OK, you work out just how big a pension pot YOU will need to pay you out, say, £30k gross pa for 25 years. Don't forget to adjust that £30k each year for inflation. And the cr@p performance of pension funds. I'm off to do just that....
But there's a limit to what I'm happy with people escaping tax on.
If you're putting away twice the average way tax-free each year, then frankly that's quite enough.
The point of tax relief on pensions is to encourage people to save towards a pension so that they will not be dependent on the state in their old age. Anything more than that is effectively money that could be spent on other things.
no subject
pete stevens (from livejournal.com)2010-10-15 04:25 pm (UTC)(link)
The point of tax relief on pensions is because pensions are taxable. The inland revenue is deferring the income until after the person retires rather than collecting it now.
To make the maths simple, let us suppose I have 100k and I'm a higher rate tax payer.
Situation (1), I put it into a pension,
I pay 100k from my gross salary into my pension which costs me 60k of net income (actually more because of NI, but we'll ignore that for now).
Sometime later I draw it out of my pension, if I'm still a higher rate tax payer I'll then pay 40k of tax on the money on the way out.
The only tax advantage occurs if my tax band is lower at the point of withdrawing the money than when I put it in in the first place.
Situation (2)
I accept 60k now and put it in the bank. When I withdraw it at retirement I still have 60k.
You'll note that in both situations you end up with the same amount of money, it's just the tax is paid later in case (2).
If money goes into pensions from after tax income and is taxed on the way out it makes more sense to put your money under the mattress than in a pension fund. This is bonkers.
Note that if basic tax rates rise between now and retirement you could end up paying more tax than you would do today.
If you account for growth of the fund at the same rate the numbers come out the same providing the income from the pension and private savings are taxed the same way. Once you account for the loss of flexibility in a pension fund compared to savings and the typically higher annual management fees in pension funds compared to ISAs it quickly starts to make sense to dump after tax money into a tracker fund / mortgage in preference to a pension.
There used to be a tax advantage in that you could reclaim corporation tax paid on dividends in a pension fund but not as an individual, but Gordon took that away.
Yes. I know this. I work for a company that does pensions.
The fact remains that (a) there's a tax-free lump sum that allows you to bypass a lot of tax and (b) your income is very frequently in a lower tax bracket when you're taking your pension than when you were paying it in.
What the government is basically saying is that (a) you can't have either of those advantages any more, (b) it would like you to do stuff with the money now rather than sticking it away somewhere safe, and (c) it would like the tax now, rather than in 30 years.
no subject
pete stevens (from livejournal.com)2010-10-15 04:53 pm (UTC)(link)
Apologies for stating the obvious. I've met a lot of people who didn't know this.
Now the conclusion I came to was that saving for a pension as a private individual is basically bonkers until you've filled all your ISA allowances, because pension funds all charge much larger annual fees than good tracker funds which means that the majority of pension funds are a worse investment than a tracker.
The only tax advantage I can see is the deferring income into future tax rates on the assumption that your future marginal tax rate will be lower than the current one.
Yes. A SIPP put into index tracker(s) is a much better, more flexible option (though I'd think seriously about a mix with corp bonds). I used to work for a pensions company too. Beating the market is rare (and usually predicated on sheer luck or insider knowledge), beating it over the long term is practically unheard of.
Having said that, I am neither heavily invested nor pensioned up right now. I was all prepped for a 70's style recession with high inflation and high interest rates....
Why do you (or anyone) get to decide what is enough? Why do you (or anyone) get to decide that someone else cannot choose to put big bucks in now and none at all later? Why should advantage accrue to those who put regular, smaller amounts in every year as opposed to people who put in the same total amount over the same overall period - just in more erratic chunks?
It's called democracy. We all get a vote as to which party we support, and they get to put forward plans as to how they will collect tax. It's not a new system, I'm surprised that you don't understand this.
I'd be, to be honest, perfectly happy with just having a lower total amount that can be saved into a pension. Which would seem simpler in many ways, and wouldn't have the side effect of not dealing with erratic incomes.
Andy, you really can be the most outrageously patronising git when you put your mind to it. I don't think that was called for. I have staged no personal attacks, and I don't feel I deserve one. Nor do you.
In my opinion, our elected representatives do what they damn well please once they are actually in power. We just have to hope that that might sometimes be something approximate to what they promised. In my opinion, as in any job, the majority of politicians, at least the ones higher up the tree, are in it for the politics, not to 'get the job done'. I see this as being true in any workplace - it's the theory that best fits my observations, and the only one that, to me, makes any sense of what goes on.
