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

In a weird way I'd like this to happen - surest way to get Labour out in 2029

I'm not making any additional contributions now because: (1) I don't have the spare cash; (2) I think it would be too hard to implement the changes on budget day. I guess I'm just taking that risk.

Going off topic: I get a bit annoyed at people who angrily come at higher and additional rate tax payers, saying "we can't afford to give them a tax break", when it feels like there are a certain set of higher rate tax payers who get hammered from all sides. For example:

• my partner earns very little and has little saved in their pension. My savings need to cover us both
• I earned little for many years and couldn't afford to pay into a pension, I'm now making up for lost time
• I recently bought my first house at high house prices and interest rates. I'm paying large monthly repayments for a basic 3-bed semi
• As a couple we have no inherited or family wealth and won't get any due to our parents not owning their own homes
• As a couple, get no financial help from parents and never did, for things like housing deposit, holidays etc both sets of parents were/are poor

Not to mention the lack of child benefits and funded childcare hours

So, people working for a wage get highly taxed. Yet, the family down the road whose parents and grandparents have houses that rose in value, and whose parents gift them large sums for deposits, or people who have large swathes of income left every month due to buying their house years ago etc etc face no vitriol for their "tax breaks".

Looking on Mumsnet, there at a whole load of people who have things I could never afford due to one (or more) of the above, but they want me to pay more tax. These people could also pay more tax and not have all their tax breaks (e.g. child benefit, free childcare hours) because they have loads of spare money every month - it's just that "extra money" didn't come from employment. There are so many mumsnet threads saying "in a cost of living crisis, how can everyone afford X" and the answer is normally: extremely high paid job, low housing costs, money from family.

It feels like the pension tax deferral is the one thing I have, and it's the anger that I face for wanting to keep it. FWIW: I voted for labour knowing this change was likely, and I'm happy to do my share for my country. But don't come at me with anger because I can afford to put £60k in a pension, which I sacrifice a lot to do.

Only at corporation tax rate. It’s a very different scenario

I know lots of people who are taking early retirement before 1st October. Partly due to changes to the USS (university) pension scheme and partly so they can access the 25 percent now.

Yes because it’s not just the impact on the tax free lump sum. For those that don’t take that, 25% of every drawdown is tax free, and for people with relatively small pension pots that makes a noticeable difference to their actual take-home pension. Doing away with that will mean that millions of the lowest income pensioners are impacted.

Pretty certain the 25% Tax free element will not be abolished or reduced. And even if it did it would not be retrospective or even immediate.....probably from April 6th 2025. And even it that happened I'm pretty certain, nay sure, that what you already have built up would be protected. So if you are aged 50 now & have £400k on your pension pot then £100k would be protected as a Tax free limo sum and then anything about £400k would have different rules applied.

For the record, I am not a Labour supporter & have never voted for them in my life. But pension rules can not be changed overnight or without any prior warning. Look at A-Day and the various protections put in afterwards to protect the Tax Free lump sum.

To much "shit stirring" on here.

To be fair, if you’ve missed vitriol at people who inherited house wealth from Boomer parents you’ve had your head in the sand on MN recently.

I agree with you though. I’ve made this point before but once this tax treatment is gone it’s gone forever. Those of us in our 50s now might lose a few years of this benefit, but plenty of people coming up who would’ve wanted to do this with their spare cash when they themselves get into their 50s and the kids are off the hands will no longer have this option.

It would also impact the complex calculations of defined benefit scheme payments and values. Since they are already valued very favourably for the purposes of the LTA and are generally far more generous they couldn't reasonably be excluded from changes to tax relief on contributions.

In any case, restricting tax relief on contributions would be likely to decimate the pensions industry. If we want growth this would be a ludicrous move given companies need investment. Not to mention that doing so would undermine the fundamental principle of the system which is that contributions are tax free for all and taxed upon withdrawal, resulting in some people being double taxed. We need people to provide for themselves in retirement, not discourage this by creating more distrust with goalposts being moved again. People need to be able to trust a system if they are going to tie up their money for decades.

