The good, the bad & the ugly of the Pension changes

[vand]

Been trying to wrap my head around how the changes to pension rules affects different people.

Changes:

- Lifetime allowance limit completely scrapped (previous £1.073mm)
- Annual allowance increased (£40k to £60k)
- MPAA limit increased (£4k to £10k)
- Pension commencement lump sum capped at current level (£1.073m)

To me these changes benefit mostly high-earning late savers (let's say empty-nester still at the height of their earning power and not yet ready to retire). These people can now throw another 20k/yr into the pension and save themselves 8k/yr in direct taxation.  You can earn £110,270/yr, put 60k towards the pension and only pay standard rate tax +NI on the remaining £50,270.   Furthermore, as these guys are quite near to pension access age they are less likely to be affected by the frozen PCLS.

Conversely, it least helps - and perhaps even harms - the opposite group - that is those who aren't high earners but are playing a long accumulation game aiming to amass £1m in total pension size. That could be a young person still a long way from retirement and earning 50k/yr or less who was previously planning to just accumulate up to the previous LTA; now that the PCLS level is frozen, 30-35 years of inflation will bring the amount they can get out tax-free much lower, their earnings were never high enough to contribute more than 40k, and the removal LTA wouldn't have affected them anyway as they were not planning to go over that amount.

In short, it seems like the rules have been tilted very favourably towards current late-career high earners who need to catch up on their retirement savings, and perhaps slightly away from young workers who were hoping for decades of compounding to help them.

[Chicothecat]

Agree with you, the aim was to get NHS consultants back to work as they retired early or left due to reaching their LTA. So definitely skewed towards that aim without really considering other possible aims.

[Brit71]

Agree with you, the aim was to get NHS consultants back to work as they retired early or left due to reaching their LTA. So definitely skewed towards that aim without really considering other possible aims.

I suspected it started with that in mind, but it spread generally to stopping the over 50s from retiring once they were in danger of nudging the £1 million limit

There's a lot of tax that relies on a small number of high earners, and a very high proportion of them compared to the general population are both towards the end of their career and seeing their pension pot expand

[Chicothecat]

Yes where I work we have a mature workforce that have good DB pensions and they early retire before we want them to. I have heard a few people saying they are staying on part time now due to the changes

[Affable Bear]

I think as tempting as this may be the question has to be how much is enough?

If you can/have already comfortably retired early in your 50s do you really want to go back just for 'that bit more' . Unless you are in a rewarding field that you genuinely enjoy (not just tolerate) I fail to see the point of coming back, especially if you can already afford to do all the things you would ever want to do.

You can't buy time, always makes me think when you ask the 85 year old billionaire if they would forgoe their fortune to be 21 again.. Im sure there would be a fair few takers!

[Borgo Panigale]

The other group to benefit will be those who run their own businesses and have a chunk of surplus profit.  The ability to salt more of it away in the pension will offset some of the effects of increasing Corporation Tax.
It's also important to remember as we've seen, it's not a great idea to try to predict how pension legislation will change.  It wouldn't surprise me if the pension commencement lump sum is adjusted in the years to come.

[Brit71]

I think as tempting as this may be the question has to be how much is enough?

If you can/have already comfortably retired early in your 50s do you really want to go back just for 'that bit more' . Unless you are in a rewarding field that you genuinely enjoy (not just tolerate) I fail to see the point of coming back, especially if you can already afford to do all the things you would ever want to do.

You can't buy time, always makes me think when you ask the 85 year old billionaire if they would forgoe their fortune to be 21 again.. Im sure there would be a fair few takers!

A bit off topic, but as a case study... I'm in my early 50s and have "enough" to retire and am still working for "that bit more".  And it's complex.

If both my wife and I were to retire then even with the amount we're saving we would still have to cut back on spending either if we were on the dividend income or if we were wihdrawing 4%.  It would still be comfortable, but it would be a noticeably cut back.  Fewer coffees, holidays, trips to the pub, presents to family, donations to charity.  We've cut back on these already (not the donations to charity - but that's accident, not virtue) in the past two years, but it would still be a clear cut.

