What caught my eye this week.
The best news this week from the election dog and pony show is that Labour will not reinstate the recently-scrapped Lifetime Allowance for Pensions (LTA).
According to the BBC:
Labour has dropped a plan to reintroduce a cap on how much people are allowed to save into their pensions before paying tax.
Under the pensions lifetime allowance, pension pots over £1.07m faced an annual tax of £40,000 on average.
The cap was scrapped in April but Shadow chancellor Rachel Reeves had vowed to bring it back, saying it could raise £800m a year.
However, her party has now reversed the decision ahead of the release of its manifesto on Thursday, reportedly because the cap would add uncertainty for savers and be complex to reintroduce.
Of course the BBC momentarily gets the LTA wrong – it’s not a cap on savings made, but rather on the total size of your pot before additional taxation kicks in – but that’s all in the rich tradition of confusion about this cursed legislation.
A lifetime of muddle
When Chancellor Jeremy Hunt first announced he’d abolish the LTA from April 2024, Reeves called it: “the wrong priority, at the wrong time, for the wrong people”.
But the LTA itself was a cumbersome shape-shifting bundle of contradictions, which surely did the pension regime more harm than anything it sort to redress.
Even in death it’s a pain in the arse. Last month the FT reported thousands of investors with large pension pots were in limbo due to sloppy legislation:
Though the Conservatives scrapped the lifetime allowance in April, errors in the legislation affected people who relied on the enhanced protection arrangements giving them the right to take out more than £375,000 in tax free lump sums.
In April, HMRC advised those savers to consider delaying their retirement plans until the rules were corrected.
Fortunately Labour now says it won’t add to this confusion.
A welcome dose of common sense which we could do with by the truckload after the fantasy politics of the past eight years.
Seven-figure sticker shock
Indeed, it’d be nice to think Labour’s change of heart marks a new era of pension stability.
But I wouldn’t bet the farm.
Many Labour supporters will still take umbrage at the seven-figure pension pots being ‘favoured’ by the scrapping of the LTA. They won’t think too hard about what size of pots would be required to deliver some of the public sector’s defined benefit pensions either.
So something may yet be done in the quest for ‘fairness’.
In reality, pension income is taxed. Those enjoying a very large pension income – whether from the private sector or the state – will be paying higher rates of tax anyway.
Possibly enough to neuter much of the tax deferral benefit of pensions.
Death is not the end
Where I do find the pension regime too generous is in pensions’ transformation into a vehicle for bypassing inheritance taxes.
Those who die before they reach 75 can pass on a pension free of income tax for beneficiaries. The latter can be heirs who did nothing to earn that money. And here I deploy my usual argument that I’d rather tax them than working people.
With all parties promising us wonderful things funded on the back of ‘closing tax loopholes’ – loopholes apparently left wide open by a cash-strapped State for many years, but there you go – maybe that’s where Labour will look instead?
For now though, the end of uncertainty about the end of the LTA is good news – if a mouthful – and good politics.
Have a great weekend!
From Monevator
Is it time to ditch index-linked bond funds? – Monevator
You don’t have to go nuclear on the idea of working for a living – Monevator
From the archive-ator: How to construct your own asset allocation – Monevator
News
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LSE to boost retail offer with PrimaryBid deal – Sky
UK mortgage arrears hit an eight-year high – FT Advisor
Wales has the worst rate of economic activity – BBC
London house building craters, UK pipeline lowest since records began – CityAM
Thailand is seeking digital nomads – Sky
Post-Brexit ‘mess’ as Italian driver’s lorry held for 55 hours at UK border post – Guardian
Britain’s economic growth has been flattered by a booming population [PDF] – Resolution Foundation
Election selection mini-special
Money aspects of the manifestos – Labour, Tory, Lib Dem, Others
There’s a huge Brexit-shaped hole in this election – Guardian
How the Tories learnt to love taxing the rich – This Is Money
Lib Dems pledge to rejoin EU’s single market in manifesto ‘to save the NHS’ – Sky
SNP’s Stephen Flynn attacks Labour’s North Sea energy plans – BBC
Even Surrey’s middle classes are angry with the Tories – Guardian
Do the parties’ spending promises stack up? – CityAM
Products and services
Get cheap tickets by filling empty seats at shows – Be Clever With You Cash
Co-operative Bank launches a new £150 switch deal – Which
Sign-up to Trading 212 via our affiliate link to claim your free share and cashback. T&Cs apply – Trading 212
Is a five-year fixed mortgage now the best option? – This Is Money
185,000+ savers penalised when accessing Lifetime ISA access – This Is Money
Open an account with InvestEngine via our link and get up to £50 when you invest at least £100. T&Cs apply. Capital at risk – InvestEngine
How to switch bank accounts again and again – Be Clever With Your Cash
PrettyLittleThings faces backlash after scrapping free returns – BBC
Where the average house price buys the most square feet – This Is Money
Homes for sale for cyclists, in pictures – Guardian
Comment and opinion
Wealth and money are two different things – Darius Foroux
Does it make more sense to rent or buy in the UK? [Search result] – FT
Young women are telling each other to ‘date rich’. How terrifyingly retro – Guardian
The cost of living: then and now – Getting Minted
Why you’re probably not missing out on hedge funds – Humble Dollar
Champagne wishes and caviar dreams – Josh Brown
Father time is undefeated – Abnormal Returns
Horseshoes and hand grenades – Fortunes & Frictions
What is enough? [Podcast] – The Long Game via Apple
TIPS and your portfolio [US but interesting] – Morningstar
US market concentration mini-special
Top 10 companies in S&P 500 now make up a record-high 35% of index – Apollo
More: how worrisome is US stock market concentration? – Cullen Roche
Tech -> Big tech -> Huge tech – Sherwood
200 years of market concentration – Global Financial Data
Naughty corner: active antics
Are Diageo shares a buy after their 35% decline? – UK Dividend Stocks
Private equity is being overwhelmed by too many rich people – Semafor
The man whose podcast helped him start a $100m hedge fund – efinancialcareers
How often is too often? – Investment Talk
Kindle book bargains
A Man for All Markets by Edward O. Thorpe – £0.99 on Kindle
Doughnut Economics by Kate Raworth – £0.99 on Kindle
Taxtopia by The Rebel Accountant – £0.99 on Kindle
The $100 Startup by Chris Guillebeau – £0.99 on Kindle
Environmental factors
The unsustainable hype around ESG [Search result, bait-and-switch headline] – FT
In ever-hotter US cities, air-con is no longer enough – Guardian
A ‘halo effect’ drives demand for sustainable and impact investments – Alpha Architect
What is the opposite of oil drilling? – The New Yorker
How parakeets escaped and made Britain their home – Guardian
Robot overlord roundup
Music just changed forever – Persuasion
Apple’s AI moment arrives… – Platformer
…with its artificial approach to ‘Apple Intelligence’ – SpyGlass
Situational Awareness… [PDF, on imminent AGI] – Leopold Aschenbrenner
…and a rebuttal of sorts [Video] – Sabine Hossenfelder via YouTube
Off our beat
The big British bamboo crisis – Guardian
40 years on: The Battle of Orgreave remembered – BBC
A month without a smartphone – Collab Fund
‘I used to run a popular newsletter. Then things started getting weird’ – Slate
Russian propagandists’ hopes for America – Timothy Snyder
If you don’t see these movies now, you never will – Slate
Do who you are – Humble Dollar
China is losing the chip war – The Atlantic via MSN
Nobody knows what’s going on – Raptitude
Tributes to Michael Mosley: 1957-2024 – BBC
And finally…
“Things that have never happened before happen all the time.”
