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A spokesman from No10 had this to say : "For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath."
Relevant to the endless discussions about pensions savings on STW these days...
so we can stick upto £40k into our pensions to avoid income tax,
but in just under 400 days time we can only earn £500 dividend and £3k capital gains before we pay tax.
(knowing several) I'm not sure that'll be enough to keep senior consultants in the NHS
Yep, saw that.
Stopped contributing to my pension a few years back as over the LT limit. Also went part time, as don't really need the money.
I was expecting them to reduce the annual limit to reduce the tax break as that costs the exchequer billions every year.
the 40k limit should really be index linked, its effectively dropped 15% in the last couple of years.
the lifetime limit is already index linked and increasing it isn't as generous as it seems. if you're already at the lifetime limit, you're likely to be hitting the higher rate of tax when you draw your pension out - so you save 40% tax on the way in, but pay 40% tax (on 75% of it) on the way out - total saving is only 10%.
but in just under 400 days time we can only earn £500 dividend and £3k capital gains before we pay tax.
only if your shares/whatever aren't in a tax wrapper like an ISA, SEIS or similar. I guess this change is more about persuading people to save for the future and stay in work than giving the self employed a lower rate of tax than others
the lifetime limit is already index linked and increasing it isn’t as generous as it seems.
It's been cut several times since being introduced, then index linked, then they froze that for years on end.
It's worth roughly half what it used to be....
we can only earn £500 dividend and £3k capital gains before we pay tax.
Mmm yes. I sold chunk of BP this week specifically because of this change. Desperately hoping they don't increase before I get mycheque and can re-buy within my ISA.
Though, doofus that I am, i thought it was changing this year, not next year!
if you’re already at the lifetime limit, you’re likely to be hitting the higher rate of tax when you draw your pension out – so you save 40% tax on the way in, but pay 40% tax (on 75% of it) on the way out – total saving is only 10%.
Help me out here... my assumption is that anyone near that limit will save the 40% on the full £40k annual chunk, or near enough. ( as you say)
But...Assuming a 4% drawdown when they retire, then they wouldn't be paying any 40% tax would they?
Even if they got a 7% annuity they'd surely only be paying 40% tax on around £20k?
Where does your 75% number come from?
Thanks
I was expecting them to reduce the annual limit to reduce the tax break as that costs the exchequer billions every year.
I think the limit drives people to retire earlier as they can’t put anymore into pension as hit the limit but at the same time have higher salaries but with fewer outgoings (kids gone, mortgage paid etc.). For most it’s either retirement or cut hours which reduces tax take more significantly.
Help me out here… my assumption is that anyone near that limit will save the 40% on the full £40k annual chunk, or near enough. ( as you say)
But…Assuming a 4% drawdown when they retire, then they wouldn’t be paying any 40% tax would they?
Even if they got a 7% annuity they’d surely only be paying 40% tax on around £20k?
Where does your 75% number come from?
Thanks
lets say you've already got £1.1mm in your pension pot on retirement. annuitys are currently around 4%, and a safe drawdown rate is somewhere between 4-5% so lets say your annual income at retirement will be £45k, plus £10k state pension - total income of £55k per year (so in the 40% tax band).
If you put another £100k into your pension it'll only cost you £60k. ignoring inflation/investment growth, you'll have £100k more at retirement, and you're going to drawdown at 5%, so you'll get an extra £5k income per year.
The trouble is, you're already earning £55k per year, so you pay 40% tax on your £5k - and your total income is thus £3k per year - the tax saving has been wiped out
in reality, you can pull 25% of your pension pot out tax-free - so of your £100k, you get £25k tax-free (that's the 10% saving) and pay 40% on the rest (40% of 75k is £30k) - so you've saved £40k up front, paid £30k later, total saving is 25% of the tax, or 10% of the total
For most it’s either retirement or cut hours which reduces tax take more significantly.
While mathematically and pragmatically encouraging the rich to get richer to increase tax take is good, a good part of me finds encouraging such huge wealth a difficult to swallow.
5lab, haven't your forgotten that you're taxed at a pretty hefty lump sum on the value of your pot that's beyond the life time allowance? 25% iirc, but not really sure. Factor that in and the benefit is smaller still.
