Weekend reading: Budget 2021 might not be the end of it

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• 1 Impersonal Finances March 6, 2021, 8:10 am

  It’s going to be interesting to see how people reconcile with their capital gains situation this year–and definitely next year. With new investors taking profits on crypto and tech stocks, I don’t think there’s been a lot of planning for the eventual tax bill to come.
• 2 Gentleman's+Family+Finances March 6, 2021, 9:15 am

  The budget was amazing in just how little changed.
  Tinkering around the edges and kicking the can down the road.

  It.makes me wonder what horrors are in store.
• 3 Jon March 6, 2021, 10:16 am

  You missed the bit about ending the lifetime allowance annual inflationary rise, then?

  https://www.ft.com/content/61351466-a918-476c-a095-8450b2850a1e

  Which will now induce a large exodus of senior doctors from the NHS.
  https://www.bma.org.uk/bma-media-centre/bma-says-the-chancellor-has-imposed-an-unfair-tax-on-doctors-and-survey-shows-many-now-plan-to-leave-the-nhs-before-their-expected-retirement

  But that’s okay.. it’s not like we have a record-breaking backlog of patients and waiting lists to deal with, over the next few years, or anything…
• 4 The Investor March 6, 2021, 10:19 am

  @Jon — I didn’t miss it. It’s another freezing of allowances, which I mention, like the rest. Obviously it’s not good if you’re hit by it, like all fiscal drag.

  I see you took part in the big and interesting thread in the comments on a January article about LTAs and doctors:

  https://monevator.com/working-from-home-life-balance/#comments

  Worth a read for anyone interested in the doctor/LTA issue.
• 5 Bal March 6, 2021, 10:48 am

  Another interesting Saturday morning read.

  On my usual trip down the rabbit hole following the different story links I noticed the PortfolioCharts story listed above which reminded me of previous visits to the site.

  I really like the site but has anyone created a Golden Butterfly portfolio using a UK approach with global index funds (instead of using US funds)?

  Whenever I’ve tried before the results are somewhat mediocre compared to the reported US version.

  Also tried using the PortfolioCharts tool in the past to set for UK (which shows a lower expected result than the US version) then tried to replicate it as a model portfolio using index funds which also doesn’t seem to tally with the expected UK results.

  Am I missing something or is there a flaw when trying to replicate it for non-US markets?
• 6 Anaplian March 6, 2021, 10:53 am

  I wonder if the long rumoured (often by pension providers) reduction/removal of tax relief on pension contributions will be coming along shortly?
• 7 The Investor March 6, 2021, 10:59 am

  @Bal — Yes, I’ve whiled away a few hours trying to make UK versions of Portfolio Charts’ model portfolios look as good, without much success.

  Gold-heavy portfolios are particularly tricky because of how gold behaved in the 1970s. That’s where I see its biggest success. I’m not a data-mining wonk so this is just a guess, but I imagine the $/gold price interaction plays a big role here, versus our experience. This is leaving aside the obvious point of US exceptional returns, which you well understand.

  With all that said I’m not one for massaging data or trying to find some golden path through the past that will highlight the future. It’s a big reason I don’t get involved in the SWR debates, and also why to the displeasure of many around here (including my own co-blogger) I still entertain atavistic notions such as living off income not capital, including dividends and/or other sources.

  Personally I try to look at where things are today and — absolutely informed by how assets have behaved in the past, but not expecting any precision from that — have a ponder about where they’ll go and how they’ll interact in the foreseeable future. And what’s in it for me.

  This is of course a lot easier (to do, I mean, not to achieve success with!) when you’re an active investor.
• 8 ZXSpectrum48k March 6, 2021, 11:03 am

  @Jon. If you have a DB pension then your multiplier is typically 20 (a few have 25). Someone with a DC pension pot at the LTA of £1.07mm is looking at a maximum RPI-linked pension of £27k/annum before taking a tax charge. Someone with a DB pension can get £53k/annum before they hit the LTA. So they’ve already got 2x the LTA everyone else has – over £2mm.

  What’s the problem? Pensions cost the government over £40bn in tax-relief each year. You want someone with a pension pot that is already over £2mm in capitalized terms to get more tax relief? Surely we have higher priorities than allowing already rich people to have more tax-relief? It’s inevitable those of us in the higher pay and wealth brackets will lose tax reliefs and pay more tax. Nothing to see here.
• 9 MrOptimistic March 6, 2021, 11:09 am

  The concern about doctors etc giving up work because they are denied a tax benefit reminds me of the ‘don’t let the tail wag the dog’ remark you get when reading investment advice. Unless they actually lose money from working employment still increases wealth surely. Seems the moral of the tale should be that the NHS has too many old and overpaid doctors and the idea that is a rewarding ‘vocation’ with the joy of helping people and alleviating suffering doesn’t cut it against the exhausting of a tax break. Am I missing something ?
  Don’t know what everyone else has been doing but I’ve taken the pruners to some bond funds. Had been thinking of going 50/50 equities/bonds but the mood music has changed. It has also shown a problem with fund of funds in that you have to sell the lot to extract the bond allocation.
  So what to do with the cash?
• 10 Al Cam March 6, 2021, 11:15 am

  @ZX:
  To be fair, any such person (DB pension holder) cannot call on that >£2m capitalised value without incurring the LTA!!
• 11 E&G March 6, 2021, 12:00 pm

  The doctors stuff may lead to some unintended consequences but it’s really hard to see why one group of very well paid workers should be treated differently through the tax and pensions systems than everyone else. It’s another example of the woe betide us echo chamber that means many really very fortunate people somehow seem to think they are hard done to which runs through a lot of FI-type blogs and comments.
• 12 Jon March 6, 2021, 12:00 pm

  Sorry @TheInvestor, when I said “You missed…” I was referring to the comment immediately above mine. I forgot to use an @
• 13 Simon March 6, 2021, 12:03 pm

  @ZX Spectrum. Is that £40bn net of future tax income on deferred salary, or are you proposing taxing pension contributions on the way in and on the way out?
  Having said that the tax free PCLS is getting harder to justify.
• 14 Jon March 6, 2021, 12:15 pm

  @E&G not asking for differential treatment (like the judges have just been awarded).
  Even the OTS agrees LTA is nonsense in DC schemes, just as the AA is stupid in DB schemes.
  Just pointing out that forcing doctors to retire early, to earn a better pension, makes no sense.

