Pension changes to look out for

[Brit71]

So we've got this new government that wants to spend, doesn't have the money and has promised not to raise the headline rates for the big taxes.  SIPPs are a big part of most of our financial planning (as are ISAs) and the pension limit has been in the firing line before.

So what should we be looking out for?

Two things I've seen are reinstating the £1 million limit with the exception of surgeons and senior NHS workers and a mooted introduction of means tests for the state pension - although Labour seems to have disowned (but not sacked) the person who floated that idea.

I've seen lots of talk of a limit of ISAs of £100,000.  Anything anyone else has seen?

[Affable Bear]

I havent read much around any potential changes as of yet but keen to see what may happen. There is room to spend in the budget although I think they all know its not going to be a Christmas party, Rachel Reeves herself stating there isnt a lot of money.

Both Labour and Conservatives are/were afraid to mention increasing taxes because they both believe this will be unpopular and cause them not to win votes. However most people also not happy with the level of public services, infrasturcture & transport, healthcare, housing, the care service etc... All of which are very expensive.

Personally if direct taxes increase slightly but I get the services I need then I would probably be ok with that, what annoys me in the present system is none of the services work as they should yet we still pay significant amounts of tax for it. If I want a doctors appoinment I am having to pay £150 privately to get seen within a reasonable time, public transport is a joke I now commute via car, the care system is broken, house building has been non existant, poor planning laws etc etc etc..

I am hoping they leave ISA's and pensions generally alone though, you would have to be an idiot to not see the impending strain of paying the state pension in the future as the population ages and there are fewer and fewer tax payers to pay for it.

The Government (Labour & Conservative) have both made positive moves over the last several decades to encourage private saving/pensions such as the auto enrolment, development of ISA's and increasing the amount you can invest over time. I am hoping because of this they will leave them alone or even better make it even more attractive for us to do this. 

I am not sure what might happen but I suspect Starmer isnt motivated to go crazy.. Who knows

[vand]

I think both OP's concerns would be very politically unpopular and damaging.

Much more likely are the IHT benefits of pensions being targeted, and I have to say that I would generally support that.. the primary purpose of pension should be about looking after your own retirement, not about passing wealth.

[Brit71]

I think both OP's concerns would be very politically unpopular and damaging.

Much more likely are the IHT benefits of pensions being targeted, and I have to say that I would generally support that.. the primary purpose of pension should be about looking after your own retirement, not about passing wealth.

Yes I can see bringing pensions into Inheritance Tax happening, although people can be funny about inheritance - the "dementia tax" (probably the fairest way of dealing with that particular timebomb) showed that.  But the family house has a bigger emotional tie than the parents' pension.

The reinstatement of the £1 million limit actually seemed to poll well, taxing "millionaires" often will, but Labour did row back in the campaign.  I can't see it as an immediate revenue raiser.

In the late 1990s Labour went quite hard for pension schemes and attempted to the same for savings, and we should be on the lookout for them doing so again.  We tend to think that SIPPs and Defined Contribution schemes are ubiquitous - but they are actually quite rare in the public sector and a lot of Labour MPs have that background.

[Brit71]

So nothing yet on SIPPs or defined contribution schemes in general.  But there hasn't been a budget yet.

However the direction of travel is fairly clear.  Despite denouncing the idea in parliament before the election and not mentioning it in the manifesto the government will means test winter fuel allowance.  They have also decided to lift the cap on care home costs, something over which there was a cross party consensus up until that point.

I happen to think that the first was right and the second is at least arguable as the estate of the person should bear the brunt of the cost for care home care, it's simply unsustainable otherwise.  But this government certainly is going to go for pensioners in order to pay for their voters or potential voters.  That's how politics works and fair enough.

But it does suggest that they will have a go for pension plans.  As stated before defined contribution schemes will be a bit alien to most Labour MPs because of their background in the public sector.

[cerat0n1a]

As stated before defined contribution schemes will be a bit alien to most Labour MPs because of their background in the public sector.

This doesn't seem to be strictly accurate, or at least not significantly different from the previous government, from what I could tell. A random sample of 100 Labour MPs and 50 Conservative MPs showed 37 Labour MPs with a private sector background and 20 Conservative MPs with a private sector background. The new Pensions minister has a background that wouldn't look out of place in the Tory party of a decade or two back - PPE at Oxford, and most recently working on behalf of the City promoting the interests of the Financial Services industry to the government.

I suspect if you're a government looking for money to remedy the dreadful state of affairs they have inherited, there's a lot more money to be had from savings to public sector pensions - for example by consolidating the large numbers of individual schemes into fewer larger schemes and removing significant fees and admin overheads.

Here's what they've actually announced though:

https://www.gov.uk/government/news/chancellor-vows-big-bang-on-growth-to-boost-investment-and-savings

if you're looking for things to worry about, that sounds like there might be some requirement that some portion of your pension is invested in the UK.