– Morgan Housel, The Psychology of Money
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‘The latter can be heirs who did nothing to earn that money.’
Neither did the State.
The brightest amongst us will always beat the system at every level-after all they are the ones who created the system in the first place
Instead of railing against this fundamental reality it would be better to persuade the brightest to contribute the mostest!
The west including America have managed to pull this off
The brightest contribute most of the (their) wealth to the community “voluntarily “
Just as well as they are the ones that generate the most of it!
This not true in the rest of the world ie it is a more normal state of the human condition for the well off to hang on grimly to their financial gains
How did we in the West achieve this? I am not sure but it’s an unusual state of human affairs
We should perhaps be more grateful for a culture that enshrines this scenario (which could always be improved) rather than the more normal default human condition of get all you can and keep it!
xxd09
Thanks for the great links and round up, as usual.
> Fortunately Labour now says it won’t add to this confusion.
I think you missed “yet” at the end of that sentence.
I certainly wouldn’t break the champagne. They need to plug the fiscal holes somehow.
It’s generous of you to believe manifesto claims. I suppose it’s positive they’ve ostensibly given up directly grabbing the cash right now. But I think the reality in a few years time might be different, as you allude to. Governments cannot resist fiddling with pensions, and politically reversing “Tory Policies” holds no qualms for Labour, when suitable. Onwards!
Yes the LTA news was probably the best thing I heard this week (but not sure it offsets the increasing risk of a fascist leading the opposition). Will save me having to crystallize and take TFLSs earlier than I need (and expose those same sums to CGT on future growth)*.
It was always daft to punish growth in a lifetime of investment given the societal purpose of encouraging personal pension provision and the inequality with DB schemes at the level the LTA dropped to was stark.
I fully expect that DC/SIPP pots will be brought into the IHT net at some point – it’s just too obvious a vehicle for those wealthy enough to not need to touch them. But I understand there are complexities around pensions being trusts that would need to be overcome. There is obviously some complexity around dependents not being hammered but perhaps this could be addressed by a “Pension IHT allowance”. Maybe such a move would just see further shenanigans like SIPPs/SSASs buying farmland as an avoidance tactic.
*as an aside you can get knotted quite quickly in optimising tax. I will need the £268k TFLS in retirement and by leaving it in the pension the growth in it will be taxable at at least BRT when drawn. If taken now growth on it currently will only be taxable at CGT rates. But at the moment it also has IHT benefits if left in. Probably points to a risk that CGT is raised closer to IT rates.
“Neither did the state”
Aside from the roads, the ports, the bridges, the railways, the rule of law, the stable economy, and so on and so forth. (But aside from that what have the Romans done for us??)
I’d suggest we not get drawn down the path of whether taxes are theft or whether the State has any right to appropriate any money from citizens et cetera.
Virtually all readers of this website think it does, even antagonists when pushed previously have admitted they don’t want to be subscribing to the Netflix of nuclear deterrents or similar.
And of course the reality is that the State does tax, so it’s moot. All we’re really debating is who and how much to tax and where to spend. (I broadly agree with those who think we’re at or near the ‘enough is enough’ point on total tax take. Unfortunately big political choices have costs and consequences, and we are were we are.)
Debating ‘tax is theft’ here will only clog up the comments.
The point re: inheritance tax as always is given that taxes exist, someone has to be taxed. I prefer lower tax at source on productive work / entrepreneurs / business. I’d tax more the unproductive heirs.
Spend your riches you made yourself before you die? Good for you. 🙂
The biggest concern with the Labour Party regarding pensions is whether Reeves will attempt to double tax pensions by restricting tax relief on contributions – something she has talked about at in the past and a proposal which is often put forward by financially illiterate ‘think tanks’. This would be even more complex to administer and fraught with problems than the LTA – especially for defined benefit pensions – and discourage many middle income workers from pension saving. But such will be their need for tax revenue it would not be a surprise to see such proposals raise their ugly head again.
@Faustus
Yes restricting tax relief on contributions is more complex than simply fixing relief to BRT. What about salary sacrifice arrangements? What about the contribution equivalent in a generous DB scheme?
