Is anyone else making a pension contribution before the budget?

[MotherOfDragonflies]

Am I worrying over nothing? I’m self employed and generally wait until the end of the tax year to put money into my pension since I can then see what I can afford to put in but reading about labours planned pension raid and the chances that they will remove the 25 percent tax free sum for new contributions and also reduce tax relief on contributions has me worried. My pension isn’t amazing and I’d been planning on increasing contributions.

is it worth putting in a lump sum or could I be tying up money for no real tax advantage

Not necessarily.
I took early retirement and put some of my (tax free) lump-sum into ISA's.

I retired early in the year so put £20k in an ISA in my name and another £20k in one in OH's. Come April, I did exactly the same so in the space of a few weeks I had put £80k into ISA's.
The remaining lump-sum was put into tax-free savings (NS&I) until the following April when another £40k could be put into ISA's.*
The remainder topped up our PB's and while while not being a guaranteed income, are safe and a bit of fun.

*Of course to do this it means you have to have not already used your ISA allowance but we purposely had not done so

@strawberrybubblegum I have toyed with the idea in the past of suggesting a divorce to DH when we retire, so he can have half of my pension (we’ve always saved more into mine as he’s a basic rate taxpayer) and we’d then be at less risk of me being a higher rate taxpayer in retirement.

If tax free cash is capped, my idle thoughts might well turn into a firm plan!

But surely you can see that is a highly unusual situation where you had a tax free payment. Most people won’t have that

As the thread is about pension contributions but had migrated onto ISA's I did not think it was an unusual situation.
As the rules currently stand, anyone taking a company or private pension would be eligible for the TFLS.

That's quite an interesting thing to do.

You had it in your pension first - and that's what made it income-tax-free, not your ISA. (Your ISA is tax-free on the way out because all tax which was due has been paid on the way in).

If you'd kept it in your pension, your 25% tax free would have increased as the total money grew, so you would have ended up with the same amount being tax-free whether in your pension or ISA - up to the £268k lump sum allowance.

But putting it in your ISA means that the £268k lump sum allowance applies to the amount you took out now: not that amount + growth.

The downside is that you lose the pension IHT protection.

Was there something specific about your circumstances that made your financial advisor recommend that approach?

(It's becoming clear to me that pension planning is really complicated, and I'm getting to the age I should get some advice!)

It would feel pretty weird, but it's a lot of money!

It would seem really mercenary, I’m not some old romantic but divorcing DH just so we could share my pension seems a step too far. I certainly wouldn’t tell anyone if we did!

You wouldn't need to tell anyone: although a nice meal out with your newly re-married DH would be appropriate I think

I would do it if it saved me the amount @thereiscustardinthejamtart mentions! I'd take financial advice first though. And I'd be fairly annoyed that the tax system was so inconsistent that it made such a difference.

DB pension so the TFLS was never going to grow.
The size of my pension was dependent on salary, length of service, retirement date and any additional payments (AVC's), there was no "pot".
From the date I took my pension the TFLS was specified so there was no point leaving it. I could have not taken the TFLS and and instead had an enhanced monthly pension (with a TF element) but that did not appeal.
Fully supported by my FA.

My DC pension is a different matter and agree, as long as it keeps growing then there would be no need to take out the TFLS unless it was required.

This idea was discussed on Meaningful Money Pod, They made the point that you won't get granted a divorce and you would need to be careful how you both dealt with Lawyers/ judges etc. Tricky to take legal advice basically.

That’s interesting @GonzoGonzo I think the reality is it would be too much hassle for anyone to bother, and it isn’t actually unfair for someone like me (who has befitted from higher rate tax relief) to pay some higher rate tax in retirement if I manage to save enough in my pension.

I’d expect that most people who are higher rate taxpayers in their working life only pay basic rate tax in retirement (as the pension pot needed to support a £50k+ income is over a million pounds), so it is unlikely to be something that many people would even consider.

Obviously if the government retrospectively changes the tax free cash then that may change, but I really don’t think that will happen.