5lab, haven’t your forgotten that you’re taxed at a pretty hefty lump sum on the value of your pot that’s beyond the life time allowance? 25% iirc, but not really sure. Factor that in and the benefit is smaller still.
I don't think I forgot it - the current limit is 1.07mm (I rounded it to 1.1mm for ease of maths) - I was trying to demonstrate what the impact is if you're currently at the maximum, and they then raise the max to 1.2mm - you save a bit of tax, but not loads (10k in that instance)
AHH, gotcha. Ie the small increase of LTA is pretty small. Got it.
I've only recently been getting my head around LTA as, as a middle earner who feels far from wealthy, I'd assumed I'd never hit it. Decided I ought to know for sure a month or so back, did a calculation and predicted I'd be a little over it! It really isn't just an issue for the wealthy, the LTA affects a lot of normal people, particularly if they choose to save a bit more than the bare minimum for retirement.
(knowing several) I’m not sure that’ll be enough to keep senior consultants in the NHS
Let's see. It's not just about keeping senior consultants, it's also about stopping the more junior ones bailing out for Aus after getting an opaque tax bill for sometimes tens of thousands for having exceeded AA, despite having done no work above contract.
It's also not quite as simple as 'you can pay in up to £40k per year', for defined benefit schemes (such as the NHS pension scheme) it's worked out as the amount your nominal annual pension x16 (I think) has grown.
Cheers 5slab. You were looking at the delta between the current threshold and a potential newer threshold, whereas I was including all the money up to the [ current] threshold.
I agree that anything extra you put in beyond a certain amount gets negligible tax benefits.
Because what the country really needs right now is for the rich to get even richer.
Because what the country really needs right now is for the rich to get even richer.
Actually it sort of does.
The super rich don't have UK pensions and also don't pay much UK tax, they also don't care much about UK tax law eg James Dyson just moved to Singapore where the tax laws are nicer to billionaires.
The better off middle classes pay the bulk of income tax and HMRC could use more money to pay for things like Roads, NHS, Schools etc, who are all short of cash.
That's not to say you shouldn't also worry about the poor at the same time; just they don't pay much tax - they tend to get tax credits.
Making them richer *by cutting their taxes* hardly helps with that though.
As others have said - some of this is about fixing the NHS pension issue. There is zero control over contributions, you are either in or out and can't control the amount.
Calculating the pension growth each year is a complex algorithm that lots of IFAs don't even get.
It is possible to get a pension tax bill bigger than your salary for the year. So you pay to go to work
That's not really the rich getting richer...
Accept jn other cases it may be!
<DELETED>
Needs raising to match the higher limit on defined benefit schemes. It’s appalling that someone gets a much better pension and yet pays less tax in the process.
And why can’t you access a DC scheme until you’re old and decrepit?
the lifetime limit is already index linked
Pretty sure it isn’t, or at least not for defined contribution.
Needs raising to match the higher limit on defined benefit schemes.
Sorry - what does?
20*ratherbe
Because what the country really needs right now is for the rich to get even richer.
Define "rich". We are not talking about HNW individuals here, just hard working middle class who have paid substantial tax already along the way while being careful enough to build a provision for their retirement.
Define “rich”. We are not talking about HNW individuals here
A quick Google defines HNW as having over $1m. Quite a bit less than the current Lifetime Pension Limit. I'd define people with over £1m in their pension pot as rich. I'll bet most of them have other savings and substantial assets in property too.
Mrs FD is an NHS consultant.
Over the last year her Trust have asked her to do extra sessions, and to be fair these have been paid at rates above her normal hourly rate , probably approaching the rates other professionals get paid.
She has then been stung on this whole pension tax thing and now is paying back thousands to the tax man (no fault of her own) . We have had to cut back on stuff to pay the bill.
She is now not doing any extra work.
Will this mean she can work again, and not face stupid tax bills so that she doesn’t end working for free / cost?
The quick fix which won’t happen is to align it with the MPs’ own pension scheme which allows them to accrue a pension pot of around £2m (value of benefits) without penalty.
Most of the public sector schemes are also under valued in that the cost of buying the same benefits in a private scheme e.g. index linking, is massively more than the stated “value”.
