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

They could have a maximum amount of ISAs going forward, say £100k so if you already have that or over you can't have any more ISAs, I think that has perhaps been mentioned.

They may also tax all savings outside an ISA,

These measures would not affect the working person that doesn't have savings and cannot just write a cheque

They already tax all savings outside of an ISA, it's just that there are allowances for savings so you can earn interest of either £1000 for basic rate taxpayers or £500 for higher rate taxpayers each year without paying any tax.

Again, those on the additional rate pay tax of 45% on each penny of interest outside an ISA as they have no savings allowance. Nice little way to hammer them even further.... particularly given the savings were taxed before at huge marginal rates too 🙄

I’ve got the 6.2 ns&i bond maturing this month. I am planning to buy a gilt. The yield is now around 3.7 but capital return tax free (unless they add cgt to gilts but I think that’s incredibly unlikely). So for a 40% tp this is equivalent to the 6.2 before tax.

@MidnightLibraryCard ah gotcha, thank you.

Some interesting points on ISAs. I have wondered if they would do something like an ISA 'lifetime allowance' to prevent people receiving 'too much' (in the government's eyes) untaxed interest.

They could restrict annual contributions but I can't see how they could impose an LTA now because doing it retrospectively would be unfair, but it would also be very unfair to do prospectively! And one of the reasons the LTA was such a bad policy was because the person being taxed has little control over whether they breach the threshold because they cannot possibly predict future investment returns potentially decades away. Aside from it discouraging saving and investment which is the last thing the UK needs! It would be nonsensical to introduce the recognised problems with the LTA on pensions and apply those same problems to ISAs too so if they did try to mess with ISAs I suspect it would be by restricting new contributions. Although that would also be stupid.

Aaargh. I always wish just for once we could have a Government that doesn't do stupid things that are obvious in advance will be a disaster. Everyone makes mistakes but many of the idiotic things done in the UK are done after people have warned of the consequences. Then afterwards the politicians pretend they had no idea their actions would have such consequences, or just try to deny them entirely and ignore reality. It's so depressing seeing this same pattern repeated over and over again by all of our Governments for decades. I keep hoping finally we'll get competent people in charge but with the things being mooted for this budget, I am very dubious.

The problem is that you appeal to common sense and fairness but Labour aren't interested in this, they are all about redistribution, so even if a policy has obvious and well predictable negative impact, they will still go ahead in the name of class war

The PLSA produced a paper back in 2021 looking at different options for reform of pensions taxation, concluding that none of them should be adopted.

I hope someone has put it in front of Rachel Reeves!

www.plsa.co.uk/Portals/0/Documents/Policy-Documents/2021/Five-Principles-for-Pension-Taxation-Second-Edition-PLSA-July-2021.PDF

Very interesting, Slippery. Thank you.

Am I understanding the 30% relief proposal correctly?
As a higher rate tax payer currently, no tax is payable. I earn £100 over the £50k threshold and put £100 into my pension.

If a 30% tax relief is introduced, I put £90 into my pension as RR takes 10%.

Then when it’s time to draw on my pension, I am taxed 20% on the £90 (assuming no growth or inflation).

20% of 90 is £18, so I get £72.

So I have been taxed twice (10 then 20%) with an overarching taxation rate of 28%?

That's correct.

It's interesting when you consider the employer contribution too.

In the current system, the employers 5% pension contribution (£2.5k on a £50k income) is also free of tax.

Now, it will be taxed at 10%.

So instead of getting £2500 in your pension from your employer, you will only get £2250. Which will be taxed again at 20% when you take it.

In addition to being taxed twice, your 40% tax threshold has changed from £50k to £47.5k

One element of the PLSA report that is often overlooked elsewhere is the need to tax the employer contribution in order to ensure salary sacrifice and/or employers simply being more generous doesn’t impact the tax take.

The complexity that this would add, especially for defined benefit schemes, is horrendous to consider.

I also liked the breakdown of where the tax relief goes, which suggests that potential for additional tax revenue from hitting higher earners again is more limited than the headlines suggest.

Not quite as simple as that.

What about the 25% tax free element ? Out of your £90 you would get £22.50 tax free and the remaining £67.50 is taxed at 20%.

Ah, ok. 67.50 taxed at 20% is 54, plus my 22.50 is 76.5. From that £100 I have put into my pension for my old age there will be a tax hit of 23.5%.

Taxing employer contributions isn’t something I had considered and it isn’t in the spirit of encouraging people to save for later life.

As a nation, we don’t pay enough into our pensions - this is hardly promoting long term saving and will have a greater negative impact on women, who save (in general) the least.

That's a very good point that this will have more of an impact on women, and who are more likely (as a protected characteristic class) to have periods of not working.

So a woman who has earned an average of £50k per year over 36 years (staying off work until her younger child starts school, which is very common) will be more badly affected by this change than a man who has earned £40k per year over a 45 year period. Even though they've had the same lifetime earnings.

If they each put 8% into their pension (which the government has said they'll make the minimum for automatic enrollment), the woman will get to keep £129.6k of her £144k pension contributions and the man will get his £144 pension contributions boosted to £158,400

Add the compound interest which she's missed out on, and my estimate (assuming pension investments double every 10 years, and spreading their earnings evenly over 40 years) is that she's lost out on £56k of an eventual £544k pension she would have had which is 13% and the man has gained the same amount. He has a pension of £600k and she has a pension of £487k. That's a whopping 19% penalty for being a woman and a mother - both protected characteristics.

Potential for legal challenge based on indirect discrimination under the Equality Act?

You put it so well, @strawberrybubblegum ! The motherhood penalty would strike again.

It comes too late for me, but this is precisely the type of issue that should be argued out in front of parliamentary committees/ politicians in full view of the media. There are so many insidious inequalities, many of them very subtle, that stack up against pensioner women over a life of work and child rearing. And frankly, there's no party political angle to be lost or won. It is a matter of fairness, if you think it takes two to create a life.

Breaking news! According to the Telegraph, RReeves is planning to restrict the tax free lump sum to £100k in the budget, instead of 25% up to £267k.

That would be wildly unfair to people who planned on the basis of that 25% lump sum, surely if they did that it would have to have some kind of lengthy transitional period.

*according to The Telegraph the Institute for Fiscal Studies is urging her to cap the amount at £100k.

The IFS is an independent organisation that offers analysis and assessments of government and political policies and manifestos. They do not write policy. There is also a fundamental economic bias in IFS’s work, because they tend to apply microeconomic techniques to macroeconomic issues, whereas many believe that fiscal policy should assessed in the context of the whole economy to identify the direct and indirect effects of policies as they work their way through markets over time

Which is not quite the same...!!

@Tryingtokeepgoing I fear that someone leaking the suggestion and it being treated seriously by the Telegraph is somewhat indicative of the way the wind is blowing.

Of course, I recognise that the IFS doesn't write policy. And personally, as we have planned our pensions and savings over 30 years of self-employment, we would be irate if it was announced in the Budget as a fait accompli, without any consultation or notice.

for SPaG.

The IFS paper does go on to say that some form of transitional relief / period would be needed, becuase of the exactly what you say - many will have planned the tax free lump sum in to their retirement or mortgage/retirement plans

Placemarking on this thread.

We will be making pension contributions before the Budget.

Well if they restrict the tax free lump sum to £100k we are fucked

If they cut the tax free amount to £100k won't that affect the NHS doctors and other higher paid public sector workers who are more likely to have high pension amounts.

It would cause chaos

Yeah, pretty much this. All planing for nothing. Really, what was the point of a pension.