You asked "who gets to decide what is enough?" which is a complete fatuous question, usually designed to complain about paying taxes at all, and about anyone else having access to money that people have worked for. I felt that my response was a perfectly accurate response to that.
If it wasn't meant for that, then I don't understand what you were asking. It certainly wasn't an attack, I was simply completely baffled as to what you were asking if it wasn't "Why do other people get to decide how much of my money to take?"
I really didn't mean to come across as patronising. I took your question seriously, but was somewhat astounded by it. I'm sorry for the tone in it. And still baffled as to whether you actually meant it seriously.
What I actually said was Why do you (or anyone) get to decide what is enough?
which, in retrospect is fairly nonsensical taken as it is written down.
you had said
But there's a limit to what I'm happy with people escaping tax on.
If you're putting away twice the average way tax-free each year, then frankly that's quite enough.
The thought/feeling in my head at the time was that you were pushing your own slant on how you think contributions to pensions should be managed as if it were the the only possible was it could be done, as if any right thinking person would surely agree - but without much by way of explanation/backup/logic as to *why*. Which is maybe not at all how you intended to come across - I believe my idea was to provoke some kind of logical defence of your view point. To just because you (or indeed anyone or any group of individuals, even a majority) don't like an idea doesn't mean to say it's automatically wrong!
I was probably also influenced, I suppose, by the flavour I get of your views on wealth, taxes, democracy and fairness form both knowing you and from what you write. (with which I often disagree to some extent).
I'm not really one to accept happily or unthinkingly the rule of the majority (given that my personality, interests and motivations are really rather far from 'average'). Yup, that means that I'm not sure I am actually much keen on democracy as such - just haven't got any better suggestions. It's damned hard to make sure that a benign tyrant stays benign :-)
To say that just because you (or indeed anyone or any group of individuals, even a majority) don't like an idea doesn't mean to say it's automatically wrong!
Naah, I wasn't trying to say that my way was _right_. I don't believe there is a right or a wrong way to govern the country, per se. There are things I like more than other things, and there are principles I care about more, but I understand that everyone has different priorities.
I don't think that limiting the pension to x-amount yearly is necessarily better than limiting it to x-amount overall, or some combination or the two. It all comes down to a balancing act, and what they can get a variety of different politicans to agree to.
I do think that there are loopholes that will be taken advantage of in any legal framework, and that there will be a constant battle between people taking advantages of loopholes and other people closing them. And that I'd rather have a simpler system that leaves a few people outside of it than an incredibly complex one that (theoretically) covers everyone.
But I don't get to run the country.
And yes, democracy is definitely the least-worst of all governing systems. Churchill was right.
In my opinion, our elected representatives do what they damn well please once they are actually in power.
In my opinion, our elected representatives are paid to exercise their judgement on our behalf to govern and/or scrutinise those that govern to the best of their abilities.
In other words, that sentence of yours basically explains the way the British constitution is supposed to work. That we have a historic tendency to elect a bunch of numpties as MPs is a fault within the system that's as much our fault as it is theirs and/or the system itself.
the majority of politicians, at least the ones higher up the tree, are in it for the politics, not to 'get the job done
Politics is getting the job done. Politics="the governance of the city". I suspect, however, you meant politicking and/or gamesmanship ;-)
JUST on the pensions bit. Ok, hard to get a real quote without going through a lot of rigmarole, but extrapolating from the 100k fund examples given at http://www.sharingpensions.co.uk/annuity_rates.htm#text1, who use a 3% inflation rate, you need a fund of 813k to get a 30k annual income.
If you start now, at £30k (gross), get 1% pay rise every year (that's my dodgiest point, I admit, so feel free to readjust that) and put 25% of your gross into your pension (that'd be £625 a month right now) and assume a pension fund growth rate of 8% (they aim for that in general, or used to, so I'll be generous and assume they actually make it) it'll take you .... just shy of 30 years to make that level of fund.
Just to show you that you need a really quite horribly big pension fund to get any sort of income at all. Not really on my main point, but trying to put contributions in perspective.
What if you are a company director whose income varies wildly with the fortunes of the company (which will typically make a loss for years in a row) - or even a man in a van who does painting and decorating with slow months/years and better ones. Or you take time (years) out of earning to do a degree/raise kids/look after granny/work on your new whizzy bit of world-changing engineering in your shed? Capping the yearly rate disadvantages these sorts of people when compared to the good little drones who grind away day in day out year after year. Under a tight er cap, they can't "make up for it" so effectively when they have a spectacular year.