A quick Google defines HNW as having over $1m. Quite a bit less than the current Lifetime Pension Limit. I’d define people with over £1m in their pension pot as rich. I’ll bet most of them have other savings and substantial assets in property too.
Check again. It's $1m of liquid assets so in addition to pension, businesses, investments, property, art, cars etc.
There is no definition for "rich" in fairness Nick. And that's why arbitrarily berating someone for having planned for their retirement and having saved £1m while paying plenty of tax sounds like classic pitchfork stuff to me. Besides, they will probably spend a big chunk of that money while retired. We actually need people like that.
I'm not berating anyone for saving a million, or whatever figure you prefer to use. I'm just saying they are rich enough that focusing extra tax bungs in their direction shouldn't really be a priority for the country.
What is it, 2 million people using food banks currently?
Will this mean she can work again, and not face stupid tax bills so that she doesn’t end working for free / cost?
Is there any information yet? It seems so far there’s been a trailer for the upcoming budget, not an announcement that says ‘our penny pinching policy on the annual and lifetime allowance has caught out many people in the NHS defined benefits pension scheme. It is time for that unfairness to end. Senior staff should not have to pay to go to work at a time when we depend on them more than ever before. To that end, the lifetime and annual allowances will be unlimited for those in public sector defined benefits schemes. We are sorry that anyone had to pay to go to work and will refund all excess tax paid since the inception of these allowances in full and with index-linked interest on top. To everyone else, and those in defined contributions schemes, it’s just tough luck and you need to take your chances.’
A quick Google defines HNW as having over $1m. Quite a bit less than the current Lifetime Pension Limit. I’d define people with over £1m in their pension pot as rich. I’ll bet most of them have other savings and substantial assets in property too.
In 2 years time I will be above the current LTA, which has come about by me starting my pension @ 16 when I joined the company, I have a steady good job and a we have 4 bed house in the North of England. with a couple cars both 5 years old.
I can assure you I am not rich ☹️
A raise in the annual allowance would be welcome.
And a raise in the tax free earnings allowance.
And in the thresholds for 40%, returning 45%, and 50% income tax together with the elimination of the personal allowance taper with its 60% tax black hole effect.
‘Fiscal drag’? Not as entertaining as it sounds and hardly an economic energiser.
Check again. It’s $1m of liquid assets so in addition to pension, businesses, investments, property, art, cars etc.
Yes, I saw that, but in think I'll still consider people with millions in savings and assets as rich even if they have trouble accessing it quickly.
Besides, they will probably spend a big chunk of that money while retired.
Ah, trickle down economics. No thank you.
Ah, trickle down economics. No thank you.
Don't be so negative. They'll spend it on champagne and piss on the poor.
I'm old enough to remember the Trusster**** when the plastic Thatcher tried to claim that tax cuts for the rich was just what the country needed.
I’m just saying they are rich enough that focusing extra tax bungs in their direction shouldn’t really be a priority for the country.
What is it, 2 million people using food banks currently?
Problem is that focusing on priorities and delivering them requires funding which comes from taxation. The ‘rich enough’ are the ones who pay the vast majority of tax but are retiring earlier. Ask yourself why and how perhaps it could be addressed?
Well, abolishing non-dom status would be an obvious start, normalising CGT to match income tax would be a sensible step and a lifetime tax threshold of maybe 100-200k on inheritances (NB not per estate, per recipient) would raise a fair bit too.
But bungs for the rich is more popular with the rich so here we are.
(All the early retirees that I know have retired because they have decided they are rich enough and value their time over getting richer. Do you really think that making these people richer quicker will encourage them to work longer? Cos that's the precise opposite of what they are saying.)
Ask yourself why and how perhaps it could be addressed?
Get rid of non domicile.
When your pension pot is 'full', then you just stop saving into it.
They then just pay income tax, like everyone else.
@thecaptain Yes, but.
There’s a specific issue with senior NHS staff where pension tax rules have been applied to the NHS pension scheme in such a way that continuing to work past a certain point leads to massive tax bills, sometimes in the tens of thousands, allied to below inflation pay rises (for what is to all intents and purposes a monopoly employer with a non-negotiable national contract) meaning people are often better off going early.
