IFS - taxation of pensions


CliveH

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There is a report in the Daily Wail that the IFS (Institute of Fiscal Studies) has suggested that politicians stop tax raiding pensions - all very laudable if true. But the reality is that having been sent a summation of the report earlier - I have no idea where the hell the Daily Wail gets this from?

 

Here is the summary of the relevant section of the IFS's Green Budget 2014

 

....................

 

Taxation of private pensions

Carl Emmerson (IFS)

Summary

 

• In 2012, about £70 billion was contributed to funded private pensions, which had a total fund value in 2011 of over £2 trillion. The amount contributed is likely to rise as automatic enrolment goes forward. The way in which pensions are taxed, therefore, is crucially important. Yet this is an area beset by misunderstanding.

 

• One needs an appropriate benchmark with which to compare the current system. A good starting place would be a system in which contributions to private pensions are free of tax, no tax is levied on any returns, but tax is paid on all pension income when it is received.

 

• The current UK tax system is overly generous compared with this benchmark system in two ways. First, up to one-quarter of a private pension can be taken entirely free of income tax. Second, roughly three-quarters of pension contributions – those made by employers – escape National Insurance contributions (NICs) entirely. Two factors work in the opposite direction. First, limits apply to the amounts that can be saved in a private pension without penalty. Second, while returns are free of tax at the personal level, these returns are still likely to be affected by both corporation tax and stamp duties.

 

• HM Revenue and Customs (HMRC) estimates that the net cost of tax relief on pensions provided by income tax and NICs in 2011–12 was £38.3 billion. But this is relative to a benchmark where individuals are not able to benefit from tax-rate smoothing by only paying tax on pension income when it is received and where the system encourages individuals to spend rather than to save. A better estimate suggests the true cost of income tax and NICs relief on pension saving is less than half the official estimate. Taking into account the impact of taxes at the corporate level – corporation tax on normal returns and stamp duty on purchases of shares and property – would reduce this figure further.

 

• HMRC estimates also suggest that a disproportionate amount of tax relief goes to those on high and very high incomes. But these data are not a good guide to how reliefs are genuinely distributed: the fact that a large slice of up-front relief goes to high-income individuals purely reflects the fact that they make a large proportion of pension contributions and pay a large share of income tax revenues.

 

• Reducing the annual allowance or the lifetime limits, or restricting income tax relief on pension contributions in any other way, would be expensive to administer and arguably unfair and would inappropriately distort behaviour. Better ways to boost revenues would be to tackle the two elements of the system that look generous relative to a reasonable benchmark – i.e. the tax-free lump sum and the generous NICs treatment of employer pension contributions. As far as NICs are concerned, they could be imposed on employer contributions. But there is a case for, instead, introducing a small and increasing levy on pensions in payment.

 

• Consideration could also be given to offsetting some of the impact of corporation tax and stamp duties on the returns achieved by pension funds.

 

.........................................

 

So - whilst the report does say that the aspects of personal taxation of pensions should not be further modified so as to increase the tax hit yet further - and by so doing increase yet further the publics feelings that pensions are "poor value" - it goes onto suggest that the 25% tax free cash is overly generous (the powers that be in the then FSA, now FCA already force Advisers to call this the PCLS -Pension Commencement Lump Sum - which smacks of a move to remove its "Tax Free" status) and that the fact that the Employers contributions into a pension "escape NIC entirely"

 

"....Second, roughly three-quarters of pension contributions – those made by employers – escape National Insurance contributions (NICs) entirely"

 

and the report goes onto say -

 

"Better ways to boost revenues would be to tackle the two elements of the system that look generous relative to a reasonable benchmark – i.e. the tax-free lump sum and the generous NICs treatment of employer pension contributions. As far as NICs are concerned, they could be imposed on employer contributions. But there is a case for, instead, introducing a small and increasing levy on pensions in payment."

 

8-)

 

So reading between the lines - my take on this is that any future Tax Free Cash you might be wanting to take? Don't bank on it in the future!

 

Because of other tax changes, salary sacrifice is becoming increasingly popular - don't bank on this being as viable as it was if Employers NIC ends up being treated in the same way as the Employees NIC re pension contributions.

 

Thirdly - even if you think "well I am old enough to have got away with it as my pot is already made!" - they are planning to get you by way of NIC to be maintained on pensions in payment!

 

"But there is a case for, instead, introducing a small and increasing (NIC) levy on pensions in payment."

 

:-S

 

Now in previous discussions on pensions - some asked why it was that I as an adviser now warns against pensions when in the past I recommended them.