We could withdraw more and spend about as much as we do, waiting for her public sector pension and later our pensions to set us on an even keel.  And although I've calculated the burn and we should be OK, it's still a risk and the calculations were close.

If one of us were to retire then that bit would be OK.  Much less would be saved but we'd comfortably be able to maintain our spending.  The question would be who would retire.  I may be older and it may be my money that we can access now, but my wife is the one with the migraines and a desire to be an artist whereas I would probably read all day and edit Wikipedia - so we've not had that discussion.

Part time work would be an option, but for me that would probably be an end to home working and for her a bit of a drop in status that she's not ready for.

So we earn that bit more and wait for that point, which should come up reasonably soon, where the income from our investments equals our spending and the choice becomes and bit easier and the excuses become harder to concoct.  That's the "little bit more" we're going for.

[Brit71]

The other group to benefit will be those who run their own businesses and have a chunk of surplus profit.  The ability to salt more of it away in the pension will offset some of the effects of increasing Corporation Tax.
It's also important to remember as we've seen, it's not a great idea to try to predict how pension legislation will change.  It wouldn't surprise me if the pension commencement lump sum is adjusted in the years to come.

Indeed, that's likely to go down further even with the warning about predicting pension legislation.

There also seems to be a disagreement between the parties about whether the cap on funds should have been lifted for private sector workers as well.  Considering that Labour is likely to come in soon that is important.  I think it would be politically foolish for them to put it back where it was, or at a low enough point where people would suddenly find a chunk of their pension taxed at 55%.  But maybe I'm wrong and the idea of a windfall tax on bankers would play well. Or perhaps they would do it despite any political costs.

It's a live possibility that they could reintroduce the cap, and although considerably less likely they could do it at a rate that could whipsaw current pension savers who take advantage of the lifting of the cap.

[Affable Bear]

If both my wife and I were to retire then even with the amount we're saving we would still have to cut back on spending either if we were on the dividend income or if we were wihdrawing 4%.  It would still be comfortable, but it would be a noticeably cut back.  Fewer coffees, holidays, trips to the pub, presents to family, donations to charity.  We've cut back on these already (not the donations to charity - but that's accident, not virtue) in the past two years, but it would still be a clear cut.

This makes sense, I guess it would be tempting to stay maybe for a short while if you have hit your goal and you could probably spend quite liberally once you no longer need to invest (as much). Not sure how I feel about it personally but my career isnt the most rewarding beyond the monetary benefits so when I go I intend to never come back, I can understand thats different for others though.

I do feel the Government is actively trying to force people to stay in work for longer, its probably in relation to the fact people are living for longer and we have an aging population but I do feel they are unfairly taking freedoms and choices away. I think the plan to increase private pension access age from 55 to 57 then linking to the state pension age is just offensive, being 33 I fully expect the state pension to increase to at least 70 (possibly even higher!) I would resent not being able to acces my private pension until I was 60 or even older. All of this is designed to keep you working and in the rat race, if I work hard and invest to retire early then I should be free to access my pension at least in my mid 50's.

This is the main reason I dont salary sacrifice and I pump the majority of my money into an ISA, that way if I have enough in there I can leave when I want without the Government telling me when I can access my money.. Its painful as there are a lot of tax benefits in paying extra into my pension but 40% isnt enough to tempt me if I am waiting until im 60+ to access it.

[Brit71]

If both my wife and I were to retire then even with the amount we're saving we would still have to cut back on spending either if we were on the dividend income or if we were wihdrawing 4%.  It would still be comfortable, but it would be a noticeably cut back.  Fewer coffees, holidays, trips to the pub, presents to family, donations to charity.  We've cut back on these already (not the donations to charity - but that's accident, not virtue) in the past two years, but it would still be a clear cut.