Clearly the easiest thing to tinker is simply to lower the annual allowance again. Few working BRT payers are probably in a position to max out contributions even at £30k and I guess lots of those paying HRT would scarcely max it out. Plus anyone earning over £100k where it really comes into its own in mitigating the effective 60% tax rate hardly commands much general public sympathy. BUT it would bite on NHS consultants and senior civil servants etc so…..
Raptitude: ‘Beliefs are Mostly Mind-Candy’
What do I think that I know that’s wrong?
We should ask ourselves this more often.
@TI, regarding “I Used to Run a Popular Newsletter. Then Things Started Getting Weird” … in that people think of the author as their friend, are you trying to tell us something??! In recent years I’ve chatted online with a couple of non-mainstream musicians; one unfriended us after we attended two small local-ish gigs and bought a fair amount of merch, and the other really, really insisted we stay with them for a couple of nights when we were passing close by in the US Midwest. We did, but were a little embarrassed! Now I’m wondering if we were stalkers. :-/
Obviously population increases flatter GDP. Per capita is surely the better metric to quote, but most sites don’t want to. It puts the UK way too far down the global list.
Regarding the main story, I’m old enough to know that manifestos cannot be legally enforced, so they’re barely worth acknowledging beyond a few headlines. And this morning I’ve been trying to decipher the questionnaire that comes with accessing an old public sector DB pension. 22 Years after leaving the post, the uplift to that pensionable salary has been 1.8x which is very nice and very welcome. Now also trying to work out whether to drain the DC pension before state pension kicks in or not, so IHT was featuring in that discussion too. As it happens, I just spent this year’s ISA money on a nearly new EV, so we are trying to spend before we “go”. Bit depressing…
The BMA will be very upset if either LTA were to be reintroduced or if AA (or the taper threshold) were to be reduced again. I can imagine doctors voting to strike again in that situation. Either that or there’ll be a lot of retirements brought forward and a lot less overtime done.
SIPPs shouldn’t be exempt from IHT. IHT is basically already a voluntary tax only paid by people who trust/like their kids less than the state.
@marc – I don’t think thats the right demographic for IHT payers. I think its the sliver of people with net worth between 1mm and approx 5mm who haven’t tipped into paying serious money for tax advice.
@DH to counter, I’d quote ‘all models are wrong, but some are useful’, I used to be pretty militant on religion, read Dawkins etc. but have softened my position considerably over the years on the basis that anything that can reduce suffering without being too damaging at the same time should be given some consideration, even if its mad as cheese. I do concede the ‘too damaging’ bit is debatable at length.. but for the old dear popping to church on a Sunday, they’re not doing any damage.
@TI, ‘Taxing the unproductive heirs’. Are you suggesting we tax the estate of young families who have just lost one of the parents, possibly the main or only earner?
@Calculus — Okay, deleted knee-jerk response. To take your comment seriously, no, in the 0.01% of cases where both parents die I am sure the law could be written to ensure the estate can deploy funds from it for the welfare of their dependants until they reach the age of 18. At which point any remaining funds can be taxed as normal.
The other 99.9% of cases (I guess, conservatively) can be treated to the usual inheritance regime.
@PendleWitch — Haha, well no really. Perhaps a vaccination! 😉 Sorry to hear about the paperwork.
@all — Thanks for the interesting comments, keep them coming.
‘IHT is basically already a voluntary tax only paid by people who trust/like their kids less than the state.’
Heard that before and it’s not true. I know this because I am in that scenario. The problem is you do not know when you might die and therefore have to retain substantial assets to cover the worst case scenario, that you or your partner may live a long time and/or need care.
Think one of the reasons the IHT tag might have been added to pensions could have been to address concerns by sceptics as to what’s the point of a pension, you’ll probably be dead before you spent it so don’t bother saving, spend it now.
I regard IHT as theft anyway. Why not just make it 100% ? That would be silly ? Why ? And if not, why is 40% right and not 20% or 60% ?
Labour’s U-turn on plans to reintroduce the pensions lifetime allowance is probably influenced by the resulting exodus of senior NHS clinicians which would have had serious consequences for the NHS and the current level of waiting lists.
@Paul_a38 – hit the nail on the head regarding retaining assets for worst case scenarios.
As for Labour doing a U-turn on the LTA cap / no cap; I’ve seen enough election promises to know that very, very few of those are kept once a party is in power.
@Rhino #13: recommend the 2012-14 Philosophy of Cosmology project’s (an Oxford & Cambridge collaboration) YouTube channel, especially Sean Carroll’s “God is not a good theory” (under “Is God explanatory?”) How many things do we believe because we want to believe? Hope clouds observation.
Permanently dropping the LTA is brilliant news. I had pencilled in our SIPPs being clobbered when we reached 75, but this will make decumulation planning much simpler.
I wouldn’t object to IHT being charged on pensions. The point of pensions should be to provide income in retirement, not IHT avoidance. Chances are our SIPPs will go to charities in any case.
“retaining assets for worst case scenarios”: the need for money to cover care costs for self and widow is logically soluble with insurance. But various attempts have shown that insurance companies can’t make a living from it and so you can’t buy such insurance.
(There’s also the problem that if such insurance were actually available and widely bought government would retrospectively introduce changes in the rules to remove some care costs from their budgets and impose them on the insurance companies.)
So hanging on to capital becomes the default remedy.
Pensions held in trust won’t be brought into IHT imo. There are other ways to increase taxation on death benefits – you can remove the under 75 rule (pensions are not life insurance any more than they are inheritance tax avoidance vehicles) and you can increase tax on death benefits – pre 2015 iirc lump sum death benefits were very highly taxed for example.
@TI:
Re “In reality, pension income is taxed. Those enjoying a very large pension income …
… Possibly enough to neuter much of the tax deferral benefit of pensions.”
And there is the rub!
Glad to see this point mentioned. IMO, this ‘dirty little secret’ has been hiding in plain sight for ever!
Whilst we could no doubt debate what you mean by “very large” one thing is clear: “very large” has been, and will continue to, reduce in real terms due to fiscal drag!