  @MrOptimistic “old and overpaid”? You obviously haven’t required the services of an NHS consultant recently..

  @ZX it’s okay that you don’t quite understand the nuances and complexities of the NHS pension scheme. Most IFAs and accountants don’t either. It’s so hard to get round the fact that the pension taxes are not in fact reduction of tax relief, but additional punitive charges on theoretical changes in theoretical value, that are subject to variables out of control of the member, and are in no way equitable. Between members, or from year to year.
  But the simple fact is that we now have a situation where doctors pay, and pension, is better the less hours they work, and earlier they retire. And if you think that’s good for the NHS at the moment, you’re not paying attention ruin! 😉
• 15 Simon March 6, 2021, 12:35 pm

  @Jon. I think you have put your finger on it.
  There is a benefit to the future economy in people having independent pension provision, so not becoming a burden on the state in later years. But you are asking people to lock away earnings for decades and be potentially subject to changes in tax/pensions law.
  In return the government offers the ability to tax efficiently smooth earnings profile. It’s reasonable to have a limit on benefits associated with pension contributions, as the intention is not to provide tax breaks to people who wouldn’t be a burden on the state. But this needs to be simple to understand, calculate and easily avoidable (in the sense of being able to manage contributions to stay within the limit).
  I’m not a pensions expert, as this post demonstrates, but I think the current legislation fails the simple, calculable and avoidable tests above.
  I’d welcome being corrected if I have any of the above wrong – every day is a school day, even Saturdays!
• 16 Al Cam March 6, 2021, 12:40 pm

  @Jon:
  RE: “But the simple fact ….”
  Whilst what you say is strictly speaking correct, this problem is not in any way unique to doctors! Thus, any solution devised just for doctors – which to my eyes at least seems to be what you are hinting at – would be “differential treatment” to use your phrase.
• 17 Bal March 6, 2021, 12:47 pm

  @The Investor – Thank you for your reply. Yes, I suspected there was something that just didn’t map over in some way.

  I find myself continually drawn to the folly of trying to work out my own models of the lazy portfolios and their derivatives focusing on a small investor perspective.

  Unfortunately my models don’t match the original versions (possibly due to differences in timelines / geographical perspectives) or they can’t be adequately created due to unavailable assets to small retail investors or their cost.

  Being a simple sole I also get lost with the finer aspects of SWR, etc. I would love to simply bolt on a couple of bits (say 5-10% gold, property) to a single multi asset fund and be happy in the knowledge I’ve done a great job. But I’ve learnt a lot from the experience sharing generosity of you guys, 7 Circles (thanks again for the link @Al Cam), etc. that it’s not always that easy.

  Things like the asset allocations in the single fund chosen may appear better than their rivals (when viewing the total return for a short period) but still might not be ideal for the longer run (i.e. heavy US allocation, market cap within the index used, etc.).

  I’ve also tried looking at equal market weightings (to reduce the FAANGs effect) but being small time anything more than a few funds makes it unpractical (cost, ability to balance smaller percentages, etc.) And there’s no global equal market tracker ( read your piece on this a while ago).

  I’m also lazy enough to just be happy to buy in to a single fund if it had all the assets in a decent mix in worthwhile measures (a kind of Vanguard LifeStrategy+ if you like) which included small cap, gold, property but such a thing doesn’t exist and possibly couldn’t due to costs or general investor perspective (we all want to know why if the fund performs less in the short term than the rival).

  So I continue to chase my tail on my quest searching for a portfolio balance using only a few funds which others have shown probably can’t be achieved without at least around a dozen funds.
• 18 Jon March 6, 2021, 12:47 pm

  Correct, it’s not unique to doctors. I only talk about doctors because that’s what I know about.

  I call for exactly what the Office for Tax Simplification have recommended to the government. Scrap the AA for all DB schemes, and scrap the LTA for all DC schemes. And then introduce some flexibility for members to reduce their contributions (and growth) if they wish.
  That’s it. Loads more tinkering could and probably should be done with the monstrosity that are public sector pensions, but the above measures would fix 99% of issues.
• 19 Al Cam March 6, 2021, 12:53 pm

  @Simon (#13)
  I agree that you should take a whole life view – but of course such a balanced approach does not provide such banging headlines and/or bullet points!
  In particular, I reckon over a long enough timescale the state probably does quite well out of deferred tax savings schemes – such as DC pensions – which of course are not really pensions either- but that is a whole other story!
  IMO the PCLS is there primarily to incentivise people to participate in a scheme that locks away money until you are at least 55 and it may well be self-funding for some schemes too!
  Also, the PCLS is capped at 25% of the LTA, not 25% of the Pot!
• 20 Al Cam March 6, 2021, 1:02 pm

  @Jon (#18)
  IMO this is rather unlikely to ever happen – not because of any particular logic but rather because the AA and LTA discussions are always framed around hitting the wealthy. This seems to be HMG’s approach – and provides a good soundbite for MP’s and apparently makes good headlines too!!
  I guess some form of acid test will be what sort of pay-rise the MP’s decide to award themselves in due course!
• 21 ZXSpectrum48k March 6, 2021, 1:10 pm

  @Jon. Actually I have gone through the calcs for a few doctors I know and, yes, the system is completely bogged up. You say it’s not equitable, and, a micro level, you have point. Yes, LTAs are dumbass. But if you can work less and get paid more, then just do it. It might be bad for the NHS but sometimes the only way to change something is to call someone’s bluff.

  At a more macro level, however, I’d argue DB pensions need to be eliminated. The only DB pension should be the state pension. Same value for everyone whether NHS cleaner or doctor. If you want more, it’s DC and your responsibility.