This makes sense, I guess it would be tempting to stay maybe for a short while if you have hit your goal and you could probably spend quite liberally once you no longer need to invest (as much). Not sure how I feel about it personally but my career isnt the most rewarding beyond the monetary benefits so when I go I intend to never come back, I can understand thats different for others though.

I do feel the Government is actively trying to force people to stay in work for longer, its probably in relation to the fact people are living for longer and we have an aging population but I do feel they are unfairly taking freedoms and choices away. I think the plan to increase private pension access age from 55 to 57 then linking to the state pension age is just offensive, being 33 I fully expect the state pension to increase to at least 70 (possibly even higher!) I would resent not being able to acces my private pension until I was 60 or even older. All of this is designed to keep you working and in the rat race, if I work hard and invest to retire early then I should be free to access my pension at least in my mid 50's.

This is the main reason I dont salary sacrifice and I pump the majority of my money into an ISA, that way if I have enough in there I can leave when I want without the Government telling me when I can access my money.. Its painful as there are a lot of tax benefits in paying extra into my pension but 40% isnt enough to tempt me if I am waiting until im 60+ to access it.

There's also this default of working. It fills the day and gives both purpose and stimulation as well as not having to think too hard about money. Of course that's different if there's something else to fill your day or if work is really unpleasant rather than mildly irritating. Ironically being at the point where you don't expect, need or especially want to be promoted makes work and the idiocy of management far less grating.

I remember my mother at her 60th birthday saying that she wanted to keep working until her 70s, although the free bus pass and lack of NICs were nice. Within 3 years she'd retired soon after the first grandchild came along.

[Affable Bear]

There's also this default of working. It fills the day and gives both purpose and stimulation as well as not having to think too hard about money. Of course that's different if there's something else to fill your day or if work is really unpleasant rather than mildly irritating. Ironically being at the point where you don't expect, need or especially want to be promoted makes work and the idiocy of management far less grating.

I remember my mother at her 60th birthday saying that she wanted to keep working until her 70s, although the free bus pass and lack of NICs were nice. Within 3 years she'd retired soon after the first grandchild came along.

I do agree that working can be fufilling, its not necessarily something that I would be against doing even into my old age, what annoys me is the attempt to restrict, influence or prevent people from retiring. I may change my mind and continue working or change field to something more interesting when I get there but I also think people should have the option to access pensions in their mid or early 50s. Yes it will take discipline and I understand a lot of people may be tempted to access them irresponsibly however what if I can retire at 50 and want to see the world for the next 5 years, if I have £1.6 million locked until im 60 I might not be able to do it, therefore forcing you to wait 5-10 years either working or living meekly. Health is a precious thing, life is a precious thing and you are more likely to be a lot healthier (and alive) at 50 rather than 60. I can do a desk job well into my 70s but walk across a desert or hiking mountains probably not..

All I ask is the freedom of choice, not against working but dont take away the choice of retiring either

[Brit71]

There's also this default of working. It fills the day and gives both purpose and stimulation as well as not having to think too hard about money. Of course that's different if there's something else to fill your day or if work is really unpleasant rather than mildly irritating. Ironically being at the point where you don't expect, need or especially want to be promoted makes work and the idiocy of management far less grating.

I remember my mother at her 60th birthday saying that she wanted to keep working until her 70s, although the free bus pass and lack of NICs were nice. Within 3 years she'd retired soon after the first grandchild came along.

I do agree that working can be fufilling, its not necessarily something that I would be against doing even into my old age, what annoys me is the attempt to restrict, influence or prevent people from retiring. I may change my mind and continue working or change field to something more interesting when I get there but I also think people should have the option to access pensions in their mid or early 50s. Yes it will take discipline and I understand a lot of people may be tempted to access them irresponsibly however what if I can retire at 50 and want to see the world for the next 5 years, if I have £1.6 million locked until im 60 I might not be able to do it, therefore forcing you to wait 5-10 years either working or living meekly. Health is a precious thing, life is a precious thing and you are more likely to be a lot healthier (and alive) at 50 rather than 60. I can do a desk job well into my 70s but walk across a desert or hiking mountains probably not..

