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

Genuine (naive) question… to the last 2 or 3 posters: Does the potential £100k cap scupper your plans because you are close to retiring with a pension pot of well in excess of £500k and you were going to use the TFC lump sum to bridge the gap between stopping work and drawing a pension?

Or are there other profiles of person that would be affected by this?

I imagine a reasonable number of people plan on using their tax free lump sum to clear their mortgage on retirement at normal retirement age. It’s not that long ago (to me at least!) when that approach was actively encouraged by banks, though regulation/legislation then changed IIRC. Personally I would always keep debt and pensions separately…

But, if I was one of them I’d be pretty annoyed if my working lifetime plan was sunk without warning and without any transitional support.

https://www.godirect.co.uk/mortgage-repayment-guide/pension-mortgage.php

I wonder if they do it (limit tax free lump sum) will people ever vote for Labour again?

They'd pretty much cement reputation of pensioner's plague so...

What I want to know is when the thresholds will be unfrozen.

At this point in time, it's painful but not completely horrific. It's properly progressive without the unfairness and complexity which plagues their other proposals, and hopefully wouldn't disincentivise pension saving too much. Crucially, pensions would still make sense as a savings vehicle, given deferred taxation and the gains you make on that pre-tax investment.

It won't affect anyone with a pension pot < £400k at all, which is fairly high. And then most people will lose about 4% of the money above that, up £33k if they have a £1million pension pot (20% tax on the 25% of the money they would have got tax free, up to the current £267k limit). Very wealthy pensioners could lose up to £66k, if they're in the 40% tax band.

But inflation and frozen thresholds makes this a complete killer in 20 years time. Perhaps that's their aim: to make it a phased introduction of a much harsher policy by stealth/without the complication of explicit phasing. Quite clever, really - but worrying for people in their 40s or younger.

If inflation continues at 5%, in 20 years time the real-terms value of that £100k will have dropped to £40k. And far more pensioners will have gone into the 40% tax bracket, since the £50k threshold (including state pension) will have dropped in real terms to £19k.

So a lot of people will have been sucked into that 40% tax band, so they'll be paying 40% tax on pension which a current pensioner with similar real-terms wealth will get tax-free.

The frozen thresholds really are the thing working people should be worrying about.

No - it's not that Ms Reeves is PLANNING to do this, it's that the Fabian Society has SUGGESTED she CONSIDER it. Very different.

I think a maximum tax free pension lump sum of 100k isn't a totally stupid idea - but how could you actually do it? Overnight would be unfair on people about to retire. With effect from a short date (eg 6 April 2025/6) would cause a rush of early retirements - hardly what the government wants when already they have a productivity problem. With effect from a long date (eg 6 April 2034) it doesn't raise them any more money now, which is the whole point of what they want to do.

It is a very stupid idea - a lot of higher earners, incl civil servants and NHS, have £1m+ pots and planned tax free amounts for mortgages etc.
If they are now taxed, at presumable 40%, there is absolutely no incentive for people in save in pensions.
Let's don't forget that pension funds are major shareholders in most of large businesses. If this source of investments dries up the economy won't grow.

But if the main (the only) objective of the budget is to "tax the rich", then yes, sure

I mean, noone is going to feel sorry for people with pensions worth over a million. I don't.

Capping the tax free cash amount retrospectively (which is the only way to raise any meaningful amount of money) would be a disaster, both for people’s existing retirement plans (including mine!) and future confidence in the pensions system. I doubt that it will happen.

I’m planning to pay my mortgage off before I retire, but the thought that if I don’t then the tax free cash from my pension will bridge that gap stops me from having too many sleepless nights about my mortgage.

The PLSA, whose report I linked to above, have written to Reeves including the report. I fear it may be too late, but let’s hope that like most former chancellors she realises the difficulties of changing pensions taxation and doesn’t do anything too hasty.

It wouldn't disincentivise people with a £1m + pension pot, because they're already above the current £276k lump sum threshold. Ie they'll already pay that tax on any additional money they're paying into their pension.

It affects people with a pension pot between £400k and £1million, taking an extra 5% of that tranche of pension savings for most people, and up to an extra 10% for the wealthiest pensioners. (Like I say, >£1million, and they're already paying it)

There's still an incentive to pay into pensions due to deferred tax, but it is a significant hit.

It might encourage people to take their tax-free lump sum early. Not necessarily retire - although since you're the restricted in how much you can put into pension after you've taken any of it, there might be a short-term disincentive for pension saving and work for people approaching retirement.

The main difficulty is for people due to retire soon who were relying on the lump sum to pay off their mortgage, especially since mortgages don't usually go past age 65.

I think the government would need to secure agreement from the mortgage industry that they would introduce mortgages on small amounts (up to £30k - that's the max most people will lose to tax) past age 65, based on pension.