LTA abolition huge IMO. RR responded instantly to CHX at AB 2023 to say it would be reimposed. U turn shows either deep pragmatism or great weakness. Take your pick according to your pior bias. Pre 2023 the Lindy effect had suggested it would survive on in some form (as introduced back in 2006). LTA made pension planning and investing into a SIPP significantly more complex and uncertain. Now let’s see what happens after a GE to the AA, the IHT benefits and the rate of tax relief. On this example at least it suggests that RR is not in category of “U turn if you want to. The lady is not for turning”.
AGI/ASI links – Sabine’s great isn’t she? First port of call for a cold dose of realism.
Leopold Aschenbrenner might mark a (or even ‘the’) peak of AI hype, like Irving Fisher proclaiming in 1929 that stocks had reached ‘what looks like a permanently high plateau’ but there’s always a teeny tiny chance that he is actually right, and that we’re on the threshold of an a wholly unprecedented phase transition which would transform every aspect of the human world – at best transcending it, and at the very worst eliminating it entirely (and with every possibility inbetween).
But the odds seem to me to be that we are standing neither at the gates of paradise nor at the entrance to hell.
If that’s right, then the question for investors is how will the market take it? Are things really that elevated? How much of any elevation is due to LLM scaling hype?
As always, no one knows anything. It’s all just guesses.
But my own guess is that we could be in for a wild ride in the markets whether ASI is near now or it never arrives (at least via the LLM route).
Gary Marcus’ take on this is reliably timely and interesting:
https://garymarcus.substack.com/p/the-great-ai-retrenchment-has-begun
@Paul_a38 – note nested quoting
‘‘IHT is basically already a voluntary tax only paid by people who trust/like their kids less than the state.’
Heard that before and it’s not true. I know this because I am in that scenario. The problem is you do not know when you might die and therefore have to retain substantial assets to cover the worst case scenario, that you or your partner may live a long time and/or need care.’
i.e. you don’t trust your kids to fund you in the worst case scenario, so you don’t pass your assets to them. Isn’t that exactly what marc1485153 is saying?
Disposing of the LTA is good news, if nothing else since it’s a simplfication of the arcane system we call pensions.
I hope though that Labour isn’t making a U-turn on this due to demands from NHS clinicians. Legislation brought in to favour a public sector job over a private sector one would be a reminder of the worst excesses of old Labour. Plus, while the LTA and various forms of tapering (personal allowance or AA) are stupid, NHS consultants earning six figures plus a massive pension surely should very low down on the priority list.
Bottom line is this will only add to the already obscene (around £55bn/annum) cost of pension tax reliefs. I hope they balance this sensible move by reducing the annual allowance or reducing tax reliefs. I really don’t any chance they can maintain their fiscal targets.
@ZX: Although out of date, the Journal of the Royal Society of Medicine published a paper analysing consultants’ incomes in England in 2003/4, including these figures for their part time private work, done alongside their main NHS practice:
Plastic Surgery
NHS Income £75,004
Private Income £142,723
Trauma and Orthopaedic Surgery
NHS Income £74,157
Private Income £103,759
Private earnings of consultants can quite easily dwarf their NHS salary, even when it’s just a top up done ‘on the side’ to their more time consuming (and likely more demanding) NHS practice.
When a consultant working private full time can earn far more than working for the NHS, then the great majority of taxpayers simply won’t be able to afford private treatment.
This is why no government will want to provoke consultants by reintroducing the LTA etc.
Re : tax relief ~=tax rate on pension
Surely it would need to be a very convoluted scenario for there to be no real benefit in saving into your pension?
1- 25% tax free element for 95%+ of workers
2- company matching percentage >= 3%
3- the “gap” where the £12570 tax free allowance is not used by wages
It still amazes me that it’s possible to take £50k from your SIPP on only pay £4986 in taxes (less than 10%) or £66,666 and pay £7586 (11%).
While these crazy low rates on tax exist pensions will always make sense – and why the UK is a tax haven for pensioners (esp early ones).
I don’t usually volunteer to pay extra tax, but we really do need to merge tax/ni and settle for 25% Basic rate. The 20% gaps leads nicely to a 35% band and then a top 45% band. If we choose the limits sensibly we can scrap the child benefit cap and the removal of TFA oddities.
And if we are feeling particularly brave then give a Citizen’s allowance (age 22+) of basics rate tax X tax free allowance, ie about £60 a week (using 25% tax). And get rid of unemployment benefit and remove illogical tax cliff-edges that disincentive working more hours.
..and remove the £12570 tax free allowance completely, so all income is taxed from the ground up.
@Vanguardfan, I agree that incorporating pensions into IHT would be complicated, but they could introduce a simple levy just as they did with the LTA charge. eg 25% charge if not left to spouse then normal income tax on beneficiaries at marginal rates as they draw.
@Boltt (#28):
It is not just about rates!
It is about total tax deferred vs total tax paid later down stream. It is really an actuarial calculation – and I suspect HMRC does quite nicely, provided folks do draw their pensions. And, HMG may even score in the IHT dodge cases too – provided somebody, sometime actually draws the money!
The government will always need money and they have a much longer time horizon than individuals! From pensions in payment they take tax on: the investments (employee and employer) and the growth thereof as well. Assuming things go as foreseen, ie the assets grow, then you will be sharing those benefits with them until your dying day.
There are obviously some extreme examples, such as, say, a non-contributory DB scheme in which, from a personal perspective, no tax was deferred and DB income is fully eligible for income tax once it comes into payment. Throw in a full SP and the personal tax allowance is all but gone too!
Framing matters. The way pensions tax relief is usually framed is IMO, at best, misleading!
The section that begins “Impact on ..” on page 29 of this document is amongst the fairest treatment I have ever seen: https://researchbriefings.files.parliament.uk/documents/CBP-7505/CBP-7505.pdf
And note that this compares reliefs granted in 13/14 vs tax received in 13/14, which is the wrong comparison. What should really be compared is the reliefs received in earlier years by those receiving pension payments in 13/14 – which, I would imagine, would be considerably smaller even after revaluing for inflation.