All I ask is the freedom of choice, not against working but dont take away the choice of retiring either

I agree, they should not have put the age up

[vand]

There's also this default of working. It fills the day and gives both purpose and stimulation as well as not having to think too hard about money. Of course that's different if there's something else to fill your day or if work is really unpleasant rather than mildly irritating. Ironically being at the point where you don't expect, need or especially want to be promoted makes work and the idiocy of management far less grating.

I remember my mother at her 60th birthday saying that she wanted to keep working until her 70s, although the free bus pass and lack of NICs were nice. Within 3 years she'd retired soon after the first grandchild came along.

I do agree that working can be fufilling, its not necessarily something that I would be against doing even into my old age, what annoys me is the attempt to restrict, influence or prevent people from retiring. I may change my mind and continue working or change field to something more interesting when I get there but I also think people should have the option to access pensions in their mid or early 50s. Yes it will take discipline and I understand a lot of people may be tempted to access them irresponsibly however what if I can retire at 50 and want to see the world for the next 5 years, if I have £1.6 million locked until im 60 I might not be able to do it, therefore forcing you to wait 5-10 years either working or living meekly. Health is a precious thing, life is a precious thing and you are more likely to be a lot healthier (and alive) at 50 rather than 60. I can do a desk job well into my 70s but walk across a desert or hiking mountains probably not..

All I ask is the freedom of choice, not against working but dont take away the choice of retiring either

OK, I'm not being funny. Well, maybe I am a bit, but... why don't you just change your job/career?

It's pretty clear that a large section of the "Desperately Seeking FIRE" community is made up of well-paid passive-aggressive workers who actually hate their jobs but are too lazy and risk-adverse to do anything to change their situation other than carry on putting up with it in order to not put up with it a minute longer than they have to.

The question "how much is enough?" has an implicit assumption that work is something to be tolerated rather than enjoyed, and that that people seeking FIRE are trying to severe their ties with paid employment at the earliest opportunity... which is a pretty unhealthy relationship to have with work.

Maybe it's just me being on the upswing of the lifetime U-curve of happiness, but in my mid-40s I am personally in a much better place with work than at any point in the past decade. Could easily see myself working several years past my official FI line - working (and getting paid) because you want to, not because you have to, is one of the most fulfilling and empowering things you can do.

[Affable Bear]

There's also this default of working. It fills the day and gives both purpose and stimulation as well as not having to think too hard about money. Of course that's different if there's something else to fill your day or if work is really unpleasant rather than mildly irritating. Ironically being at the point where you don't expect, need or especially want to be promoted makes work and the idiocy of management far less grating.

I remember my mother at her 60th birthday saying that she wanted to keep working until her 70s, although the free bus pass and lack of NICs were nice. Within 3 years she'd retired soon after the first grandchild came along.

I do agree that working can be fufilling, its not necessarily something that I would be against doing even into my old age, what annoys me is the attempt to restrict, influence or prevent people from retiring. I may change my mind and continue working or change field to something more interesting when I get there but I also think people should have the option to access pensions in their mid or early 50s. Yes it will take discipline and I understand a lot of people may be tempted to access them irresponsibly however what if I can retire at 50 and want to see the world for the next 5 years, if I have £1.6 million locked until im 60 I might not be able to do it, therefore forcing you to wait 5-10 years either working or living meekly. Health is a precious thing, life is a precious thing and you are more likely to be a lot healthier (and alive) at 50 rather than 60. I can do a desk job well into my 70s but walk across a desert or hiking mountains probably not..

All I ask is the freedom of choice, not against working but dont take away the choice of retiring either

OK, I'm not being funny. Well, maybe I am a bit, but... why don't you just change your job/career?

It's pretty clear that a large section of the "Desperately Seeking FIRE" community is made up of well-paid passive-aggressive workers who actually hate their jobs but are too lazy and risk-adverse to do anything to change their situation other than carry on putting up with it in order to not put up with it a minute longer than they have to.