[Brit71]

As stated before defined contribution schemes will be a bit alien to most Labour MPs because of their background in the public sector.

This doesn't seem to be strictly accurate, or at least not significantly different from the previous government, from what I could tell. A random sample of 100 Labour MPs and 50 Conservative MPs showed 37 Labour MPs with a private sector background and 20 Conservative MPs with a private sector background. The new Pensions minister has a background that wouldn't look out of place in the Tory party of a decade or two back - PPE at Oxford, and most recently working on behalf of the City promoting the interests of the Financial Services industry to the government.

I suspect if you're a government looking for money to remedy the dreadful state of affairs they have inherited, there's a lot more money to be had from savings to public sector pensions - for example by consolidating the large numbers of individual schemes into fewer larger schemes and removing significant fees and admin overheads.

Here's what they've actually announced though:

https://www.gov.uk/government/news/chancellor-vows-big-bang-on-growth-to-boost-investment-and-savings

if you're looking for things to worry about, that sounds like there might be some requirement that some portion of your pension is invested in the UK.

I think this is what you are talking about: https://www.apellaadvisors.com/our-thinking/apella-advisors-insight-labours-next-100-new-mps-and-their-knowledge-of-business

It says that 37 of the 100 have some private sector background (the figures add up to more than 100) compared to 79% of the workforce.  I can't find the 50 Tory MPs as comparative, although 40% does seem very low to me particularly if using the same metric - which would include short stints working for for profit lobbyists and PR companies (9 of the 37) or as lawyers (another 9).

However this is a higher number than I was expecting and there is some hope there.

Forcing defined contribution schemes to invest in the UK has been an idea that's been around since at least Blair's time.  Obviously it could be very bad news for FIRE types if that meant we had to invest a proportion of funds in gilts, in the same way it cratered annuities, but I suspect it wouldn't got that far and would take a time before it came for SIPPs and ISAs which seem to be the main FIRE savings vehicles for UK FIRE types.

[cerat0n1a]

I think this is what you are talking about: https://www.apellaadvisors.com/our-thinking/apella-advisors-insight-labours-next-100-new-mps-and-their-knowledge-of-business

Ah, sorry, I wasn't very clear. I'd been doing some data analysis on MPs for something else and so was able to take a random sample of my own. Good that their figures for the new intake are pretty similar to mine for all MPs though.

Of course, when it comes to the UK electorate, age was by far the biggest predictor of how someone voted in the last few elections, with social class and income levels barely a factor (the well-off are marginally more likely to vote Labour than the less well-off, but not by much). So to a first approximation, Labour voters are people who are currently paying into pensions, Conservative voters are those in receipt of pensions.

It's perhaps also worth pointing out that well over a third of the workforce is enrolled in the Nest pension (and over 1 million employers IIRC) which is more than the total number of people enrolled in all DB schemes, so DC pensions will be uppermost in the mind of any politician looking at pensions you would think?

[Affable Bear]

Here's what they've actually announced though:

https://www.gov.uk/government/news/chancellor-vows-big-bang-on-growth-to-boost-investment-and-savings

if you're looking for things to worry about, that sounds like there might be some requirement that some portion of your pension is invested in the UK.

I was hoping this wouldnt happen, like a fox looking at the hen house! Just the casualness of calling peoples pensions an 'untapped resource' is just down right offensive.

[cerat0n1a]

The long list of quotes from pension funds and others in the city seem to be pointing more at relaxing the rules about what pension funds can invest in - certainly didn't see anything in there to worry about.

[Affable Bear]

It all depends on how they go about it, to me it sounds as though they want to use pension pots to invest in UK business which I am not against if people choose to put their money there. They are seeing £2 trillion and thinking how they (Government) can use that money, a dangerous mindset to have in my opinion.

My main concern is if they remove the choice and force people into investing in a particular way. Most of the talk I think is mainly geared towards the default funds investing into UK instead of maybe bonds and low yield 'safe' securities, which isn’t quite forcing people into investing in a certain way but the end result may not be far away.

I am also not convinced doing this would result in massive returns either, I just think the bar is so low compared to bonds that pretty much any increase in equity, even UK equity will increase returns over default funds with their high fees and bonds. But if you compare UK returns to a global or US index fund and their cheap management costs of a simple index fund over a managed fund, UK equities have performed significantly worse over the last 20 years. I guess there is the added intrinsic value in investing in the UK if it does improve the economy, infrastructure, country etc.. It could pay off more than simple investment returns, but you are betting a lot of chips on it paying off. Looking at other big expensive projects we have done over the last few years is reason enough to be cautious (looking at you HS2).

Citi UK CEO Tiina Lee said:

We welcome the Government announcing a pensions review to boost investment in the UK economy.

The UK is home to the second-largest pool of long-term capital in the world. Based on Citi’s experience with global investors, increasing pension fund investment will reinvigorate funding in British companies and infrastructure projects and bring real benefits to our economy and society.

