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

It would definitely have a big impact on people who had planned to use it to pay off mortgage. It should be reduced gradually over a longer time, maybe a decade, to give people time to change their planning. This would also prevent everyone dashing to get their lump sum before it changes, and then retiring earlier or reducing hours earlier since they can't put so much into pension tax-free after taking it (I've known some people work a few extra years in order to put almost all of it into pension for a final big boost. )

That gradual reduction would be the grown-up, good-for-the-country thing to do. But doesn't provide an immediate quick-fix of cash, so will RR take the quick cash injection or take the long-term good?

And for long-term good, to prevent the 'why do I bother saving into pension' emotional reaction to this change, she should at the same time extend auto-enrollment obligations to higher percentages, and market it lots so that people know what a great deal it is and take it up. The existing auto enrollment rules really are a good incentive : a basic rate taxpayer gets twice as much into their pension as they would if they took the money now (8% of salary into their pension vs 4% net of tax if they take it now). But 8% of salary isn't enough. The government should increase that, ideally with flexibility over amount of contributions - proportionately matched - since the inflexible "in or out" is a disincentive.

I still don't see how the lump sum change disincentivises the consultants who are maxed out on their pension (by which I think you mean close to £1million). They will like everyone else with a pension pay a huge load of extra tax. But it doesn't change their incentive to save, since they're already above the limit where extra money they save wouldn't give them any more money tax-free, even under the current rules. What am I missing?

This distinction will not be tolerated on the thread.

I accept Reeves COULD do the things under discussion, however the thread has decided she definitely WILL.

It's very worrying when changes are coming that could affect your future, but at present we have noises from all political sides and no announcement from government yet.

How does tax-free lump sum actually work for the NHS defined-benefit pension scheme, and how would it change with a reduced tax-free lump sum?

I know that teachers have the option to take a lump sum or else keep it in the pension to have a higher benefit. Is it the same? Presumably, the same calculation could be applied to offer either the reduced lump sum or calculate how much the extra benefit would be (allowing for taxing that portion).

I think any pension changes do need to apply to defined benefit schemes as well as defined contribution. Where there are painful changes, it's absolutely crucial that it should feel fair.

This government and the last both have form for leaking their plans to gauge public reaction.

The annual pension is multiplied by a factor, 20x if I recall, to get the "pot" value and 25% can be given tax free currently. The remaining pension will be reduced if a lump sum is taken.
Very similar in operation in that sense to a DC pot so I wouldn't see the need to differentiate the treatment of the tax free lump sum between different scheme types.

Please correct if I am wrong, but I believe that is indeed that actual median pension pot, not the median pension pot at retirement which would be the relevant figure.

Intention was to use the tax free lump sum to pay off the mortgage, then to reduce to part time hours mortgage free. Necessary to retire before state pension age due to progressive illness. And although pension pot is OK, it’s for two people, as DH cannot work and therefore has very little pension. I am fortunate to be a top rate tax payer at the point where I had planned to take the lump sum, which means the tax impact would be £80,772 for me.

Absolutely - and very sensible that is too.

However, (1) the fact that something is being discussed doesn't mean it was leaked and (2) the fact that something was leaked means it is being CONSIDERED and not for sure happening.

A great case in point actually is the pensions Lifetime Allowance. It was leaked that it would be raised to £1.8 million, and when no-one seemed bothered in fact it was removed altogether.

It's not QUITE that simple, but that's very close, and a decent way of thinking about it.

In reality you are allowed to have 25% of the value of your DB benefits as a lump sum, so you end up with an equation that is:

lump sum = 25% x (residual pension x 20 + lump sum)

As the residual pension depends on the commutation factors in the scheme it ends up being very slightly different to 25% x 20 x original pension, unless your commutation factor is exactly 20.

Andy Haldane has nailed it though, this early doom laden announcement has created panic and fear. Maybe this is labour's plan for economic growth - rumours of a CGT rise, IHT, I bet financial advisers are having a very busy spell!

That's the beauty of a services based economy - much easier to get quick growth than if you have to gear up manufacturing ;)

Mrs Thatcher really was a visionary. 😂

😂

When they leak, they go to friendly papers. These are not leaks. These are Telegraph speculative articles.

I'm not say it won't come to pass, but it's just Telegraph noise at present, we e nothing more.

An alternative is to put your savings into a tax free ISA

You can currently put a maximum of 20k per tax year into an ISA. All the interest earned is tax free.

There are different types

Normal cash ISA

Stocks & shares ISA

Peer to peer ISA

JISA if you are under 40

Some ISAs allow you to remove & add money back in during that tax year

Some ISAs are locked until the end of their term

If pensions are a target then ISAs will be too I reckon. After all, loads of Gen X and Millennials will have significant investments sheltered in these vehicles, and those people are not classed by this government as hard working, so are fair game as well.. Because hard working broadly means those on the national living wage or a little bit more, plus of course every single public sector worker ;)

Yes, there have definitely been mutterings on ISAs being too generous....but I've not seen any specific articles re ISA changes

Isas are all well and good but the money going in has been taxed.

And, let's not be disingenuous here, a person can only put £20k annually into an ISA. The contributions that can be made to pensions are much more generous. We are old but still running our SME, so the company can contribute to a directors' pension fund, and claim back the tax via the accounts. As it happens, this has been a shit year and we have run at a loss. So we shall take the early profit from our new year of trading, which is starting out promisingly, for the pension.The wages will still be paid, and the landlord and everyone else. But after many months of not taking anything at all, we will aim to recover some of what we didn't take.

I'm so sorry @thereiscustardinthejamtart that sounds like it would have a really bad impact for you.

You've probably already been hit by other tax disadvantages enevenly-earning couples experience as well, which other countries manage by considering household tax rather than taxing spouses separately (well, until it's time to take away child benefit - then it's at household level!).

Really hope the reduction in tax-free lump sum doesn't happen.

@snowlaser thanks! I stand corrected
Touched on this a bit in a past job, unfortunately not one where I got one of these nice pensions though...

Yes, but at least growth / returns are tax free within an ISA. The alternative being an investment made out of taxed income where you are taxed on gains and income as well surely? Unless you haven’t maxed out and are happy with when you can access a pension.

They are much more flexible than a pension as you don’t have to be 55/57 to access them, so as a tool for bridging the period from when you want to retire to when you can actually access your pension, or the state pension, they are very helpful. Particularly as they are completely tax free on the way out, not just 25% tax free.

Btw @thereiscustardinthejamtart , presumably divorcing (where your husband might take part of your pension as divorce settlement, getting his own £100k tax allowance, personal allowance and standard tax rate... ) and then re-marrying shortly after... would cost much less than £80k... Just don't die in the interim!

(Just an evil thought!) You should obviously get financial and legal advice - as well as thinking everything through carefully. And wait to find out whether the law does change, hopefully it won't happen.

I do think it's unfair and an anomaly that spouses can pass most assets between them tax-free but not pension.

@Tryingtokeepgoing , agreed but we're 68, and DH is still The man running the company. The people that have been engaged to take on DH's role have looked at it and bowed out. I despair, frankly. We have funds to retire on, but DH is understandably keen to see his baby grow and thrive. And I can't disagree with his response; he created and built it, and it's still successful, and the game still thrills both of us.

Thanks for such lovely thoughtful posts @strawberrybubblegum 😊

I did suggest a brief divorce to DH, but he is understandably sceptical! I do wonder how long one would have to remain divorced. Presumably just minutes, in theory. It does serve to highlight how ludicrous it is.