@Boltt (#28):
Re my comment at #31:
P.S. which is not to say you should not invest in your pension – but rather just be aware of the spin, etc around the subject.
IMO it is more of a win/win scenario than a win/lose scenario and both sides are likely to try and game the system too!
There are some easy work around a for the NHS consultant problem, and at the end of the day, these are highly skilled people that the country desperately needs.
One solution is to make the scheme tax unregistered. This has already been done for other vital public sector employees who were throwing in the towel, judges.
Another is to allow employees to opt out but still be paid the employer contribution as taxable income. At the moment most places steal the employer contribution on opting out.
I don’t see how people with a chip on their shoulder like zxspectrum could be against the above options.
Consultants pay in the uk is much lower than other first world countries in general. Something will need to be done.
“NHS consultants earning six figures plus a massive pension surely should very low down on the priority list.”
If we need their work badly enough we could always enslave them. Failing which clearly their financial incentives will need to be considered.
Why only theirs? Because it’s our job to serve the NHS.
@A1cam
I’m not sure the whole market (or individual) £tax deferred now v £tax paid later is the relevant metric – and I may be wrong.
If 60p buys a 100p of investments that grow tax free until withdrawal- and the withdrawal tax environment is a chunk (25% ish) of TFLS plus tax less than 40p tax on the remaining ~75%.
Then mathematically , the non-pension comparator (ISA) is 60p now plus the same growth as above then tax at 0% (ignoring Labour risk) must be smaller ie less value.
The actual nominal deferred v paid seems irrelevant to me.
Is there an example of an individual person you’ve seen that brings this to life? I really can’t see lose scenario.
@Marco. I may have a chip of my shoulder but the issue here is if money is genuinely tight, why the hell are we pandering to those who earn in the top few percent? The priority is really to allow people to hive away £60k/annum in their pension and another £20k in their ISA? Is that the people we need to protect? Pension tax relieft is now comparable to the defence budget. It’s out of control.
With regard to the NHS, I’m not a fan. I’d prefer to see a system modelled on Australia with more insurance/co-payments. I do not see much of what is done by the NHS as “vital services”. If some granny needs their knee or hip done, they can pay for it or take insurance (subsidized by the govt). Elective surgery should not be free on the NHS.
We have an aging population. Since killing off old people seems to be considered somewhat mean, we are going to need more supply of medical staff. The ratio of applicants to places at medical school is currently 6:1 so there is clearly demand from students to become doctors. The necessary grades are not at all demanding at 3 As. My perception is the BMA and various Royal Colleges act as a cartel to systematically reduce that supply. Perhaps to force compensation higher, perhaps to put the govt over a barrel, perhaps because they are genuinely worried about standards. Whatever the reason, it needs to change since just paying a limited supply of people more will not meet that sort of increase in demand.
@Boltt (#35):
Depends on whose perspective you are taking and what you are comparing.
Looking again at your ISA vs SIPP comparison. Putting aside PCLS and employer contributions in due course both routes both would pay you the same net take.
However, under such circumstances*, the tax man gains considerably more (albeit delayed) from the SIPP route than the ISA route. Stick the two scenarios into a spreadsheet and do a side-by-side comparison – it may be quite informative.
The tax mans gains (vs ISA route) are such that providing you stick around for long enough he can afford to even give you the PCLS and still come out on top via the SIPP!
At no point have I said do not go the pension/SIPP route (see #32) – but rather watch the spin. The governments largesse is grossly mis-represented and that HMG effectively take a loyalty from you in the form of income tax (in exchange for a tax discount up-front) IMO makes good business sense for HMG.
So when I say win/win I mean you win & HMRC wins too! Sure there are circumstances where HMRC may lose (tax rate arbitrage being one possible example), but likewise there are circumstances where you can lose too, see e.g. https://monevator.com/rich-optimal-pension-contributions/#comment-1727891 noting that a smallish perpetual annual tax bill will always eventually (at least in theory) trump a hefty one-off tax discount!
*with real growth
@ZX (#36):
Re: “Pension tax relieft is now comparable to the defence budget. It’s out of control.”
As I try to explain at #31 & #37 above – this admittedly very large – figure is definitely not the whole story. I would certainly hope that the government’s actuary’s are all over the situation [of reliefs vs tax raised later], but ….
@36ZXSpectrum48k
It’s the government who caps medical school places! Consultants would dearly love there to be more doctors out there and available for employment in the NHS.
Reducing the Pension Annual Allowance back down to £40,000, with no tapering down for super high earners, and continuing the principle of applying tax relief at full marginal income tax rate would be the simplest way for the treasury to save on tax relief without the complexity of reintroducing LTA or implementing a reduced flat tax rate of relief.
This will encourage doctors to work for longer to build up a decent sized pension pot and stop them moaning there is no incentive for them to continue as we keep hearing.
90%+ of the population won’t care, because socking away £60k pa into tax efficient wrappers (pension + ISA) is more than they can afford anyway.
As previously mentioned, my wife and I work in the pensions space. The abolition of the LTA, whilst welcome, was an absolute car crash.
To give you an idea of what a dog’s breakfast it was, HMRC produced a FURTHER, summary Q&A document in April that contained 105(!) questions and answers. It was a nightmare. On certain issues, everyone was proceeding on one basis, before HMRC would say ‘no that’s not right, that will create a tax charge’ before everyone panicked and then HMRC would 180. The legislation came in at the last moment, and then had to be changed when glaring issues arose.
Any sensible tax accountant or lawyer advising Reeves on the LTA would surely have told her: don’t reintroduce it, it would be a nightmare.
@SemiPassive
Actually, doctors would rather the AA was scrapped, than the LTA.
The AA is totally inappropriate for DB pension schemes.
In DB, the amount you pay every month does not go into your ‘pension pot’, but is actually a pension membership fee (which is also steeply tiered in the NHS, more than other public sector schemes, thereby effectively removing tax relief.. but that’s another story!)