The question "how much is enough?" has an implicit assumption that work is something to be tolerated rather than enjoyed, and that that people seeking FIRE are trying to severe their ties with paid employment at the earliest opportunity... which is a pretty unhealthy relationship to have with work.

Maybe it's just me being on the upswing of the lifetime U-curve of happiness, but in my mid-40s I am personally in a much better place with work than at any point in the past decade. Could easily see myself working several years past my official FI line - working (and getting paid) because you want to, not because you have to, is one of the most fulfilling and empowering things you can do.

Maybe me being a bit resentful atm as I guess im not satisified professionally so I 100% see your point and maybe I was a bit extreme in my previous post. I guess I need to consider my future career and maybe finding something more rewarding, I guess I am in a bit of maliase at the moment where I feel there is little point to my work beyond the financial.

[MisterA]

OK, I'm not being funny. Well, maybe I am a bit, but... why don't you just change your job/career?

The thing is, it can take years (decades?) to get into a well paid job, and generally this is achieved through career progression. I didn't see 'starting again' as a viable option, which is part of the reason I'm old and grumpy. My salary would have at least halved if I had changed career, which would have made many of my goals (including supporting my family) unattainable. Most people achieve their best jobs due to specific qualifications and experience, so it's hard to change career. And that's if you manage to get into a well paid job at all, many people don't.

It's pretty clear that a large section of the "Desperately Seeking FIRE" community is made up of well-paid passive-aggressive workers who actually hate their jobs but are too lazy and risk-adverse to do anything to change their situation other than carry on putting up with it in order to not put up with it a minute longer than they have to.

Yup!

The question "how much is enough?" has an implicit assumption that work is something to be tolerated rather than enjoyed, and that that people seeking FIRE are trying to severe their ties with paid employment at the earliest opportunity... which is a pretty unhealthy relationship to have with work.

Agreed. But work isn't meant to be easy or nice, otherwise you wouldn't get paid so much to do it. If you've managed to get to a place where you enjoy your work and can sustain your goals and achieve your targets, then I'm truly envious of you. Or maybe I'm just old and grumpy.

[Affable Bear]

The thing is, it can take years (decades?) to get into a well paid job, and generally this is achieved through career progression. I didn't see 'starting again' as a viable option, which is part of the reason I'm old and grumpy. My salary would have at least halved if I had changed career, which would have made many of my goals (including supporting my family) unattainable. Most people achieve their best jobs due to specific qualifications and experience, so it's hard to change career. And that's if you manage to get into a well paid job at all, many people don't.

This is definitely a big one for me, my job serves its purpose and it would be a step down I think if I switched. Maybe when I am close to my number I can make that change but after so long I might want to take some time away too.

Or maybe I'm just old and grumpy.

Haha im glad im not the only one, trying to stay positive though and looking at my goals helps, not sure how I would cope if I didnt have the MMM/FI mindset id probably be grumpy all the way to state pension age otherwise!!

[PhilB]

Late finding this, but can't resist replying.

The people who are the real winners, as it stands, are those who want to use pensions as a way to dodge inheritance tax.  That's a loophole that definitely needs to be plugged.

Other than that, I am very happy to see the LTA go and the MPAA increased. From a public policy perspective anything that discourages people from working (and paying taxes) is bad news. 

Once you cap the TFLS I see no need for an LTA anyway for the simple reason that there is already a nice check built into the tax system.  Say you amass £1.25M and take £250k as TFLS (round numbers).  4% drawdown on the remaining £1M is £40k.  Add in state pension and you're tipped into the 40% tax band.  So basically anything you accumulate beyond this point gets taxed at 40% anyway when you withdraw it, so the net cost to the exchequer isn't worth worrying about.  There's no incentive (or punishment) to exceed that level.  Unless you fail to plug the IHT issue.

[vand]

Late finding this, but can't resist replying.