There is a decent proportion who would stay on, and without them, and without younger staff doing extra work (which they won’t do due to fear of annual allowance tax bills which can exceed the amount earned doing the extra work, due to the bizarre way it’s calculated) we will never catch up with the post-pandemic backlog.
Hunt is well aware of all of this and was calling for action when he chaired the health select committee. There is of course the law of unintended consequences (which got us into this mess) which means a specific fix for a small group might cause problems elsewhere…
When your pension pot is ‘full’, then you just stop saving into it.
They then just pay income tax, like everyone else.
Except they don’t because they give up work but that seems lost on some folks. Just over 50% of adults pay tax in the UK the rest don’t.
Have I got this right?
The notional LTA for the NHS bods is 20xAnnual Pension + lump sum. That is the scandalous complex calculation that people are talking about is it?
Wich, unless I am much mistaken is very similar to the DC calc of 4% PA indefinitely ( appreciate this us just a ballpark estimate) or 4-7% PA + lump sum if you get an annuity.
They seem pretty similar. What's the issue?
Yes, I saw that, but in think I’ll still consider people with millions in savings and assets as rich even if they have trouble accessing it quickly.
Good so now you understand what HNW individuals are, ie not your typical middle class earner who wasn't profligate and saved £1m in pension over their (half decent) hard working and tax paying career and benefited from healthy stock market returns. For all we know their only other significant asset may be their house. This is not "wealthy", just middle class. That should not be enough to upset even the most bitter of Labour voter.
That should not be enough to upset even the most bitter of Labour voter.
Not bitter, I'd just lean towards helping those using food banks or choosing between heating and food rather than the millionaires, even if they are only paper millionaires.
This is not “wealthy”
It absolutely is wealthy and to claim otherwise is ridiculous imo.
Just over 50% of adults pay tax in the UK the rest don’t.
Utter ignorant bollocks.
Double down on it a couple of times and then I'll explain it to you.
It's wild that people think that having £1m in a pension pot isn't rich.
Reminds me of the bellend on QT a few years back who insisted that his 80k salary was below average.
How much does one have to invest to end up with a £1m pension pot at age 55?
Some googling brought me to this web page;
https://www.nutsaboutmoney.com/pensions/average-pension-pot-uk
<table class="tg">
<tbody>
<tr>
<th>Age</th>
<th>Average pension pot</th>
</tr>
<tr>
<td>16-24</td>
<td>£2,700</td>
</tr>
<tr>
<td>25-34</td>
<td>£9,300</td>
</tr>
<tr>
<td>35-44</td>
<td>£30,000</td>
</tr>
<tr>
<td>45-54</td>
<td>£75,500</td>
</tr>
<tr>
<td>55-64</td>
<td>£107,300</td>
</tr>
</tbody>
</table>
So to claim having a £1m pot is not wealthy is deluded.
FFS! Gotta love this forum. 3 ****ing developers and this is what we get...
Age Average pension pot
16-24 £2,700
25-34 £9,300
35-44 £30,000
45-54 £75,500
55-64 £107,300
I don't actually believe those numbers. They're insane.
Ie, I agree with doomanic
Are they too big or too small in your opinion? Averages are easily skewed by a few people with large pension pots. Don't look unreasonable to me. 100k is f all if you're hoping to retire on it, you'll get about 5% per year ie 5k.
@thegeneralist, the calculation is simple. But the pain is in the value of DC contributions in the NHS. Suppose you earn 80k per year and accrue 1/60th final salary. Times that by the HMRC 20 gives a value per year of 1/3 of your salary or 27k of the annual allowance of 40k
Now suppose you earn 120k, then that 1/3 annual value for pension is the max limit of 40k. Earn any more and the pension contribution doesn’t stop, but you will have to pay tax on any contributions made over 40k. Since there is no real money in this Ponzi scheme, the tax due comes out of the worker salary via self assessment. Also recall that the effective tax rate at 100k is 60% as the personal allowance is eroded to nil, and senior consultants just don’t see the value in additional work.
I had a significant bonus a few years ago and was in the same situation. My pension annual allowance was also eroded and my DC 20x contribution couldn’t be turned off. My effective income tax rate for the year was 51%! Don’t feel sorry for me.
Calculating pension increase of mhs pension year on year is far from simple. Google Tony Goldstone NHS Pension for the long winded explanations as ehs written loads on it.