The AA is therefore tested against your deemed pension growth, using a formula, such of 16x+TFLS = 19x growth. Therefore if the theoretical future value of your future pension goes up by more than £3150ish, you breach the 60k AA, and get a tax charge. (or £2100 / 40k AA)
Doctors’ pay can fluctuate year-to-year, so AA tax charges can arise for theoretical pension growth that is never realised. And it’s a nightmare to calculate, meaning it’s extremely difficult/impossible to plan for it.
Jon, maybe they can change the formulas used at the same time then, in fact my preference would be to do away with defined benefit schemes altogether in the public sector. They can instead switch to defined contribution schemes, partly invested into “national infrastructure funds” to get the socialists on board.
Ok, we may get a few strikes…
@SemiPassive
What do you think happens to worker’s DB contributions for the 40 years or so that they are working?
And don’t forget that DB pensions usually can’t be inherited by offspring in the same way that DC pensions can. Is the public going to pay for that if they are changed?
Had the FSA/FCA/PRA and BoE not misdirected regulatory pressure into forcing private sector DB schemes (and Life Assurance and Pension providers generally) from high return (equities) to low return (gilts) assets from 2000 or so onwards we wouldn’t be in this mess of a two tier provision of private sector DC and public sector DB. You can’t blame those with DB for wanting to keep it and, as Jon #42 above says, its not all a bed of roses for DB – the public sector schemes come with their own pitfalls for members. For the NHS this can result in massive tax bills for even junior low paid staff arising from routine up / down fluctuations in earnings (the DB AA calculations being a one way street, where a reduction in earnings cannot produce a negative PIA for the AA, but a reversion back to the previous year’s earnings creates a massive fictive PIA leafing to a hefty tax charge). It also means that it is often simply not worth going for promotion or taking on more hours etc because you get hit with a tax charge on a fictitious / notional 16x or 19x increase – by reference to the AA – of the year on year deemed change in pension benefits.
@Delta Hedge (#45):
Re “(the DB AA calculations being a one way street, where a reduction in earnings cannot …”
Is it no longer possible to carry forward any unused AA from up to the last three PIP’s?
@Al Cam #47: I’m not in the NHS scheme so I can’t speak to the exact numbers etc but a stylised example using a FS DB with 1/47ths accrual (scheme retirement age at SP age).
A surgeon with 20 years employment with the NHS works PT for £47,000 p.a. so PIA is ordinarily 16x£(47,000/47)= £47,000.
He then goes full time at £94,000 p.a.
His PIA at the end of that first year after going FT becomes 21 yrs x (16x£(94,000/47)) minus 20 yrs x (16x£(47,000/47) = £672,000 minus £320,000 = £352,000.
This is some £292,000 over the AA, thereby leading to a tax charge at 40% of ~£117,000.
Even having a full 3 years’ of PIA carry forward wouldn’t help that much, and in reality much less carry forward would be available.
Nobody in that situation is going to increase their hours, or try for promotion, if they’re going to be immediately hit with a six figure tax bill.
FYI
The closed FS scheme in the NHS was 1/80 accrual, compulsory tax free lump sum of 3 times pension (can exchange for pension at poor commutation rate), and normal retirement age 60.
The current career average scheme is 1/54 of actual pensionable pay each year, no compulsory lump sum (can exchange for pension at poor commutation rate) and normal retirement age pegged to state pension age.
If you’re going to criticise at least do it on the basis of facts.
Ok. Fair enough @Vanguardfan #48, but I did say: “I’m not in the NHS scheme so I can’t speak to the exact numbers etc but a stylised example”. So it was tolerably clear that the numbers use were no more that a hypothetical example, and not the actual ones that either apply now, or which applied previously, to the NHS scheme.
Based upon the info. which you’ve given, the outcome would be basically the same in my example for a PT surgeon with 20 years on the new scheme earning £54,000 p.a. going FT at £108,000 per year.
@delta hedge
Asking as lay person with some actuarial knowledge (in GI not pensions)-
Surely the extra year working full time doesn’t increase the pension payable for the previous 20 years working half-time. Eg
Accrued pension last year = 47/47x16x20= 320
Accrued pension this year = last years + inflation + current year
= 352 (assuming inflation 10%) + 16×94/47
= 352 +32
So PIA is 32k after allowing indexation of bf benefit.
Final salary pensions do take into account hours worked, doubling hours in the last years doesn’t double your pension.
I have a feeling I may regret this post!
@DeltaHedge. The reason why the FSA forced private sector DB schemes (and Life Assurance and Pension providers generally) from out of “high return” equities into “low return” bonds (as you put it) was that the “high return” equities were producing negative real returns in the 2000s, creating a massive hole in their ALM. Meanwhile “low return” bonds were outperforming hugely. So by 2009, these companies were in deep trouble.
It’s true to say that the FSA then forced them to “sell low and buy high”. Nonetheless, if these DB schemes hadn’t been so irresponsible in the 90s (when equities could do no wrong) and 2000s, and the SFA/FSA has actually been awake (unlikely), this issue would have happened. Many in the late 90s were warning that these DB schemes had way too much equity exposure and no bonds but nobody listened.
Right now most of these funds have a very sensible asset allocation of around 80% bonds + 20% risky assets. There is an incorrect idea that the move higher in yields in 22 hurt them but it actually benefitted them. The Kamikwasi issue in Sep 2022 was a function of poor margin management.
The whole issue around DB pensions for those NHS workers earning top few percent type compensation could be easily solved just by moving them to a DC pension. Rich people like NHS consultants definately don’t need DB pensions. I’d prefer all DB pensions gone (leaving the State Pension as the lone DB pension) but I cannot see any reason why those earning over £200k per annum between state and private work (as you’ve kindly quoted above) need a “safety net”. If they need to be paid more fine. Creating unknown forward liabilities places too much of a risk on the future tax base. DC is so much better.