Then the issue also of the pledges not to raise income tax or to tax workers more, which have been reiterated again over the last couple of weeks. Charging income tax on pension contributions would break these pledges, obviously.

It's a total non-starter and the last thing a Government would do if they want growth and productivity. Many people - lots of whom are in skills shortage areas - would simply cut their hours to avoid yet more excessive tax on top of the current cliff-edges.

Hope pp are right re: 25 % lump sum!

As pp upthread, we have never had Bank of Mum and Dad, either. No inheritances and not likely to in the future.

For many years, any pay rise was negated by entering higher tax bands, changes to child benefit, etc, which meant for almost 10 years we were actually slightly worse off after pay rises 🤷‍♀️

Quite depressing, really.

No it doesn’t. Public sector schemes are either defined benefit or career average. You get an amount of money guaranteed based on your salary and length of service

But clearly the amounts guaranteed would have to be reduced significantly if tax is apied to contributions. You can't imagine that they'd still get the same payments when they retire with contributions reduced by 20%? They are already given much more generous tax treatment, it would not be remotely viable to exempt them from such a change and penalise only those with DC schemes that are already much poorer value.

I hope you're right @MidnightLibraryCard I've got my fingers crossed. I wish they'd raise income tax rather than all this ill thought fiddling.

I'm not saying they won't do it! Just that it would be shooting themselves and the economy in the foot if they did, as well as breaking a key election pledge that they're repeated again recently. It would decimate pension saving, increase skills shortages, reduce productivity and economic growth, be hideously complicated and expensive to implement and likely lower overall tax take over the long-term (as well as the basic point about it being unfair because it would result in double taxation for many). One would hope that with an economist as the Chancellor she wouldn't do something so obviously stupid that would undermine all the goals she says she wants to prioritise, but...

As I have posted several times, economists forecast 6 of the last 2 recessions ;)

Even if they do it I think there is zero chance it would be immediate. Think of all the payroll systems that would have to be changed, they’d have to work out a new policy on salary sacrifice, think through implications for every public sector workforce (including the doctors who they do not want to still be on strike!). This isn’t something they could do quickly.

But, but, but - this would help equality, right?
Apparently budget blackhole is now much bigger than £22bn, so we really need money and those with broad shoulders surely won't mind? it's only fair after all

Regardless of whether we believe that they didn’t know about the £22 billion, and let’s not forget, half was caused by decisions this government made - it’s not a black hole. It’s less than 2%, given on the latest figures government spending was £1.2 trillion in 20022/23.

To put that in context, the average income in this country is £35k, or £28k after tax/NI/pension. That’s £2,350 a month. 2% of that is £47 - or a little under £600 a year. If, at a personal level, you’d overspent by £600 would you say there was a black hole in your household budget? Or would you say, less than £50 a month? I’m sure we can sort that out.

@Tryingtokeepgoing 😉

This is an interesting report, although I totally disagree that any exception should be made for DB schemes https://fabians.org.uk/wp-content/uploads/2024/08/Fabian-Society-expensive-and-unequal-Aug-24-for-pdf-fixed.pdf

Part of the reason why some higher earners make such high contributions is the cliff edge at 100k which sees earnings between 100-125k taxed at a marginal rate of 60% (more if you use childcare). Any proposal to restrict tax relief that fails to appreciate what drives high earners to make pension contributions (and change those drivers by removing cliff edges) is unfair.

There's a worrying lack of analysis of the actual impacts of the proposals, and how they may change behaviour.

For example, the fairly obvious fact that charging up to 35% income tax (25% flat tax relief, in the £100-125k bracket) on money you won't actually get until 20 years later is a pretty big disincentive to pension saving. People might well not have that money available! (Since they didn't get the income it's due on). This was exactly why the doctors pension fiasco was so bad.