A five figure tac bill for one years pension growth is entirely possible, and once you get into that problem the only solutions is to leave the scheme or drop hours, both of which are an issue for the NHS.
Yes the pension is a good one but there are a number of consultants finding themselves in a position where early retirement leaves them better off than continuing to work.
Which is madness!
Are they too big or too small in your opinion? Averages are easily skewed by a few people with large pension pots.
According to the link I shared it's far too small. The people with the large pots will be compensating for the people with even smaller pots.
Are they too big or too small in your opinion?
They're absolutely miniscule. That cohort that is about to retire is looking at an annual income of £4k + state pension (later on)
Don’t look unreasonable to me.
Don't they ? 😉
They looked damned unreasonable to me.
100k is f all if you’re hoping to retire on it, you’ll get about 5% per year ie 5k.
Sounds like we're in full agreement.
Age Average pension pot
16-24 £2,700
25-34 £9,300
35-44 £30,000
45-54 £75,500
55-64 £107,300I don’t actually believe those numbers. They’re insane
They look about right to me. I consider myself (lower) 'middle class' and am somewhere near these figures. MrsD is below.
I and many of my old uni friends were still paying student loans into our 40s, and didn't get on the property ladder until our 30s, with mortgages due to run until we're around 60. Ok, so I spent 7 years as a skint musician, but still, I don't think those numbers are way off.
Whether or not they're unreasonable - I don't find those numbers surprising.
Oh, i agree they are hopelessly small, but I believe they are probably representative. Lots of people have next to no independent pension and will be relying on whatever the state provides.
(There are also a bunch who have investments other than a personal pension, admittedly this is probably a small number.)
@tired I’m not sure that’s entirely right.
The NHS scheme is DB, not DC, and pension growth depends which scheme you’re in.
For the sake of argument, each year’s service in the 2015 scheme gives you (I think) 1/54th career average salary, which is then multiplied by 20 to give the pension growth.
Difficulty is that consultants didn’t have to do that much extra work pre-pandemic (funnily enough HMG increased the taper threshold during COVID) to taper, where the tax bills came in.
I had a colleague who got hit for £75k.
I appreciate this affects a small, highly paid cohort.
Utter ignorant bollocks.
Double down on it a couple of times and then I’ll explain it to you.
Please do as I’d really like you to explain.
suggests that there were 32.7m income tax payers for 2021/22.
reckons 51.7m over 20.
63%.
I suspect (with no basis) that that's a "low" proportion more because a lot of people don't earn enough to pay income tax, rather than they've earned so much that they've hit the pension limit.
suggests that there were 32.7m income tax payers for 2021/22
I suspect that number is artificially lowered by self employed people who pay exactly the max tax free salary they can then pay the rest as dividends.
The average pot numbers may be skewed by the large number of people with no pots because they're
A)on very low salary
B) on a defined benefits pension
Income tax is less than a quarter of the total tax take.
Obviously it suits a certain political viewpoint to minimise the contribution of the less wealthy and exaggerate the contribution of the rich, but it takes some chutzpah to pretend that the only tax that counts is income tax.
A five figure tac bill for one years pension growth is entirely possible, and once you get into that problem the only solutions is to leave the scheme or drop hours, both of which are an issue for the NHS.
Yes the pension is a good one but there are a number of consultants finding themselves in a position where early retirement leaves them better off than continuing to work.
So what we're actually saying is the NHS pension system is so generous at the top end of salaries? Taxpayers money going into private pensions at a crazy good rate, with of course a 40%+ tax benefit.
Time to solve that at a contractual/salary level.
It’s not going into private pensions, our pension contribs go straight back to the Treasury. The nominal pension pot doesn’t actually exist.
At the top end, the scheme is actually less generous than it is at the bottom - it’s a defined benefit scheme (which I appreciate is a lot better than most private sector schemes) but contribs are tiered so people earning less have lower deducted contribs for the same proportional benefit.
Time to solve that at a contractual/salary level.
If by that you mean reducing doctors’ salaries, I rather think you need to look at how the NHS is struggling to recruit people. I suspect most medics could earn considerably more if they worked privately.