It would be an outrageous consequence if the lack of time to plan meant people had to take out a taxed lump sum since they're too old to get a mortgage extension and hence were forced into a higher rate of tax for that year! That really would destroy confidence in mortgages.

Reducing the tax-free lump sum would be painful (I would personally lose loads) but it would be much, much less harmful than their other crazy ideas like fixed-rate tax relief.

The tax free lump sum is genuinely a tax break: this is income which has never been subject to income tax. And reducing the allowance is progressive, without distortions, and without significant disincentives to pension-saving or - worse - disincentives to work.

It needs to come alongside pension provider changes, to reduce impact.

And also, if everyone is being asked to put more into the state, it needs to come alongside some serious changes to reinstate incentives to earn and to save. It's crazy that pension credit is almost as much as the state pension, for example. Working more and saving more should always benefit you. That's key to the social contract.

If they restrict the tax free sum to £100k then anyone with pension pot over £400k at the point of retirement is disadvantaged. That is an awful lot of people. It isn't just the super rich.

I can't see how they could justify doing this unless it is only applied to money invested after the point of announcing the change. So anything in the pension prior to the change would be on the old 25% rules. However given that changes have previously been made to the tax free sum and have been applied to the whole pot, who knows

Sorry, of course it also affects people who have more than £1million pension pot. I meant that it starts affecting people at £400k, then everything after that is impacted... up to the £1million point where it was already all taxed.

Ie people with a >£1million will be paying between 5% and 10% extra of their pot between £400k and £1million, same as everyone else (probably closer to the 10% extra than people with the smaller pension. It is a neatly progressive change). Then the rest is already taxed at that higher amount.

The tax free lump sum is the only incentive for basic rate taxpayers to bother tying up their money until retirement, if you make it less generous then you risk basic rate taxpayers (and everyone if you also cut tax relief) saving in ISAs instead, and then having free access to those funds at retirement (I know pensions access has become more flexible, but it is subject to income tax).

As well as destroying confidence in the pensions system, it would represent further intergenerational unfairness.

@Milsonophonia , you may not feel sorry for those with a £1m + pension pot but I predict that owners of such pots will start withdrawing their labour from the workplace if any changes are substantially to their detriment. That’s presuming the calculations could be done to extract additional tax from defined benefit and contribution pensions. Doctors, lawyers, surgeons, other highly paid workers, could go part time or retire completely. Not great for our nation’s productivity problem, the tax take won’t be so large and there will be more subtle demands on the state, as in many instances, paid work increases wellbeing. It would also be a waste of those skills.

Thanks, @SlipperyLizard for mentioning the PLSA report has been sent to Rachel Reeves. Let’s hope she reads it and takes note.

It may not bother @Milsonophonia , or anyone else, but we're quite close to retiring (at nearly 70) and having worked the hours and years to get by without becoming a burden, we are actively considering relocating to Portugal. I'm quick at languages, even at 68, and the weather is an attraction. Live 30 minutes from a well serviced airport, swap houses with the kids who already WFH in the summer holiday.

They have six weeks/a much longer summer holiday in the sun, and we escape the torrid heat. We look after each others dogs.

I added the last sentence.

You mean people like the doctors, then.

And this is why tax reforms need expert consideration, due to the incentives they are changing. Still a long wait til the budget!

I presume you want a doctor available to you @Milsonophonia , even an old one.

I've stuffed a few extra thousand into my additional pension. I usually wait until about November to do this but I don't trust RR.

We were planning to do likewise, but in the middle of changing SIPP providers, and nearly ready to start taking out money, we dont know whether to crystallise funds now or wait for new rules.

I think extending mandatory employer contributions is the way forward. Employers are already required to contribute at least 3% with auto enrollment, along with the employees 5%. This could be extended to require contribution matching to a certain level.

And £100k tax-free is still significant. It should be increased in line with inflation, along with tax thresholds.

@nearlylovemyusername In that scenario, surely SCS would just pay down their mortgage while working and use inverse commutation to reduce the lump sum and take a higher pension (albeit paying higher rates of tax in retirement).

I agree @strawberrybubblegum employer (and employee!) pension contributions need to increase. There’s a massive crisis ahead with people who haven’t been able to buy their own home also not having saved enough for retirement. The housing benefit bill will spiral, and as I know from my mum’s experience there aren’t many decent homes that housing benefit will cover.

The average pension pot is woeful, compared to the defined benefit pensions of previous generations, but the cost of living is so high how can people be blamed for ignoring the long term?

The median pension pot is under £200k, only 2% have pots worth over £1M so I'm guessing those who have over £400K will be between 5-10% of the population so the government probably think that's a reasonable share of the population to have to pay tax on a larger percentage of their salary.

But the point is that people have factored it into their retirement planning. We certainly had. If they restrict the 25% then a significant portion of the population will have had their planning impacted. I have loads of friends with large mortgages who are planning on using the tax free sun to pay off their mortgages.

I also know lots of consultants who are maxed out or close to maxed out on their pensions