Interesting. TBH it never even occurred to me that these day someone might not “grant” you a divorce. I guess because society has moved on, and the mainstream opinion now is that it takes two people’s ongoing consent for a relationship to continue.

However it’s not really all that long since a couple wanting to get divorced had to arrange for one of them to be “caught” cheating, with witnesses available (where both the affair partner and the witnesses were paid and the whole thing staged). Ironically all stemming from laws designed to protect women.

That was my first thought when that point was made. You just can't tell your lawyer as puts them in difficult legal position.

Did anyone else hear Money Box today? There was a man from the IFS talking about their ideas to change pensions. I missed the first few minutes but will catch up via iPlayer.

Update, if you're interested. It was definitely the co-author of the Institute for Fiscal Studies interviewed. So an input into the Treasury on pensions rules, of which the two big take outs are to restrict the tax breaks on money going in to standard rate tax, and to cap the tax free element of the lump sum on crystallising funds. Of course, the Chancellor has not announced or commented, but I don't think they will be able to frame new rules to take effect on Nov 1, so we are minded to crystallise before Oct 30, and take the money inside 12 months. As the rules currently stand. It sounds straightforward but I have a load of admin and chasing to do to make it work.

Bugger. Thanks for the update though - that's useful to know.

Seems sensible for you to do that, given that you're in your 60s. Will it change what you do with your business?

Wrong age for me. This really does mess with my plans to have one last decade loading up my pension, having reduced my working hours for a while when DD was young. But there's no way in the world I'm paying 30-40% tax now then more tax when I get it out... only have it in a savings vehicle I can't access for years and the government can raid even more in the meantime.

I'll find some other way to structure things.

Bugger indeed.

Wonder how this will work with salary sacrifice schemes.

If employer contributions will be included, salary sacrifice for pensions presumably will too.

Not sure about other types of salary sacrifice. That would add fiscal drag on steroids!

I have mixed feelings: it's annoying and will have a serious impact on my pension, but I like the idea of family summers. Maybe in a campervan!

That would make the already huge cliff edge at 100k absolutely enormous. It would create a huge disincentive to earn over that level. Surely they’re not that naive.

What does this actually mean? Were they saying they were reducing the tax free lump sum? Does this mean for the whole pension pot or for contributions after the date of the change?

Maybe they don't care that they'll lose that tranche of output from people who currently earn £100k-£140k.

They're not getting income tax from it today, they perhaps don't care about the lost tax take and increased state dependancy in 20 years time, and they have judged the lost productivity (fewer key staff such as doctors and the knock-on effects of that, lower corporation tax take, and probably lost lower-level jobs) as not significant.

Labour don't have a great record of analysing likely consequences.

I’ve just listened to the Moneybox programme. Some of the language is disingenuous. It doesn't ‘cost’ the treasury as it’s not their money and it will become a tax cost to the private citizen. One of the reasons the figure is so large is because of fiscal drag; many more people have been caught in the higher rate of tax in recent years. It didn’t talk about the ‘cost’ once tax was paid on the way out, either. Plus they talked about it being IHT free without saying the beneficiaries would pay tax at their marginal rate (if you die over 75). That will be 40% on death and taxed again when the remainder is inherited. I wonder what the pensions industry has to say about all this - saving into a pension will look far less attractive.

I look forward to learning about the impact assessment of these possible changes. The government can’t overlook that after the WFA outcry.

I thought they were suggesting reducing the tax free lump sum, taking 20% of contributions from higher rate tax payers and applying IHT to pots on death. Surprisingly nothing on reducing the annual allowance. It’s far too complicated to do overnight.

Lower corporate growth being compounded by reduced access to staff with shortage skills and also less financial investment.

Didn't RR want to grow the economy?

Maybe the sustainability goal has won out in the end. Lower standards of living across the population are certainly more environmentally sustainable.

Lower corporate growth and lower productivity overall. There will be more doctors retiring and less help for those waiting for operations, currently not in the workforce. Going for growth? I think not.