Again, it’s not that simple - because of the system we have in the UK, doctors functionally have a monopoly employer. If you want to do PP it’s usual to work full time for the NHS as well to be credible.
However we’ve had 30% real terms pay erosion in 10 years and when, for example, the Irish are offering a consultant salary double what the NHS is, never mind Aus/NZ…
Obviously it suits a certain political viewpoint to minimise the contribution of the less wealthy and exaggerate the contribution of the rich, but it takes some chutzpah to pretend that the only tax that counts is income tax.
Utter ignorant bollocks 😀
It sounds like the top NHS paid staff either reach the LTA or exceed the Pension relief taper which are both pretty first world problems especially if you are a lowly paid nurse or porter etc..
The easiest low for people to have a large tax bill is to stop paying into a pension is you exceed the LTA or hit the pension relief taper (which starts at £205k in salary and employer pension contributions)
As above, I am fully aware this is a problem affecting a small, highly paid group, but comparing consultants with porters isn’t comparing like with like (which is not to suggest portering isn’t important, but you don’t need 5 years of university and 10 years of postgrad training including higher exams to be a porter)
When people who are hard to replace go early or decline to do work over and above contract for fear of punitive tax bills, and hospital waiting lists get longer and longer as a result, at what point does this become everyone’s problem?
sounds like the top NHS paid staff either reach the LTA or exceed the Pension relief taper which are both pretty first world problem
It may be a first world problem for them, but if the behaviour it drives is them leaving the profession then it becomes a problem for all of us.
In my company we can elect to have our pension contributions paid as cash. Obviously you're taxed on them, but it avoids this being a problem as you approach your pot limit
We all hear about the issues with the NHS but your max pension tax free amount per year going from £40k at an annual £240k to £10k at around £300k seems like a pretty minimal reason to leave the profession. General Pressures on people in the NHS make people leave.
Yes, but as above the threat of tax bills make people retire earlier than they would, and it’s not as simple as being able to pay £40k in - if it was, none of us would have a problem. Remember that the psychological threat of a massive tax bill is almost as important as the reality, and while you’re right about general pressures being important, the pension tax issues (which are a massive subject of online discussion) don’t help people feel that the system or HMG value them.
There are so many consultant gaps even with people coming through training, we cannot afford people going five years earlier than they would otherwise.
There's apparently 40,000 doctors impacted by this in the NHS, I think that's enough for a significant impact. If they're getting taxed at 40% on their pension when they pull it, it doesn't make much of a difference to the treasury
I don’t pretend to fully understand the whole thing. However Mrs FD has been advised she will not exceed her total life time pension allowance before retirement, however for the last 2 years she has been stung by substantial 4 figure tax bills.
Her salary is £120k per year and that we budget for that. However she does additional sessions and gets paid a sessional rate. She has pretty much told work she is stopping doing it because we can’t determine what detrimental impact it will have on our income
Last years unexpected tax bill is costing us £600 per month this financial year. That is already having paid roughly 50% tax on the earnings when it was received in the previous tax year, so overall a massive net loss with no ability to budget.
Basically it has cost her to go to work.
Last years unexpected tax bill is costing us £600 per month this financial year. That is already having paid roughly 50% tax on the earnings when it was received in the previous tax year, so overall a massive net loss with no ability to budget.
Basically it has cost her to go to work.
£7k additional tax on a £120k salary doesn't seem in the realms of working being a net loss.
I'm making no comment on whether the tax burden is fair or sensible, or whether it could be structured more efficiently - just that it's a long way away from costing money to work.
Basically it has cost her to go to work.
Hyperbole much?
I don’t think it’s costing money to work. But it’s one of those perverse incentives that our tax system seems to struggle with.
There are lots of bits that could be faired / squared up.
The two earner family each on 49k vs a single earner on 100k and child benefit. See also paying back the tax free allowance.
No one really objects to paying tax. They do object to the absurdities and being told that they are rich enough not to care.
I'm still not clear on the detail here, but getting the impression that Docs on around £120 to £160k are getting hit with potentially " five figure sums" of tax due to getting a non contributary pension benefit of around £40 to £50k
Izzat right?
If so, it feels pretty much in line with what nonDocs on similar salaries would be paying. Clearly the devil is in the detail.