  But do we want pension tax relief at all? Is it really equitable that those of us who are paid in the top few percent get 40/45% tax relief? It’s utterly ridiculous to see that as a priority. I can’t really see any real justification for pension tax relief, ISAs, VCT/EIS/SEIS etc. Or CGT (with a CPI deflator) at a different level from as income tax. CGT exemption on homes. Why? These are all just tax reliefs for those of us who don’t really actually need them.
• 22 MrOptimistic March 6, 2021, 1:53 pm

  On a separate note I was surprised there was no speculation about salary sacrifice schemes. These seem only to largely benefit those working for big organisations and swerve around national insurance. Think I would be looking to scrap them.
• 23 Naeclue March 6, 2021, 1:55 pm

  I do feel as though we have dodged a lot of bullets in this budget. No mansion or second home tax, no changes (for next year at least) to CGT, no tinkering with the SIPP/ISA tax shelters, no changes to income tax. Fiscal drag yes, but even then our LTAs were already fixed. This budget could have been a whole lot worse for us. Tax day may be much more interesting.
• 24 Simon March 6, 2021, 1:58 pm

  @ZX I think you are perhaps expressing it in slightly black and white terms.
  As I understand it pensions tax relief is provided as the income is considered to be deferred. You don’t pay tax upfront, however you still pay tax on withdrawal. Perhaps “tax deferral” would sit easier for you here. If you want tax paid up front then you are going to have a job getting anyone to put money in if they get taxed on the way out as well. If you aren’t taxing on the way out, well why not use an ISA? Then you can get your money whenever you want and don’t pay tax on growth.
  The complications with pensions start when there is scope (intentional or not) for arbitrage, e.g. not paying higher rate tax now, but paying basic rate tax when pensionable. However, as I understand it, the purpose of the annual and lifetime limits is to limit how much advantage can be taken in this way. For the higher earners, excess income is either taxed at a suitable marginal rate, or if put in the pension, is punitively taxed. This is OK by me in principle, but the execution seems quite clunky.
  We already withdraw the personal allowance and child benefit at certain income thresholds – what threshold would you suggest for pension tax relief?
• 25 Grff March 6, 2021, 2:15 pm

  @ZXSpectrum48k
  Mmm ban all DB pensions.
  Perhaps we should go the other way a DB pension plus state pension for workers and just the state pension for shirkers. Beats the race to the bottom you advocate.
• 26 Matthew March 6, 2021, 2:26 pm

  If a doctor was forecast to breach the LTA at expected levels, can they not just opt to stop pension contributions?
  Or even the option of less conntributions for slower accrual could be offered

  Although it could be that even with breaching the LTA it still beats a GIA for them since if they were filling isas they have no way to escape a hammering anyway
• 27 Naeclue March 6, 2021, 2:31 pm

  Tax reliefs are offered for the very simple reason that they change behaviour, encouraging saving and investment in ways that governments consider to be beneficial. Scrapping all tax reliefs could prove very detrimental over the long term.

  I have often thought though that scrapping tax relief on ISAs for those over state pension age would not discourage long term saving. Similarly I am not entirely sure why investments in pension funds should continue to remain untaxed once pensions are being paid.

  For the avoidance of doubt, I really hope my suggestions are not taken up 🙂
• 28 Al Cam March 6, 2021, 2:35 pm

  @Naeclue:
  I agree: this ain’t over, it has probably only barely started – but to have done anything else could have jeopardized any sort of recovery/bounce-back! Interesting times ahead.
• 29 Matthew March 6, 2021, 2:37 pm

  @zx – you ask why these tax reliefs for the rich…
  1 – If you incentivise high skilled people to work more with relaxed pensions and somewhere to park their cach, they will supply more of that expensive work, making it cheaper for the common man who needs professional services
  2 – hmrc has a finger in our investment pies and wants them to grow to bring money into the country or to get eventually through IHT or not having to provide benefits – with the laffer curve a cut bring in more revenue long term
• 30 Seeking Fire March 6, 2021, 2:54 pm

  mmm had a feeling this article might provoke a number of comments.

  @3 / 13 – Jon. Never looked at Doctors / Public sector DB pension issues before. It’s unfair relatively but not to the beneficiaries of DB pension schemes but those paying for it and recipients of DC pension schemes. Put bluntly if a Doctor can retire at the age of 60 and take a circa 45k pension then they are over-paid relative to the DC paying population. That DC equivalent would need a circa £3m pension pot taking into account LTA charges on circa >£1m based on best annuity rates. Very high earners might achieve that but they’re not allowed to save more than £4k into a pension so it is largely unachievable for anyone who doesn’t have a DB pension. I advocate as many do removal of LTA / AA but would there not need to be a counter balance – perhaps tax of 50% on any income / withdrawals >25k? Your points that the system is flawed and causing people to retire early is a good one. The solution though is removal of all DB pensions. Only fair to everyone else and absolutely guaranteed not to happen. What is happening is a result of the fact that DB pensions are unaffordable and the govt doesn’t want to admit it.

  The budget seemed somewhat irrelevant and politicking as ever. On the one hand you have a chancellor commenting how the country is very susceptible to higher interest rates given borrowing levels and on the other there is active encouragement for people to take 95% mortgages to pump up the housing drug further. A desire to reign in borrowing and yet corporation tax yields circa 7/8% of total tax. A comment from the health secretary that 1% is all that can be afforded and yet the BoE now owns circa £900 billion of Gilts. The govt can clearly afford >1% or indeed what ever it wants at least short term as the BoE can just print more money. If you were basing affordability on a balanced budget based on £230 billion projected borrowing next year and total spending of around £850 billion in a normal year what would the tax / expenditure consequences have been? Can you imagine 30 years ago your response if someone has told you in 2020 there will be a link to the BoE that explains why we need quantitative easing?

  https://www.bankofengland.co.uk/monetary-policy/quantitative-easing

  What’s the point of raising corporate tax rate? Raises circa 8% of tax – there’s also an island pretty close to here that’s actually in the single market – you know they can trade without any barriers, also speaks english as a first language and has a corporate tax rate of 12.5%. Politicking to an economically illiterate electorate.

  The vice will certainly tighten but given it has very little to do with actually trying to balance the budget sustainably one must consider that it will be applied largely based on politics. Which means wealth > average is squarely in the x hairs. At some unknowable point, the govt will have squeezed every drop, the electorate will eventually realise the only option is to pay our way and actually grow the economy. Going to be a painful couple of decades.

  I’ve been mulling over a Family Investment Company. High quality problem to have. I know the in’s and out’s but I’m wondering whether anyone who has one thinks given the way the wind is blowing whether this is too risky tax wise and wouldn’t bother.