The people who are the real winners, as it stands, are those who want to use pensions as a way to dodge inheritance tax.  That's a loophole that definitely needs to be plugged.

Other than that, I am very happy to see the LTA go and the MPAA increased. From a public policy perspective anything that discourages people from working (and paying taxes) is bad news. 

Once you cap the TFLS I see no need for an LTA anyway for the simple reason that there is already a nice check built into the tax system.  Say you amass £1.25M and take £250k as TFLS (round numbers).  4% drawdown on the remaining £1M is £40k.  Add in state pension and you're tipped into the 40% tax band.  So basically anything you accumulate beyond this point gets taxed at 40% anyway when you withdraw it, so the net cost to the exchequer isn't worth worrying about.  There's no incentive (or punishment) to exceed that level.  Unless you fail to plug the IHT issue.

Very astute observations, PhilB.

I have to admit that whenever I run through the gamut of lean-to-fat FI Scenarios and the balance between OMY and more income, the upper end of the distrubution tops out at the top end of the normal tax band, annual spending wise.. and more realistically more like 40k (or some deft bucket juggling with the ISA) and live through the first 10 years on lower income until the SP kicks in to eventually bring it up to the threshold limit..

NIC record is also something to consider, albeit not one that is likely to make a huge difference. I personally now have 28 years of NICs, so another 7 to go for the full compliment.  More than 35yrs and your mandatory 11% NICs don't buy you any more benefits.. so with any extra income likely to be taxed at 40% one way or another and no extra benefit to accruing more NICs I don't see myself going past 35yrs, and probably stopping a few years before and then voluntarily topping up for the full 35yrs.

[PhilB]

Late finding this, but can't resist replying.

The people who are the real winners, as it stands, are those who want to use pensions as a way to dodge inheritance tax.  That's a loophole that definitely needs to be plugged.

Other than that, I am very happy to see the LTA go and the MPAA increased. From a public policy perspective anything that discourages people from working (and paying taxes) is bad news. 

Once you cap the TFLS I see no need for an LTA anyway for the simple reason that there is already a nice check built into the tax system.  Say you amass £1.25M and take £250k as TFLS (round numbers).  4% drawdown on the remaining £1M is £40k.  Add in state pension and you're tipped into the 40% tax band.  So basically anything you accumulate beyond this point gets taxed at 40% anyway when you withdraw it, so the net cost to the exchequer isn't worth worrying about.  There's no incentive (or punishment) to exceed that level.  Unless you fail to plug the IHT issue.

Very astute observations, PhilB.

I have to admit that whenever I run through the gamut of lean-to-fat FI Scenarios and the balance between OMY and more income, the upper end of the distrubution tops out at the top end of the normal tax band, annual spending wise.. and more realistically more like 40k (or some deft bucket juggling with the ISA) and live through the first 10 years on lower income until the SP kicks in to eventually bring it up to the threshold limit..

NIC record is also something to consider, albeit not one that is likely to make a huge difference. I personally now have 28 years of NICs, so another 7 to go for the full compliment.  More than 35yrs and your mandatory 11% NICs don't buy you any more benefits.. so with any extra income likely to be taxed at 40% one way or another and no extra benefit to accruing more NICs I don't see myself going past 35yrs, and probably stopping a few years before and then voluntarily topping up for the full 35yrs.

Thanks vand.  We were in a very similar position.  Planned to squeak in below the 40% band for me and quit with both of us needing 5 more years of NICs.  We're buying voluntary NI for Mrs B, but I landed a very cushy 7 hours a week job with my employer and will earn my final stamp this Friday :)

As a real MPP, my earnings from this job mean I'll now almost certainly end up paying some 40% tax eventually, but that's a nice problem to have.

[shackleford]

I'm a winner from the changes, as I'm now putting quite a bit over 40k per year into my pension.  I can easily live on way less than my gross salary.  Increasing the annual allowance and removing the LTA are surely good things for most, or all, people targeting FIRE, and I say that as someone with a passionate aversion to praising anything a Conservative government does....