And whilst he is very adamant that Employers pension contributions should be included in the change to add income tax - in order to avoid distorting behaviour - he doesn't mention that this effectively lowers all the income tax thresholds (which have already been frozen for so long) by a minimum of 3%, and more likely around 8%.

He's basically a bean-counter, who only considers how the numbers affects his own bottom line, without trying to understand what the numbers actually mean.

My favourite was his outrage that the cost of the pension tax relief is increasing faster than the pension-age tax. No shit, Sherlock! It's a natural numeric consequence of increasing wealth redistribution (due to frozen tax thresholds)! And that's even without behaviour change, which happens as the frozen thresholds mean ever more people are pushed into punitive tax brackets which they mitigate through pension payments (particularly £100-125k).

And no, the best way to respond to that probably isn't (as he suggests) to increase redistribution even more to make up for the behaviour changes you've already caused by increasing redistribution...

Partway through I started thinking 'if this is the quality of thinking Labour has access to, no wonder they introduce such stupid policies'

By the end, I was despairing.

I very much hope that Labour have access to some better analysis before they make hugely significant, sweeping Pension changes.

@strawberrybubblegum i thought it contained useful context but drew the wrong conclusions. Although NICs on private pensions to keep the WFA makes sense.

If there’s no overall tax advantage to tying money up for 40+ years (I.e. if tax relief granted is broadly equal to income tax on pensions later, as is suggested should be the case) then why would anyone save in a pension? For basic rate taxpayers the only tax advantage currently is the tax free cash, if that is reduced going forward then an ISA would be preferable.

And one reason more tax relief is going to DC pensions is because of auto enrolment, which is a good thing (albeit with contribution rates too low).

My negativity certainly isn't aimed at you, @SlipperyLizard@SlipperyLizard. I really appreciate you sharing the article - it was very interesting reading.

Totally agree that the aim of making tax relief broadly equal to income tax on pensions later is ludicrous. Even worse when combined with the other aim of using some of the pension tax take specifically to shore up pensions for lower earners. (What is it with Labour and their hypothecated taxes?!? Are they not able to think of the budget as a whole? ) Taken together, that would result in higher earners being be worse off putting money in a pension than just taking the money!

And yes,as you say, auto enrollment will be part of the reason for the shift of tax relief being for DC pensions But also the reducing number of DB pensions available. It's hardly surprising that the share of tax relief for DC pensions vs DB pensions is rising when the proportion of that type of pension is rising! It really doesn't tell you anything about fairness, unless you dig into the numbers a bit more. In fact, given that the same value of a DC pension requires more money to be contributed than for an equivalent-value DB pension, you'd expect more tax relief for the DC pension. That certainly doesn't imply that the DC pension-holder is more privileged than the DB pension-holder! It means exactly the opposite: that they've paid more for the same value pension.

I could find holes in that report all day tbh.

Actually, correction: he's not actually saying that the increasing percentage of pension relief going to DC pensions indicates inequality.

He's just being a bean-counter and mentioning that the reducing proportion of tax relief going to DB pensions is a mitigation to impact on his bottom-line if they exclude DB pensions from the reform. Ie not considering fairness at all.

Don’t worry @strawberrybubblegum I didn’t take it as aimed at me!

There is no quality analysis of this issue that I can find. I’m not sure if Dan Neidle has ever looked at it, but he’s good on the cliff edges/marginal rates issue. The whole system needs to be thought through, and some grown up conversations had with the electorate, but that’s never going to happen.

Re NICs though, a lot of pension contributions will have already been subject to NICs (unless salary sacrifice), so it would be unfair to charge NICs again on withdrawal.

As PP said above, reducing tax relief and/or tax free lump sum will disincentivise pension savings in favour of other forms of investments where one can get access to funds before reaching retirement age. This will have MASSIVE implications for investments given that pension funds are the main shareholders in most of more or less significant businesses.