  Interesting articles on bonds – I generally feel investors over estimate their risk appetite – you see many bloggers talking about being 100% equities, who haven’t experience a sustained draw down – let’s chat after a decade of going nowhere with 30 / 40% suck outs. That’s why other options – cash, bonds ($TIPS for me), gold are important even though the yield is near zero. You need to adjust your return expectation unfortunately though.
• 31 Simon March 6, 2021, 3:10 pm

  Also, you need to be careful in withdrawing otherwise universal benefits. These currently include child benefit and personal allowance, but might include pensions tax relief if I’ve understood ZX correctly. For the record I think this is ill-conceived.
  Call me cynical if you must, but most policy makers will be high earners and I think it is good for them to have some skin in the game when adjusting such rates, limits etc. even if the effect on them is small. An analogy would be that the general staff and board in a company should all belong to the same pension scheme…
• 32 MrOptimistic March 6, 2021, 3:22 pm

  @BAL, global equal weighted, what about
  https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.hl.co.uk/shares/shares-search-results/v/vaneckvectors-global-equal-weight-ucits-etf&ved=2ahUKEwitnOSh7pvvAhWPZhUIHe8fAoAQjjgwAnoECAEQAg&usg=AOvVaw0wrnEjIcRz0yLjw1BVKT1K
• 33 Al Cam March 6, 2021, 3:32 pm

  @SeekingFire:
  Re FIC:
  Are you familiar with FvL’s site, e.g. https://firevlondon.com/2017/12/22/reducing-my-tax-rate/
  IIRC, he uses such a scheme and from time to time makes comments about it.
• 34 Naeclue March 6, 2021, 3:46 pm

  @Seeking Fire, I regret the decision on CT as well, but this has been the direction of travel for a while. George Osborne was taking us steadily towards lower CT and building credibility that the UK was becoming a low tax and business friendly country. All pissed away in 2016 unfortunately. And we all know what Boris thinks about business.

  Regardsing a Family Investment Company, I considered this a few years ago. It has some advantages, such as being able to collect dividends at zero tax, but the advantages have been diminishing over the years. Final nail in the coffin for me was the removal of indexation allowance. That means that all capital gains from 2018 will be taxed at full CT rates, with no allowances. I have not read the rules recently, but I believe that investment companies used to pay the full CT rate as well instead of the small business rate. You might want to check the small print of the budget documents, but if that was still the situation it would mean tax at 25% on all gains with no annual allowance, compared with just 10% for a basic rate taxpayer on gains over their annual allowance. Discretionary Trusts are another option I looked at, but again they suffer from high taxation.

  For IHT mitigation, I concluded the best way forward was to pass money to beneficiaries early. They can then use their ISA allowances, etc. That does of course mean giving up control. Putting a lot of money into some young people’s hands might not be a good idea either.
• 35 Bal March 6, 2021, 3:52 pm

  @MrOpimistic – thank you for the link, I was not aware of this.

  I’m with Fidelity who don’t seem to offer it. My other fly in the ointment is that the ETFs costs/fees would be high for the amount I could buy.

  Have considered a FreeTrade ISA which would solve the ETF purchase costs issue however yearly costs are currently higher than Fidelity (reason I currently only buy index funds).

  Pity Vanguard don’t do anything like this, then I would move to them as they would also sort both costs issues.
• 36 Al Cam March 6, 2021, 3:59 pm

  @Bal (#5, etc):
  IIRC, the second site I forwarded to you earlier in the week (ie not 7 circles) had a go at the Golden Butterfly.
• 37 Bal March 6, 2021, 5:17 pm

  @Al Cam – thank you for the reminder. Firstly, I must admit I didn’t take the time to read it properly and mistakenly misread the information (thinking it was all about drawdown), now reread again – apologies!

  One thing I did notice was the switch from a total US portfolio to a total UK portfolio. Personally, I wouldn’t do either but go more for a global tilt on equities but from what I’ve tried before I guess it’d be more variable depending on the type of global equity tracker used (developed world / all world). I’m guessing, judging from my previous attempts it would be nearer to the UK (my debatable calculations got me to approximately 4%).
• 38 ZXSpectrum48k March 6, 2021, 5:19 pm

  @Simon. HMT calculates the value of various tax reliefs. Pensions £42bn. ISAs £3bn, VCTs/EIS £1bn. ER relief £3bn. Principal residence relief £28bn. IHT nil rate band £21bn etc. That’s a £100bn/annum to start with. The vast majority of those reliefs goes to those who are the top 10% percent in wealth/income terms. Now those numbers are probably not the reality of what you collect if you remove these tax reliefs but it’s a starting point.

  Now, I took fixed protection on my pension in 2012 (LTA £1.8mm) so I haven’t paid anything in since then. I wouldn’t get any pension tax relief given what I earn. Nonetheless, I enjoyed huge tax relief during the period I built up that pension. Why was someone earning in the 1% allowed such tax relief? Was that a social priority? Next month, I will be sticking £58k into ISAs. Again, is that really a priority for government policy?

  Right now, I’d carry on issuing Gilts. The forward SP and DB pension liability makes the national debt look modest (especially once you ignore the £800bn+ that the BoE owns and which really doesn’t exist). At some point, however, the yields on those could rise enough to make tax rises a less worse option. If you don’t tax those like myself who can afford it, what do you cut instead in terms of public sector spending? What taxes do you raise instead? How do you raise say £50-100bn/annum? It’s not easy.

  Unless, of course, you believe in those sunny uplands, Britannia unchained, a productivity miracle or perhaps just your fairy godmother.
• 39 BBlimp March 6, 2021, 6:10 pm

  @zx it isn’t tax relief is it ? Just tax deferment , which would be relief if you pay income tax at a lower rate in retirement than whilst working…

  … we’re in for another long freeze on the higher rate band… nobody knows the future but I hazard I’ll be a higher rate taxpayer in retirement, just as I am now. So… where’s the relief ?
• 40 Simon March 6, 2021, 6:52 pm

  @ZX – good discussion. Here’s my take.