Personally, I haven’t contributed to my pension in the last 12 years or so. I was still in my 30s when I last contributed. I’ve worked for 3 companies since then and received no pension contributions from any of them. Basically, there is no point. For most of that time I could have contributed £6k (now £10k) per year given the tapering of the AA to receive a 45% tax relief, which I would then 45% when drawing down. I agree odd rules creating strange marginal rates between certain pay levels are dumb but it doesn’t stop me working or trying to earn more.
@Boltt – That’s exactly how the final salary Civil Service scheme that I’m a member of worked. You work part time, and rather than earning 1/47th or 1/60th or 1/80th or whatever it happened to be, if you were half time you’d earn 0.5/60 (or whatever denominator the scheme chose), but the ‘rate’ it was earned on was the FTE salary equivalent (plus pensionable allowances). Then when valuation comes there is some function based upon best of the last 3 years, best two of the last 5 years, or something like that.
Of course, we were all kicked off that, and there exists a progression of slightly different schemes that goes far beyond a short comment to get into, with the current scheme being career average, so a spike in earnings doesn’t cause the historically earned pension to increase.
The only spikes you could get would be if you got promoted and had a substantial pay rise with it, or if you acquire some pensionable allowance due to a change in circumstances – being deployed to certain locations had some of these, at one point technical bonuses were pensionable, London weighting etc. Do these have an equivalent in the NHS scheme? Probably, but changing your hours seems unlikely to me to be one of these triggers.
It depends on the scheme and scenario.
If it’s full FS, and not CARES, and your last year’s FTE earnings are twice those the year before then, yes, in principle your annual benefits could double year over year.
An extreme example for sure, but imagine someone on 60ths in a full FS scheme (like the old CS ‘premium’ FS scheme) on a £60,000 FTE salary and getting a role on promotion at £90,000 and with 30 years in the scheme at that point, then their pension pre promotion is £30,000 (30 years x £1,000 p.a.) and post promotion one year on it will be £46,500 (31 years at £1,500 p.a.).
So from one year to the next that’s an increase in benefits receivable of £16,500 (£46,500 less £30,000).
Assume zero inflation adjustment (to keep it simple) and using the 16x change for the PIA calculation means that person will have a PIA for that year of £198,000 (16x £16,500), which is £138,000 over the £60,000 AA limit giving a tax bill as a HR taxpayer of £55,200 (40% of £138,000); which is quite a wallop if they’ve no used PIA from the 3 previous years to carry forwards.
Example is a hypothetical, so real numbers may vary (for the avoidance of doubt, I’m not in the CS premium scheme, so doing this from what I can out find online).
Now you could say that for a £55,200 tax charge you’re getting £16,500 p a. more pension per year in retirement – and that would be true in the above example. But it’s still £55,200 to cough up in the next January 30th SA payment.
(NB: last post, #52, was in reply to @Boltt #50. Sorry should have said. Also typo spotted in my last reply. Should have said “no unused PIA”, and not “no used PIA”. Sorry again. Hope that it still made sense).
@ZX #51: “easily solved just by moving them to a DC pension”. Might be bit more complicated than that.
The accrued FS pension for an true FS scheme is affected throughout your working life with the employer by what you earn with them.
Even after you’ve been moved from DB to DC, the changes in your salary thereafter (e.g. raises/promotion) can leave you with a substantial PIA from the legacy FS DB scheme, as well as one from your current DC scheme.
With DB it’s all notional figures not actual contributions.
The same applies BTW with moving people from DB FS onto DB CARES. You can end up with two different PIAs – one for the legacy and one the new scheme.
I agree with one of the earlier comments above that the way that the AA is calculated for DB, and especially full FS DB, is practically often more of a complication than the LTA is/was.
@Vanguardfan (#48):
Re: “The current career average scheme is 1/54 of actual pensionable pay each year, no compulsory lump sum …”
OOI, is the revaluation calculation pegged to CPI or RPI and is it capped or not? My reason for asking is that hefty revaluation (RPI peaked at 14.2% in Oct ’22 IIRC) of already accrued pension benefit could, I think, also possibly lead to AA issues.
Obviously, there are many factors/scenarios at play. However, I suspect a “hefty revaluation” AA issue might apply to long-standing members of the now closed FS NHS scheme – ie those with the largest accrued benefits in the closed scheme.
@Delta Hedge (#47):
Thanks for your thoughts, and apologies for the “heat” you took.
My own view FWIW was that the carry forward might help with salary fluctuations but was not going to be of any long term good versus a constantly rising [high] pensionable salary.
Alex, the idea of the children of a public sector DB pension holder inheriting their pension at taxpayers expense is hilarious, but just for the record I’m ok with DC pensions not being used as an IHT dodge either.
I suspect Labour will make some changes in that area.
@DH #52
In a traditional (eg 1/60th) scheme someone working full time who gets a huge pay rise near the end of their career does get a massive lift in their pension.
But someone who earns massively more by increasing hours does not see a similarly big lift in their pension. If you work half-time you only earn 0.5 of years final salary benefit for that year.
Anyone getting a 50% pay rise in the last couple of years in a traditional FS 1/xth scheme sounds odd and a neat way to give a friend a huge financial bung, at the expense of the pension scheme. Yes these things did go on, so I’m sort of glad it has tax consequences.
I’ve just realised that I’ve gone and multiplied by 12 in my head, and not 16, as I should have done above, so in my last example it should actually be a PIA of 16 x £16,500 = £264,000 (not £198,000), and the excess over the AA is £204,000 (not £138,000), with a tax charge of £81,600 (and not £55,200) using 40% HRT. As you may gave guessed, I’m not an accountant 😉
@ semi-passive
It should be ludicrous but some public sector schemes do mention dependant adult children. So we aren’t far from financially dependent ADHD/autistic children making a claim against their parents pension fund. This will not have been built into the funding of the scheme and represents a huge emerging risk (especially if similar words have found their way into private sector schemes).
@ Boltt (#56):
Re: “If you work half-time you only earn 0.5 of years final salary benefit for that year.”