 

The answer is two fold and the second part is underlined here in the IFS report. Firstly, in the 1990's annuity rates were in double figures so getting your "pot" back before you die was relatively easily achieved in a few years - with todays low annuity rates this is simply not the case.

 

The second point is the successive and relentless tax raids on pensions.

 

This IFS report gives a clue as to what the powers that be are planning regarding pension taxation.

 

How the hell the Daily Wail can interpret it as a "hands of" warning to politicians I have no idea! :-S

 

Edit:

 

Link to Mail article -

 

http://www.dailymail.co.uk/news/article-2552670/Pensions-tax-raid-stop-people-saving-old-age-Plan-hit-middle-classes-unfair-says-watchdog.html?ico=home%5Eheadlines

 

 

 

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No doubt CliveH explains this very well but not being a newspaper reader I never get involved with what others propose

 

I'm a go by the day person who adjusts accordingly and find it so simple. I assess all such newspaper articles as a job to be fulfilled in order to keep the company buoyant.

 

There is no doubt that media aggravation is good for business. Make people unhappy is the cry, they will buy more goods.

 

Ps its raining here.

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Will85 - 2014-02-06 10:08 AM

 

Have not read or seen a newspaper for 50 years. Why would I need to involve myself with any other persons writings.

 

.

 

That explains a lot Will (lol)

 

 

 

 

(JOKE ! - just in case the red mists are rising!!! )

 

 

 

 

 

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Will85 - 2014-02-06 10:28 AM

 

Yes I thought it was a bit naff so rewrote it.

 

I may be smart or fortunate but my pension (FIXED) will last me from age 70 to 95 quite easily and I'm at about level with the original cost at the moment.

 

The 'golden age' of pensions are well gone now for most people, my father didn't need to put a lot of thought into pension savings, he joined the company scheme, paid in a modest amount and retired on a good pension, since his death my mother has been paid 50% of the pension, this on top of her own pensions means she can live quite comfortably.

Myself having lived throu Maxwell, Gordon's tax grab and the collapse of final salary schemes, have had to take a make more active role in attempting to ensure I will have a comfortable retirement.

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Will85 - 2014-02-06 10:28 AM

 

Yes I thought it was a bit naff so rewrote it.

 

I may be smart or fortunate but my pension (FIXED) will last me from age 70 to 95 quite easily and I'm at about level with the original cost at the moment.

 

The 'golden age' of pensions are well gone now for most people, my father didn't need to put a lot of thought into pension savings, he joined the company scheme, paid in a modest amount and retired on a good pension, since his death my mother has been paid 50% of the pension, this on top of her own pensions means she can live quite comfortably.

Myself having lived throu Maxwell, Gordon's tax grab and the collapse of final salary schemes, have had to take a make more active role in attempting to ensure I will have a comfortable retirement.

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And I would suggest extreme caution in placing too many eggs in a pension "basket" if the politicians see your nest egg as a stash of cash that they can raid.

 

I know I repeat myself - but pensions are seriously NOT as good as they once were.

 

You do need to look for alternatives.

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I've always been a small-print reader and a good listener on any official documents, taking my time to understand every small detail even with a magnifier.

 

When 70 I gleaned that I could decide at that time to take what was offered or lose it, so of course I went ahead although it was not wanted, it was a very large sum (for me) and still is for someone who is tight.

 

I thought about various investments but have NONE not even ISAS. I pay tax of course but I have all the money to do whatever I like with it and its great, Just bought the VW all paid and have used lots on the family.

 

I tried the self assessment but presumably kept cocking it up and got fined and they even suggested I was avoiding paying and had to fill in a hand written document explaining why I was a naughty boy.

 

This year back to an accountant. and Mr Tax Man has very kindly sent me a very large cheque well over. 10,000.

 

Its great to be simple minded !

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Joined the auto-enrol pension last week,they are taking the princely sum of £2.90 a wk(you clever buggers can now work out what i earn lol) and the company are matching it,so i aint gonna be rich when i retire! Obviously we have savings and are certainly not hard up,but i asked about adding a bit more to my pension,say a tenner a week,wages office said it has to be done as a percentage,not good with figures so i gave up and went back to work.Other strange thing was both my manager and wages were very reluctant to even discuss it with me,as soon as i mentioned pension they both said they were not allowed to give me financial advice,which wasn't what i was asking for!
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PM me if you want a bit of help with working things out. No probs

 

As for your firm not being able to give you help - this is a genuine fear - the law has big teeth when it comes to employers rule breaking. And one of the rules is not to give advice unless you are authorised to do so.

 

 

 

 

 

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