  1. It’s income deferred, so tax is deferred. I asked if the number you quoted (£40bn) included the effect of future tax revenues on deferred income. I don’t think I’ve had a clear answer. And it matters, because if we expect future revenue of zero, 20, 35, 45 or 60 £bn in today’s money the arguements for and against change radically.
  2. Notwithstanding whether this “costs” money, is encouraging private pension provision an appropriate public policy goal? If so, we can discuss how to encourage this behaviour, and taxation incentives have typically been used. See also ISAs, and in a negative sense, taxes on alcohol, tobacco, fuel. A pension must be close to the ultimate in delayed gratification, and there are lots of people out there who struggle with this, so significant incentives are likely to be needed.
  3. If so decided, tax incentives need limits or they will be abused. What I and other contributors have observed is that whilst potentially well intentioned, the implementation of these limits is sub-optimal and have led to unintended consequences.
  4. The wider point about reliefs being available to high earners I’ve addressed with the “skin in the game” comment, but I would also argue there also needs to be a perception that the system is fair, especially by those who pay alot into it. Giving everyone allowances helps with this. You may not need this, and as you seem to be a high earner I tip my hat to you for that, but different strokes and all that.
  PS it probably won’t be popular on this site, but I really can’t see the justification for ISA millionaires, or even ISAs now, as there is a modest allowance for interest and dividends outside ISAs. But a lifetime limit on ISAs is well overdue in my opinion, especially with an annual limit of £20k.
• 41 dalb March 6, 2021, 7:00 pm

  @ZX.Please excuse my naivety but how can you commit 58k to ISA in April when the Individual ISA allowance is 20k
  Another vote of thanks to TI/TA for vastly expanding my knowledge and confidence in personal finance.When is the book coming out?
  I’m another one with a DB pension and as a GP can confirm that the AA and LTA charges encouraged me to leave the NHS pension in 2017.Fortunately we can keep the employers and employees contributions whereas hospital doctors generally cannot and either have to take the hit or ‘hokey Cokey’ in and out of the scheme to try to control PIA and avoid punitive charges-and good luck trying to deal with Capita.
• 42 Naeclue March 6, 2021, 7:34 pm

  @Simon, I agree with most of what you say. Tax reliefs for “good behaviour” can be a good thing for the country. Increased taxes on “Bad behaviour”, fags, booze, carbon emissions, etc. also a good thing. I do have some qualms though as occasionally the government gets this wrong, such as with the SDLT holiday (IMHO). Another I used to invest in were limited life VCTs. 30-40% tax relief that predominantly went into fairly low risk asset backed loans and subsised green energy projects, with the government tax relief shared between investors and VCT managers over 5 years. Not really what the government had in mind and the loopholes now closed.

  I think ISAs though are a good thing. They allow people to save and build up capital while they are working. As I mentioned above, where I think they go wrong is in extending the tax free status past retirement. In retirement I cannot see why the “good behaviour” needs to continue to be encouraged, so I would set a maturity date. After that date all subsequent gains are taxable as though the holder sold and bought back in an unsheltered account.
• 43 The Rhino March 6, 2021, 7:40 pm

  @dalb 58k ISA will be husband + wife + 2 kids, 20 + 20 + 9 + 9
• 44 dalb March 6, 2021, 8:15 pm

  @Rhino.Many thanks,that would make sense
  Following on from the above,I’m going to front-load our ISA’s with 40k in April.With tech sell-offs and potential UK brexit bounce I’ve been considering deviating from my Kroijer-esque mantra and investing with Vanguard LS100 (Increase home bias,less tech and no nasty bonds) and Vanguard active UK equity (Actively co-managed by Baille Gifford and passive level OCF)
  Is anyone else tweaking their ISA allocation next month?
• 45 Bal March 6, 2021, 8:20 pm

  I have another possibility very unpopular point to make.

  I have no issue with people being able to having very comfortable retirements and being able to retire when they wish. In fact I wish them the very best as I would do the same in a similar situation.

  However there are a growing number of people who have to (not want to) work much longer in retirement to make ends meet. Their standards of living would be viewed as fairly harsh.

  There are also a lot of basic rate tax payers who work extremely hard and pay as much as they can in a pension and will have the same deferred tax effect as some higher rate tax payers in retirement however they won’t have anywhere near the same standard of living. In fact they would need to fall into a level of poverty before they paid less tax in retirement. Remember a number of these may also still be paying some form of mortgage/rent.

  Yes, the percentages of tax does increase as income increases but if you’re a higher rate tax payer in retirement can you really put hand on heart and say your standard of living was anywhere near the same or that you could prove you are more deserving than the rest of the population.

  Please excuse my ignorance but after taking your tax free lump-sum couldn’t you just decide to draw down less from your pension and accept a lower (basic rate tax payer) lifestyle to avoid the higher tax rate? and wouldn’t your pension also last longer?
• 46 ZXSpectrum48k March 6, 2021, 8:31 pm

  @Simon. It isn’t all deferred. Of that £40bn+, £17bn is non-payment of employee and employer NI. That doesn’t come back later. Now if we extended NI to pensionoer and investment income (or just raised the basic rate to 32/33%) you’d have a point.

  Of the remaining £24bn due to non-payment of income tax, some is lost due to PCLS (perhaps up to 25%). Some of the remaining amount is lost due to pensioners being in lower tax bands than when employed.

  Moreover, the deferred tax needs to be discounted back to today off the yield curve to incorporate it’s cost of funding. If you lose £40bn today, you need to issue £40bn more Gilts. £1 returned in 30 years is only worth 67bp today.

  As for “skin in the game”, I don’t really agree. The UK tax system is not at all progressive. It punishes earning income over having wealth. The UK is a great place to live in terms of tax avoidance. I have my pension, my ISAs, PIC, offshore bonds, trusts. IHT is totally avoidable. CGT easily defused. No CG on primary residence. No land value tax, no wealth tax. I’ve looked at other countries (US, Australia for example) and the UK beats both in terms of avoiding tax once you have wealth.

  Let’s face it I work with people educated at Eton, went to Oxbridge and live in Sloane Square. Send their kids to London private school. Yet they are non-doms? Only in the UK.

  @dalb. 2x20k for adults, 2x9k for kids.
• 47 Andrew March 6, 2021, 8:31 pm

  Pension tax relief being framed as some sort of perverse government handout annoys me. You’re simply not paying tax now, and paying it later instead.