I'll get back to the bias against just having/earning money later....
If you run a company with wildly varying income then, yes, you may be caught by this. But even then £50k for a few years will happily catch you up. I suspect the numbers caught out by this due to wildly varying incomes are a fair bit smaller than the numbers of people who simply earn large amounts.
One of the reasons for this is to stop directors who massively pad out their pensions when they are appointed - which is something that I've seen happen repeatedly in the finance industry. Look at Fred Goodwin, for instance, who ended up handing half of his back under pressure. Suddenly had a load of cash handed to him, in the form of a ridiculous pension that wasn't based on anything except hiding the income he was getting.
no subject
pete stevens (from livejournal.com)2010-10-15 04:55 pm (UTC)(link)
You appear to have forgotten the £268k lump sum payout in your calculation. If you exclude this you only need £536k. This is still a lot of money, but quite a lot less.
There are other things to address in your reply but I have to marshal my thoughts to make my response considered, coherent and comprehensible. I'll be back...
![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
andrewducker) wrote2010-10-15 12:01 pm
no subject
I'm not in favour of offering people rewards more than are necessary to get them to do it.
If you're putting aside more than £50k into a pension fund each year then you have gone well beyond the level at which I have any sympathy.
no subject
no subject
But there's a limit to what I'm happy with people escaping tax on.
If you're putting away twice the average way tax-free each year, then frankly that's quite enough.
The point of tax relief on pensions is to encourage people to save towards a pension so that they will not be dependent on the state in their old age. Anything more than that is effectively money that could be spent on other things.
no subject
To make the maths simple, let us suppose I have 100k and I'm a higher rate tax payer.
Situation (1), I put it into a pension,
I pay 100k from my gross salary into my pension which costs me 60k of net income (actually more because of NI, but we'll ignore that for now).
Sometime later I draw it out of my pension, if I'm still a higher rate tax payer I'll then pay 40k of tax on the money on the way out.
The only tax advantage occurs if my tax band is lower at the point of withdrawing the money than when I put it in in the first place.
Situation (2)
I accept 60k now and put it in the bank. When I withdraw it at retirement I still have 60k.
You'll note that in both situations you end up with the same amount of money, it's just the tax is paid later in case (2).
If money goes into pensions from after tax income and is taxed on the way out it makes more sense to put your money under the mattress than in a pension fund. This is bonkers.
Note that if basic tax rates rise between now and retirement you could end up paying more tax than you would do today.
If you account for growth of the fund at the same rate the numbers come out the same providing the income from the pension and private savings are taxed the same way. Once you account for the loss of flexibility in a pension fund compared to savings and the typically higher annual management fees in pension funds compared to ISAs it quickly starts to make sense to dump after tax money into a tracker fund / mortgage in preference to a pension.
There used to be a tax advantage in that you could reclaim corporation tax paid on dividends in a pension fund but not as an individual, but Gordon took that away.
no subject
The fact remains that (a) there's a tax-free lump sum that allows you to bypass a lot of tax and (b) your income is very frequently in a lower tax bracket when you're taking your pension than when you were paying it in.
What the government is basically saying is that (a) you can't have either of those advantages any more, (b) it would like you to do stuff with the money now rather than sticking it away somewhere safe, and (c) it would like the tax now, rather than in 30 years.
no subject
Now the conclusion I came to was that saving for a pension as a private individual is basically bonkers until you've filled all your ISA allowances, because pension funds all charge much larger annual fees than good tracker funds which means that the majority of pension funds are a worse investment than a tracker.
The only tax advantage I can see is the deferring income into future tax rates on the assumption that your future marginal tax rate will be lower than the current one.
Or am I missing something more important?
no subject
But basically you have the tax-free lump sum, and the lowering of total tax paid due to a lower tax bracket as the two main reasons.
