Labours plans re taxing pensions

[Catlover1705]

Does anyone know what these plans are please? Planning to retire next year at 60 with a moderate Local Government monthly pension and lump sum under 100k.

It would simplify taxation as there would be only one level of tax relief, plus if the relief is still at 20% it would provide a generous incentive to save for retirement. A win win.

No, it wouldn’t to both of those comments.

Don’t forget people who get their tax relief via salary sacrifice in net pay arrangements. Scheme design and/or payroll changes would be needed.

Perhaps you could explain how 20% is generous tax relief compared to 60%. Particularly for those who are going to be taxed at 40% in retirement.

I think that they may be eyeing up pensions in drawdown as these pots can be passed on without inheritance tax rules applying.

Yep. If you add that to changes to contribution tax relief, this would make saving even less attractive

I’d vote for tax simplification. 20% Tax Relief for everyone upto £40k per year.

At present someone on £100k a year can put £50k into their pension, get £10k added as Tax Relief and get given £10k back. So they pay £40k for £60k in their pension. If they do that for 17 years thats a £1million in the pension pot with zero growth.

Then from their pension freedoms age they can take 25% (£250k) of it tax free and then take the rest of it out at £12k a year and pay zero tax on it until their state pension kicks in, at which time they stop taking their personal pension and leave it outside of inheritance tax to their children to repeat.

Plenty of people do exactly this as they don’t “need” the pension income to live on when their TFLS is so big, the “business” they own provides them with a new car each year and their housing is paid-for family properties.

There are massive perks for the wealthy and how they pass wealth down to the family line, including zero tax on pensions if you die before the age of 75.

People inherit £2million pension pots and pay no tax.

I’ll say it again, massive perks for the wealthy.

Explaining is simple, 20% tax relief is considerably more generous than many countries give, and a 20% contribution from the government is still generous. Plus pension funds should be included in estates for inheritance tax, that is a loop hole that needs closing. Both myself and my DH are higher rate tax payers and I am happy to contribute more to help the country out of this mess.

This isn't correct. There are some pensioners who have the 2nd state pension in addition and they are are above the PA with state pension alone.

i am not sure your first sentence makes sense. The tax relief/contribution will be either or.

MNers like you who can’t wait to give more tax to the Treasury should feel free to do it right now anyway; it collected the princely sum of £212 in voluntary tax in 2022.

Given the state of the countries finances and public services, helping people paying higher rate taxes, via tax relief, cannot be a priority.

Sunak & the Tories, freezing tax thresholds so many times since 2010 has been a totally wrong headed decision & is keeping us all poor, pensioners included, it totally disincentives work, lowers productivity and drags more people into "in work benefits"

So much for the party of low taxes!!

The first sentence is quite clear. 20% tax relief is a generous amount and enough to ensure that investment in pensions will continue. It is also more generous than most countries. It is not that I can't wait to pay more tax, I would prefer if we could all pay less, but realistically more tax will be needed in the short to medium term and those earning the most should bear the burden.

People don’t want to be helped they just don’t want to have to pay 60% tax, 62% if you add in the National insurance. Basic laffer curve economics says that the tax take will fall anyway as those people withdraw their labour. That’s where productivity will fall

One of the first things the last Labour administration did was tax dividends on private pension pots, this reduced the return on pension savings abd killed off most private final salary schemes, leaving public sector pensions unscathed. I am sure the next admin will look at how they can dip into prudent people's pension pots too. It is easier than reducing public sector pensions to match isn't it?

Final Salary schemes died because they are unsustainable, the amounts paid in, simply cannot provide the outgoings as people live far longer.

Our private sector FS scheme had already had down grades in the amounts paid out in the 90s under the Tories.

Brown removed the £20 rebate/credit in every £80 in dividends, quite why you think that everyone else should subsidise pension schemes is beyond me and even beyond the Tories, as they never reinstated it either.

They have only frozen the tax threshold since Covid in 2020. In the 10 years prior to that they increased the threshold by more than the rate of inflation, as well as increasing the minimum wage by more than the rate of inflation to help lower paid workers. They also pumped in a huge amount of money to help people with furlough and high energy bills caused by Putin attacking Ukraine. They have also frozen the fuel escalator that Labour were keen on increasing by more than the rate of inflation every year. They have done a lot of crap, but not everything. Oh,and they increased the limit that you start paying NI too.