  Someone who gets a pay bump from £100K/year to £120K/year in 2021 only takes home £7,600/year extra. The government takes 62%!

  Now imagine you put that £20K in to your pension and beat inflation by 3% over a 40 year period. You now have £65K in real terms, which the government taxes at say 20%, when you draw it as income. They’re now taking 20% of £65K which is around £13K in todays terms. Oh, and the government doesn’t take any investment risk.

  Either way the Government is getting a good return…. but no, let’s call it unfair and have all the better off piss it up against a wall now and lean on the state in their old age!
• 48 Al Cam March 6, 2021, 8:46 pm

  @ZX (#46):
  Your second to last para begs an obvious Q – if the UK tax system is so good for wealthy folks, why does anybody bother being a non-dom?
• 49 Simon March 6, 2021, 9:21 pm

  @ZX

  My understanding was that both you and your employer paid NI on full salary, but salary was effectively reduced by pension contributions for purposes of income tax only. So no NI loss, which “justifies” not paying NICs on pension income. But I’m not an expert and I’m sure there are wiser heads who can put me right on that. Of course for a higher earner incremental NICs are nominal, but could be significant for a pensionable salary. Hmm – maybe something here I hadn’t recognised.

  In one of my earlier comments I said the PCLS is becoming harder to justify, so no disagreement from me there. Also agree the higher rate now versus lower rate in retirement point – rightly or wrongly I see this as compensation for locking up capital for decades subject to the whim of various future governments.

  I also said we would have to value future tax revenue from deferred income “in today’s money”. Clunky wording on my part, but I think we agree here. The point I was making is that if we don’t know how much it costs, or we are making estimates without considering all relevant factors, we can’t accurately judge if it is value for money. If the pension fund grows faster than inflation, then could the income tax take could be greater in real terms than that foregone?

  The “skin in the game” argument works for me, YMMV.

  I agree there is something fundamentally wrong with how we fund the state in the UK. I think we should explore wealth taxes, and I say this as a likely significant payer of such a tax (humblebrag alert!). We tax income and consumption way more than wealth, and the income bit has too many “convenient” inconsistencies.

  Finally, in my opinion, the existence of non-dom status isn’t consistent with a well managed and equitable modern state, but it suits many influential people, including a mass circulation newspaper owner and a former treasurer of a major political party…
• 50 Jonathan B March 6, 2021, 11:11 pm

  @ZX, your contributions to discussion here are once again excellent and supported by figures. Those numbers comparing tax reliefs are revealing.

  OK, as others have commented, incentivising people to save towards their own pension is a social good which wouldn’t happen without those incentives – and depending on how it is calculated some of those lost taxes will return anyway – so in my view there is a legitimate political justification even if you don’t agree. Second is primary residence relief, completely out of proportion to what was (when it was introduced) just an electoral gimmick; but how to undo it? And then IHT nil rate which I find more difficult, the “value” listed is presumably against there being taxation on anyone with any assets at all at death and while it seems appropriate to have some sort of threshold – if only to avoid cost of collection exceeding amount collected – it is difficult to know what that should be.

  The last few are fairly small scale incentives which may or may not be effective (seems that Entrepreneur’s Relief creates much larger benefits than I had imagined) but aren’t going to undermine the economy. Certainly you may be able to justify £3bn/yr for encouraging a fair proportion of the population to have their own “rainy day” fund.

  The discussion you prompted does however generate a few real questions about taxation. Is the 25% PCLS still justifiable? Is the ISA allowance appropriate? (the annual allowance looks to me too high, but reducing it would be politically difficult so as @Simon suggests a lifetime limit might be a solution). Should the tax labelled as National Insurance be extended to pensons and investment income? (my take is that politically it would have to be traded for something identifiable as a new benefit, for example an entitlement to government contributions to care in old age).

  For politicians it will be easier to avoid these questions than face them.

  Finally, although tangentially, you point out very forcefully that non-dom status in the UK is open to massive exploitation. An example I heard of: a friend who used to be a teacher in a very highly regarded grammar school had one kid who was flown in on a private jet each week from daddy’s offshore abode (presumably she, if not they, had been resident for the last primary school year and massively tutored for the 11+). Whatever the rules are they are clearly open to serious abuse.
• 51 Naeclue March 7, 2021, 1:14 am

  @Jonathan B, the justification for the PCLS is that some future bright spark might have the idea that NI should be chargeable on pension payments! Or more generally the risk that pensions tax relief turns out to be at a lower rate than when the pension is finally paid. Given that risk and all the other hassles of having your money tied up for years, would you want to contribute to a pension?

  There are 2 types of non-doms. The first and most detestable is the one whereby you are a non-dom simply because your father was. You could be working alongside someone born and living in the UK, investing the same way as you, yet they are subject to less tax than you. There aren’t many of them (about 100,000?), but those that are tend to be very wealthy. Arguments about banning this revolting practice revolve around the loss to the country should the non-doms b****r off abroad. So be it as far as I am concerned.

  The second sort are people who used to be UK domiciled, but have moved abroad, sold their UK property and cut most other ties. I suppose this is fair enough if actually the case, passport given up, no business interests, etc. It is however extraordinarily difficult to lose one’s status as being UK domiciled. Non-resident, little problem, Non-domiciled much harder. The main benefit of becoming non-dom as opposed to non-resident is that non-doms are not subject to IHT (apart from on UK assets).

  Ps Entrepreneurs Relief was heavily cut last year.
• 52 G March 7, 2021, 6:21 am

  I agree with both camps on the LTA front.

  It is definitely a very nice problem to have although with annuity rates being what they are even a £1m+ pension doesn’t necessarily put you into the super-wealthy category anymore. You can be simply comfortable – especially if your pension has to cover a dependant too.

  On the other hand, we all trade life for money with work – and nearly all of us will reach the point where life is more important than more money. When I was first notified of the possibility of breaching the LTA it gave me pause for thought. I did my calculations and figured we could still live comfortably by bringing my retirement date forward by a decade and going part-time now. It has the double benefit that I can invest more time in my local community and that opens up a considerable barter and gift economy. For example, we no longer traipse around garden centres as the missus swaps plants with neighbours. I’ll probably never need to buy another DIY tool again as I can access anything I need from my local community shed/tool lending scheme (and I have donated a bunch of tools to that too).