I get cheap pension servicing, which makes it more worthwhile for me, but even so I have debated just paying off my mortgage faster.
no subject
Having said that, I am neither heavily invested nor pensioned up right now. I was all prepped for a 70's style recession with high inflation and high interest rates....
no subject
no subject
I'd be, to be honest, perfectly happy with just having a lower total amount that can be saved into a pension. Which would seem simpler in many ways, and wouldn't have the side effect of not dealing with erratic incomes.
no subject
In my opinion, our elected representatives do what they damn well please once they are actually in power. We just have to hope that that might sometimes be something approximate to what they promised. In my opinion, as in any job, the majority of politicians, at least the ones higher up the tree, are in it for the politics, not to 'get the job done'. I see this as being true in any workplace - it's the theory that best fits my observations, and the only one that, to me, makes any sense of what goes on.
no subject
If it wasn't meant for that, then I don't understand what you were asking. It certainly wasn't an attack, I was simply completely baffled as to what you were asking if it wasn't "Why do other people get to decide how much of my money to take?"
no subject
I really didn't mean to come across as patronising. I took your question seriously, but was somewhat astounded by it. I'm sorry for the tone in it. And still baffled as to whether you actually meant it seriously.
no subject
which, in retrospect is fairly nonsensical taken as it is written down.
you had said
But there's a limit to what I'm happy with people escaping tax on.
If you're putting away twice the average way tax-free each year, then frankly that's quite enough.
The thought/feeling in my head at the time was that you were pushing your own slant on how you think contributions to pensions should be managed as if it were the the only possible was it could be done, as if any right thinking person would surely agree - but without much by way of explanation/backup/logic as to *why*. Which is maybe not at all how you intended to come across - I believe my idea was to provoke some kind of logical defence of your view point. To just because you (or indeed anyone or any group of individuals, even a majority) don't like an idea doesn't mean to say it's automatically wrong!
I was probably also influenced, I suppose, by the flavour I get of your views on wealth, taxes, democracy and fairness form both knowing you and from what you write. (with which I often disagree to some extent).
I'm not really one to accept happily or unthinkingly the rule of the majority (given that my personality, interests and motivations are really rather far from 'average'). Yup, that means that I'm not sure I am actually much keen on democracy as such - just haven't got any better suggestions. It's damned hard to make sure that a benign tyrant stays benign :-)
no subject
To say that just because you (or indeed anyone or any group of individuals, even a majority) don't like an idea doesn't mean to say it's automatically wrong!
no subject
I don't think that limiting the pension to x-amount yearly is necessarily better than limiting it to x-amount overall, or some combination or the two. It all comes down to a balancing act, and what they can get a variety of different politicans to agree to.
I do think that there are loopholes that will be taken advantage of in any legal framework, and that there will be a constant battle between people taking advantages of loopholes and other people closing them. And that I'd rather have a simpler system that leaves a few people outside of it than an incredibly complex one that (theoretically) covers everyone.
But I don't get to run the country.
And yes, democracy is definitely the least-worst of all governing systems. Churchill was right.
no subject
In my opinion, our elected representatives are paid to exercise their judgement on our behalf to govern and/or scrutinise those that govern to the best of their abilities.
In other words, that sentence of yours basically explains the way the British constitution is supposed to work. That we have a historic tendency to elect a bunch of numpties as MPs is a fault within the system that's as much our fault as it is theirs and/or the system itself.
Politics is getting the job done. Politics="the governance of the city". I suspect, however, you meant politicking and/or gamesmanship ;-)
no subject
If you start now, at £30k (gross), get 1% pay rise every year (that's my dodgiest point, I admit, so feel free to readjust that) and put 25% of your gross into your pension (that'd be £625 a month right now) and assume a pension fund growth rate of 8% (they aim for that in general, or used to, so I'll be generous and assume they actually make it) it'll take you .... just shy of 30 years to make that level of fund.
Just to show you that you need a really quite horribly big pension fund to get any sort of income at all. Not really on my main point, but trying to put contributions in perspective.
What if you are a company director whose income varies wildly with the fortunes of the company (which will typically make a loss for years in a row) - or even a man in a van who does painting and decorating with slow months/years and better ones. Or you take time (years) out of earning to do a degree/raise kids/look after granny/work on your new whizzy bit of world-changing engineering in your shed? Capping the yearly rate disadvantages these sorts of people when compared to the good little drones who grind away day in day out year after year. Under a tight er cap, they can't "make up for it" so effectively when they have a spectacular year.
I'll get back to the bias against just having/earning money later....
no subject
One of the reasons for this is to stop directors who massively pad out their pensions when they are appointed - which is something that I've seen happen repeatedly in the finance industry. Look at Fred Goodwin, for instance, who ended up handing half of his back under pressure. Suddenly had a load of cash handed to him, in the form of a ridiculous pension that wasn't based on anything except hiding the income he was getting.
no subject
no subject
(scrolls down, sees followup)
...huh, I was right.
no subject