Cleary correct for a pure FS scheme, but ….
I used to think this would apply generally, but I spoke with somebody a few years ago who had a) halved his working hours and b) it would not adversely effect his DB pensions accrual calculation – neither the reduced hours or the reduced pay! IIRC, he even went and double checked with his scheme. I guess this is just another area where the rules sometimes are scheme specific and serve to introduce further complexity and conditionality. An algorithm something like average of the highest N of the last M years would probably do the trick.
@A1cam
I’m sure there are some weird scheme rules out there, the it must be very very rare for any scheme to give full time pension benefits for part time hours.
Is it possible that the “ not adversely impact” may have been that after 30-ish years full time the last couple parttime didn’t materially change their benefits? Some people do think halving working hours in their last year will half their pension.
My scheme FS scheme is based on the highest year in the last 5 years, adjusted for inflation.
Trigger warning – what follows might be nonsense on stilts & not survive scrutiny. Please don’t flame me. Trigger warning over.
So maybe there is a win – win – win – win here for the Treasury, the wider body of taxpayers, the members of Public Sector DB schemes and the Life Assurance (LA) industry.
Assume, for simplicity, that the members of Public Sector DB schemes each on average have an accrued right to let’s say a £10,000 p a. scheme pension. The real average number will be different, but I’m keeping it simple here with a nice round (faintly plausible) made up one.
Assume that there are about 6 mn or so Public Sector workers entitled to a DB pension. I don’t know if this is the correct figure or not, but I think 6 mn is in the right ball park for the total Public Sector workforce.
So, that would mean that, collectively, those 6 mn Public Sector DB scheme members are entitled to receive £60 bn p.a. in DB pensions in retirement.
Assume that the LA industry can raise money on the markets at 4% p.a.
Public Sector DB pensions can’t be cashed out presently, but assume here that legislation could be passed permitting this to happen, and that the current market value of the Public Sector DB pensions, if encashed, would be around 25x the accrued annual pension entitlement.
Again, the actual numbers will be different. This is just a greatly simplified illustration.
That payment of 25x the annual DB pension entitlement for cashing the pension in will then be subject to IT.
Because of the amounts concerned, let’s just assume, for simplicity’s sake, that ART of 45% will apply to all it.
The LA industry then issues bonds for £1.5 tn to cover buying out all 6 mn Public Sector DB pension scheme members (£60 bn p a. x 25), for which it charges the scheme members a 1% fee (£15 bn).
The LA industry will receive £60 bn p.a. from the government and pay £60 bn p a. on its borrowings, i.e. a wash. But it will have a nice £15 bn fee for it’s role.
The government gets to tax the £1.5 tn which is shared across the 6 mn DB scheme members at 45%, so £675 bn tax brought in, which is enough to bring down the national debt by 25-30% of GDP.
After tax, each of the Public Sector DB scheme members would have 54% of, on average (in this particular example), £250,000 each left (after paying both IT at 45% ART as IT, and also paying the LA industry’s 1% fee). On average that leaves the scheme members with £135,000 net each.
I reckon that most DB scheme members would go for that deal.
The LA industry gets £15 bn for sitting in the middle.
The Treasury gets a one off boost of £675 bn.
Of course, the actual numbers in any such arrangement would differ but in principle what am I missing here?
Addendum: Obviously, using the numbers in the example here, the Life Assurance industry bonds would have to be perpetual ones (like the old consuls, which the government used to issue) and the government would similarly have to agree to pay the LA industry £60 bn in perpetuity. But, for that, the government would get a much needed £675 bn ‘upfront’. So, not a bad trade for the Treasury, not least as it would otherwise be paying £60 bn p.a. to the Public Sector DB scheme members.
@Boltt (#61):
Re: “Is it possible that the “ not adversely impact” may …”
Could be. I have tried to locate the related chatter, but could not find it. Sorry.
@Delta Hedge (#62, #63):
I take it you see where I am coming from when I describe pensions tax relief as more like a “win/win scenario than a win/lose scenario” at #32?
Ever since I stumbled upon this I have wondered if I might also be missing something with regards to public sector DB schemes too.
I cannot claim to fully understand your proposal (lots of moving parts) but it is definitely an interesting line of thought.
@DH. You say it’s difficult to convert DB to DC pensions … and then basically give an example of capitalizing them! There are clearly complexities with tax issues on things like PIA, it’s hardly rocket science to convert DB to DC. We do it every day when we calculate yield to price on annuities, bonds etc.
The issue is, as always, nobody will agree on the conversion rates, the tax to be paid on the lump sums etc. Vested interests will prevail. The holders will want 30x income and no tax on the capital, the govt will want 20x and some level of tax of the capital. So it could never happen. Leaving us with a massively overcomplicated pension system. We’ll never bite the bullet, leaving younger generations to incur the cost.
@DH @ZX et al.
As an ex-NHS worker (27+ years “in service”) leaving a fairly well paid job (~75k pa) in 2009 with a projected pension of 30K at age 61, I converted my NHS pension a few years later when I decided to settle in Middle Earth.
Before cashing up became verboten, that is.
My multiple was 17.1 so somewhat less than the 20-30 you postulate. So, as ZX states, I shifted from a DB to a QROPS then an investment portfolio (65/35 equity/cash+bonds) at age 55, all within the rules.
All feasible, if cumbersome paperwork, and I managed to avoid the sharks that work on a % of the principle and worked with a firm that did a flat fee conversion.
Whether this was a good and sensible idea financially is, of course, moot. In terms of FI, yes, very much, but still working 3 days a week at 63 as essentially a contractor, just in case. And I get the state pension here at 65.
@TI, #15 re your proposed very high rates of IHT. Id argue it would affect a much greater number – all families who have assets which they consider as a part proxy for life insurance. Removing that resource would effectively require an increase in LI premiums – so a tax on the living.
Maybe coincidence but some countries with the highest IHT rates such as South Korea also have the lowest fertility rates.