  For me, the issue is not necessarily the additional tax etc, but that it gives people the permission and incentive to say “hang on a minute…”
• 53 Al Cam March 7, 2021, 9:19 am

  @G:
  How is P/T working out for you?
  I ask because this is often not really a viable option with some jobs.
• 54 JimJim March 7, 2021, 11:25 am

  Good articles again @TI, How to survive and make money in the Matrix made me smile and I love the analogies, I know the movie too well 🙂 The Finance as Culture one was a good read too.
  On the discussion regarding pensions and tax in general, it seems we all recognise that the system is unfair in many aspects while trying to maximise our benefits from it. Some would argue, a fine problem to have.
  Perhaps a reverse and sliding scale of tax relief on pensions savings is the way to go, giving your savings better buying power at a younger age with tax releif at a higher rate than you pay, more time to accrue gains and compound, encourage uptake of pension schemes early and then taper the relief down the nearer to an LTA you get. Designed correctly it could benefit low income workers, provide better pensions for many in later life and ease the burden on the state in top up benefits.
  Too Radical?
  JimJim
• 55 Grumpy Old Paul March 7, 2021, 12:39 pm

  Regarding pensions, surely the simplest solution is to limit tax relief to the basic rate and eliminate the LTA.

  I’m not what most on here would regard as wealthy but I confess to drawing two private sector DB pensions together with a State Pension and do recognise that I’m very fortunate. I agree strongly with the view that income is taxed far too highly compared to wealth.
  I’m also of the view that we pensioners have been treated very generously compared to people of working age. I notice that the basic State Pension is still being increased annually at 2.5% as a result of the triple lock and that this is well ahead of both the rate of inflation (RPI, CPI or CPIH) and the increase offered to NHS staff. Don’t forget either the ridiculous Winter Fuel Payment (cost to the Treasury of around £2bn) which I donated to the local food bank. Pensioners are of course exempt from NI which is nothing but a regressive disguised income tax which was increased from 6.5% in 1978-9 to the current level of 12% in order for tabloid headlines to laud reductions in the basic rate of income tax.
  An argument which I don’t seem to have heard is that in order to minimise the impact of tax increases on economic activity they should be concentrated on those with the lowest propensity to spend.
• 56 Algernond March 7, 2021, 3:28 pm

  If someone has been diligent about overpaying into their pension because of the existing rules, and then gets hit because govt. wants to finance their ever increasing size by changing the rules game that seems pretty unfair, especially since with pensions your money is inaccessible for many years so you cna;t do much about it (except reduce your payments into it).

  Also, it’s very sly to freeze the LTA for several years when high inflation is not likely far off. Those that have researched how to set-up their portfolio to be inflation resistant could suffer quickly. Imagine the situation where you are only half way to the LTA, but then inflation is 15% per annum and your portfolio is successfully hedged for it… it’d only take ~4 years to hit the LTA! (and that’s with no other growth on top of inflation).
• 57 Naeclue March 7, 2021, 4:09 pm

  @Grumpy Old Paul, anyone contributing to a pension is taking a risk that a future government will not change the rules to the disadvantage of the person contributing, as they have just done and done several times in the past. A rational person would not take such a risk without seeing some tangible reward. For basic rate taxpayers, the PCLS provides that reward.

  Longer term having something like Osborne’s Lifetime ISAs maybe a better approach, but that would still leave a legacy of immense complexity with existing pensions and employment contracts.
• 58 JohG March 7, 2021, 5:49 pm

  @Jon – The doctor pension problem is the perfect example of how a refusal of governments to think long term in the past leads to no good options in the near term. People have already made the case for how incredibly generous the compensation, especially in regards to pensions, has been for those individuals. A solution based on giving people who clearly don’t need more money (given that the risk is they’ll stop working) very considerable amounts more isn’t great.

  The LTA these days is relatively generous, and very generous if you can get a DB pension, and only looks bad compared to the ridiculous limits of the past. The way tax relief works out is generally more favourable to higher earners (who can defer income which would get the higher rate of tax now and expect to take most at the standard rate of tax later) so I wouldn’t even begrudge some adjustment to balance this.
• 59 Jonathan B March 7, 2021, 6:01 pm

  @Algernond, your example shows one reason why a fixed LTA is a bad idea. Another is the variation in annuity rates – currently something like 2.5% on the open market when it has been much higher. That means the needed pension fund is now higher. (Plus the issue that people are affected differently, that is the rate for a commercial annuity wheras DB pensions are treated as equivalent to a 5% annuity and as readers of this blog know well drawdown SWRs are an inexact science but typically proposed at 3-4%).

  And @Grumpy, I love your statement “in order to minimise the impact of tax increases on economic activity they should be concentrated on those with the lowest propensity to spend”, people need to say that to encourage Conservative Chancellors to see the benefit of progressive taxation.
• 60 The Investor March 7, 2021, 6:08 pm

  Great and constructive comments all, cheers!

  For my part, I believe we should replace all tax reliefs with a flat rate of say 30%.

  Basic rate taxpayers would thus get a boost from the Government. Higher-rate taxpayers much less than now, which would hopefully pay for the former.

  Both would benefit from investments compounding in a tax shelter unmolested by both taxes and onerous reporting, which until you’ve done it you can’t understand how annoying it is. It also saves HMRC a lot of hassle.

  We’d ideally combine all ISAs and Pensions into one wrapper, with a single annual limit (quite high, say £40,000) and scrap the lifetime allowance. If your investments turn into several million then good for you.

  The LTA is the equivalent of sticking a “GO TO” hack into an elegant piece of code. The annual allowance is what would cost out government generosity. If a person hits £5m or whatnot at 65, then the government can benefit from various sales taxes (and ideally a high rate of inheritance tax, of course 😉 ).

  Withdrawals from this single wrapper would be tax-free.

  Ideally we’d get rid of ALL private and state defined benefit pensions, which are atavistic in the modern era and make everything more complicated to fix, and put everyone onto a defined contribution system, with everyone operating under exactly the same rules.