Thats not quite true, pension tax thresholds have been removed and the high rate has had below inflation rises too.

The NMW has matched inflation rises, nothing more, just depends on when they pitched the inflation rate, which has been 11%.

Energy bills? well, if they'd taxed the 100s of billions in energy company profits earlier and for more, they wouldn't have needed to borrow so much to help families.
The UK has the highest electricity prices in europe when standing charge included, a disgrace, as Lizzie would say!

Furlough? oh yes paying millions to stay at home which many companies took the piss out off.

Labour have supported the freezing of fuel duty each and every year, so you re wrong on that one.

Tories cut duty by 5p, costing us billions but fuel companies pocketed it and never passed it on.

The Tories have been a disaster when it comes to money or anything else for that matter.

Final Salary schemes died because they are unsustainable, the amounts paid in, simply cannot provide the outgoings as people live far longer

Actually, many final salary schemes were perfectly well funded until the change in tax dividends. It affected the formula by which scheme funding levels are measured and created shortfalls effectively overnight. It’s widely recognised that Brown did not appreciate the impact of this when he introduced it

So living longer wasn't an issue for these schemes? i think you re wrong about that,
Our FS (defined benefit) scheme went from 90% Final salary to 2/3rd Final salary in the early 90s, long before Brown, down to scheme members living longer and spousal benefits.

FS schemes were (in some cases) sustainable only because the tax payer funded a 20% credit on dividends.

DC schemes don't and never had had this advantage, again, why should people without a FS scheme pay out for this???

Our scheme final closed only due to the GFC and ended up paying inflated transfer fees to get rid of long term liabilities,so its still going strong for deferred members.

You seem to be overlooking that pensions are taxed in retirement.

If I only get 20% tax relief on my pension contributions then at the very least the government will get the entire 20% back in retirement, so the tax relief is worth nothing, and they may even get 40% back in retirement, meaning that overall I'm being taxed at 60% for locking my money in a pension rather than 40% if I take it now.

If you limit tax relief to 20% then pension schemes become unviable for higher earners.

Nobody is going to stop investing in pensions because the tax relief is 'only' 20%. I am not overlooking anything, and I am higher tax payer myself.

You are utterly, utterly incorrect.

As a higher rate taxpayer myself the very day tax relief is cut to 20% I would cut my pension contributions to the bare minimum that gets the employer matching contributions, rather than paying about 15% of salary AVCs as I do today.

Otherwise, what's the point of locking money away until I am 60+ only to pay the same tax on it as I would for taking it today?

Well you are demonstrably incorrect as both myself and my DH will carry on contributing even if the tax relief is reduced, to give two examples. Hard choices need to be made and the burden should fall on those with the broadest shoulders.

I would expect high earners, including doctors etc, would leave and take pensions before any change bites - which would be a disaster, and for that reason they won't reinstate the lifetime cap (1.073m) before 55% tax applies.
The max tax free lump sum is still capped at £263k ish, though.
I agree with others, a nightmare for planning, and I'm only 40. God knows what will happen but all you can do is keep building it and react as soon as changes are announced.
At the moment the above applies - no lifetime cap, but a cap on the tax free max drawdown. This is a stealth tax as docs and professionals will get less than 25% tax free. But I recognise we're already well off at this point.

My point is that if you limit tax relief to 20% then pension schemes instead of being tax efficient for higher earners become tax inefficient instead. That isn't "demonstrably incorrect" - indeed if you work through the maths it's correct once you get to high enough levels of pension.

I don't dispute that raising tax should be done from higher earners - but limiting tax relief on pensions to 20% relief is a bad way to do it. Better would be to reduce the Annual Allowance, or increase the rate of income tax.

As for you your DH - you clearly can do anything you like, but that doesn't mean what you would do is financially sensible or that most other people would do the same.

Investment in a pension is not a zero sum game. The extra 20% will grow due to compounding. An extra contribution from HMRC is not one to be passed up.

You're still not getting it. The growth will be taxed at 20% when you draw it.

HMRC isn't helping you.