  In terms of access to the pot, in theory I like the idea of money being able to be taken out at any time if required — at the cost of refunding the government tax-relief top-up — but the annual limit still holding, so you can take money out if needed (e.g. house/emergency) but you can’t put more than £40,000 back in under any one year.

  In practice this creates recycling issues (withdrawing last year’s contribution and reinvesting it next year to repeatedly earn 30% tax relief). So some thinking would have to be done here, and sadly likely age limits / links to the State Pension imposed.

  Legacy issues loom large.

  Perhaps my new system could unilaterally begin for a new cohort of 21-year olds, and after that two systems hold until everyone old has died off. Obviously it would seem grossly unfair but on the other hand people in their 20s are most likely to be basic-rate payers and so benefiting from that very useful extra government top-up (due to 30% relief).

  The detail all gets a bit complicated for a blog comment!

  But anyway, ideally a flat rate system, incentivize everyone a bit but basic rate taxpayers more to encourage long-term self-provision and plain good money habits, get rid of a gazillion stupid exemptions, tweaks, hacks, cliff edges and whatnot, and ideally save hundreds of thousands of if not millions of hours of faff, avoidance, billed accountancy charges, company financier faffing, and HMRC’s time.

  Chances of it happening: something near zero!
• 61 The Investor March 7, 2021, 6:11 pm

  Oops. Crucially forgot to say withdrawals (except under some penalty condition, so presumed in retirement) are tax-free under this new wrapper. Remember both standard ISAs and 40% relief have gone, before it seems too generous.

  With that said I haven’t done the maths, so we’d have to play around with annual allowances and the flat-rate to get the right numbers, but at least with a simplified flat-rate system the inputs and outputs are few.
• 62 Naeclue March 7, 2021, 7:07 pm

  @TI, LISAs then? I wouldn’t argue with that.
• 63 The Investor March 7, 2021, 7:28 pm

  @Naeclue — Eek, close to, which is a problem as I don’t like Lifetime ISAs (from a policy perspective I mean — they have use cases for many individuals!)

  My defence would be that with everything rolled into one account with a fairly generous annual allowance, the “is it this or that?” nature of a LISA – and the difficult comparisons with other options – would be done away with.
• 64 Ali March 7, 2021, 8:20 pm

  Does the bond market issue mean that Vanguard Lifestrategy funds are a bad idea at least in the short term?
• 65 The Investor March 7, 2021, 9:11 pm

  @Ali — Nobody knows, though it will probably look obvious in hindsight if anything dramatic does happen. People have been warning about bonds dragging down portfolios for many, many years. People have seldom come back to say they got it wrong.

  I think yields could easily go up a bit further, but I’d be astonished if they soar in the next couple of years. If they do, stocks will probably be clobbered too, at the index level, with popular tech stocks smashed. (Some other sectors might benefit, such as financials, assuming it didn’t cause a recession).

  Eventually higher yields are good for bonds because your bond funds start to earn a higher income. But it takes a while.

  If yields tick gradually higher then stock markets might continue to advance modestly, offsetting the declines in bonds.

  Anyway the whole point of LifeStrategy — and passive investing in general — is to stop you having to make these kinds of decisions. If you’re thinking about it, you can guarantee the market of many millions of investors is. You probably agree you don’t know better than the market, except by luck. So why try to make a call on bonds?

  No, I don’t know why either but my experience of editing this blog for 10 years is legions of supposedly passive investors who accept they have no edge keep doing it. 😉

  If one was really terrified of a bond collapse, didn’t believe it’d do in returns from equities, and wanted to stay in LifeStrategy, maybe one could move to the next higher level of equities. (E.g. If one was minded to go 60/40 then go 80/20). Note that this would definitely be an increase in risk and volatility, no matter what anyone on the Internet says.

  Obviously this isn’t individual advice to you, whoever you are! (That’s the point, I/we don’t know. 🙂 ) Just some things to think about.
• 66 Ali March 7, 2021, 9:36 pm

  @TheInvestor Thank you, I appreciate the reply.
• 67 Jonathan B March 7, 2021, 11:10 pm

  @TI, love the radical rethinking. Not sure we will vote you in as Chancellor of the Exchequer immediately though.

  Single rate of tax relief is a no-brainer, in fact it should already have been done. Not so sure about single tax-relieved funds for pensions and savings though, I think your perspective has been skewed by years of exposure to the FIRE movement. I suspect quite a lot of money is withdrawn from ISAs pre-retirement and needing to pay back the tax relief every time would create a massive disincentive to saving this way. Which would then mean fewer people having their own pension fund.

  And removing State Pension (difficult to work out how any equivalent support could exist if not DB) would create a lot of hardship among some groups.

  Nevertheless, the start of some interesting ideas for which it would be intriguing to see some serious modelling of the implications.

  (And, from your comment in another post, I have taken just the step personally you suggest of moving my most recent VLS investments up one step away from bonds).
• 68 The Investor March 8, 2021, 1:47 am

  And removing State Pension (difficult to work out how any equivalent support could exist if not DB) would create a lot of hardship among some groups.

  Oops, I wasn’t clear. When I wrote “state defined benefit schemes” I meant “public sector defined benefit schemes”.

  I agree we need a state pension.
• 69 G March 8, 2021, 4:23 am

  @Al Cam – part-time is working well. It helps that my bosses are a job-share. The key danger when working from home and part-time during a pandemic is that part-time becomes full-time through slippage of work-life boundaries.
• 70 MrOptimistic March 8, 2021, 8:07 am

  @TI. Flat rate of tax? Problem is politics/ tall poppy syndrome/ envy. Everyone thinks that people who have more than them should contribute more ( to each according to his needs…..) and a flat percent take which indeed does that doesn’t take enough from them. So it’s an open goal against you at the hustings if you were to propose that. The ‘Tories’ being the rich people’s party and all that.
• 71 NewInvestor March 8, 2021, 8:05 pm

  Two slightly conflicting articles this week.

  On the one hand, Portfolio Charts use the example of the golden butterfly to illustrate that all of the asset classes that make up that portfolio have periods of being up in value whilst others are down. Only for the other article – What’s happened to gold? – to debunk that gold will rally in various scenarios that appear ripe for it to do so.

  What to believe, eh?