My question to this is, if the returns on doing this are so great then why isn’t private/global capital already attracted to the UK? (16% decrease since Covid according to NCUB)

Maybe there are no great returns and in fact there’s going to be a lot of costs involved in which the UK has to pay one way or another to get back on its feet. We have 2 ways to do this, increase direct taxes or raid your pensions so you don’t even realise you are paying for it, as a politician I know which one looks more attractive...

I guess a pessimistic view! Lets see what happens in October. Default funds are atrocious and it would be better to force UK equities into them than whatever is in there at the moment but there are a lot of better options out there in terms of returns too. Just allow us to pick a different pension provider than the one your employer wants to use and allow us to buy low cost index funds instead of expensive managed funds and I would be happy, guessing the expensive pension providers and banks would'nt be though!! 

[bownyboy]

Until something is actually announced by the government in the kings speach and/or the budget I'm doing exactly nothing and carrying on as normal.

Journalists love to click-bait and rage-bait based on gossip and 'what ifs' to sell more papers or ads.

Otherwise its VWRP and chill.

[vand]

There's nothing to do because absolutely nothing has changed.

Yes, they may tweak around the edges.. but that's nothing new. One they actually announce some changes the bods will figure out the impact (and these can be quite nuanced), and then you'll have time to figure out how to plan around that.

I understand, but don't really agree with the skepticism around any changes to pensions -- if you look at the cold facts, personal pensions have become increasing more attractive as an investment wrapper over time both in terms of tax advantages and freedom of choice in what you invest in and how to draw on it.

[cerat0n1a]

In the end, nothing apart from some sensible looking changes on inheriting pensions?

[PhilB]

In the end, nothing apart from some sensible looking changes on inheriting pensions?

The devil will be in the detail on that one.  Something had to be done, but if the tax charge - including any charge on subsequent withdrawal - is much more than 40%, then I and many others will be drawing it out and gifting from income to avoid it, whilst trying to judge how much I need to keep for our old age. 

[cerat0n1a]

Something had to be done, but if the tax charge - including any charge on subsequent withdrawal - is much more than 40%, then I and many others will be drawing it out and gifting from income to avoid it, whilst trying to judge how much I need to keep for our old age.

I guess that was already the position for any other asset other than the family home - ISAs etc. Seems logical that pensions should actually be for retirement spending and not used as an inheritance tax avoidance scheme, and also the slightly odd situation vis-a-vis dying before or after the age of 75.

I wonder whether it will lead to more people buying annuities with their DC pension - losing the ability to avoid IHT was a factor in some people not choosing to buy them.

[PhilB]

Something had to be done, but if the tax charge - including any charge on subsequent withdrawal - is much more than 40%, then I and many others will be drawing it out and gifting from income to avoid it, whilst trying to judge how much I need to keep for our old age.

I guess that was already the position for any other asset other than the family home - ISAs etc. Seems logical that pensions should actually be for retirement spending and not used as an inheritance tax avoidance scheme, and also the slightly odd situation vis-a-vis dying before or after the age of 75.

I wonder whether it will lead to more people buying annuities with their DC pension - losing the ability to avoid IHT was a factor in some people not choosing to buy them.

I've skimmed the consulation document and the intention is indeed to take 40% IHT and then income tax on top of that when the beneficiaries withdraw.  I worry though that they will change the regular gifts from income rules, as otherwise anyone with any sense will withdraw the lot just before death and gift it.  Even if they pay 45% income tax it will still beat the 52% total if kids are 20% payers or 64% if they are 40% payers.

[cerat0n1a]

I worry though that they will change the regular gifts from income rules, as otherwise anyone with any sense will withdraw the lot just before death and gift it.

I think it would need to be 7 years before dying, wouldn't it? Otherwise it might be a chargeable lifetime transfer.

[PhilB]

I worry though that they will change the regular gifts from income rules, as otherwise anyone with any sense will withdraw the lot just before death and gift it.

I think it would need to be 7 years before dying, wouldn't it? Otherwise it might be a chargeable lifetime transfer.

Gifts from capital have the 7 year rule, but gifts from the excess of your taxable income over your expenditure, if part of a 'regular' pattern of gifting, are exempt.  The deathbed withdrawal would be taxable income so would fit the rule.

[shelivesthedream]

My parents are being affected by the pension inheritance rules changing. Or should I say that I am? My parents both have local government pensions and the state pension, which is enough for them to live on, but my father also has a large SIPP. He had deliberately never withdrawn anything for the express purpose of leaving it to me and my brother. With the new rules, by the time we actually get to spend it (it having been taxed twice, once ad an inheritance and once as income) it could lose around 75% of its value.

So he is now starting to take an income from it monthly which he is then gifting straight to me and my brother as Gifts from Surplus Income. He has recently submitted an IHT return for my grandmother who did this, and so was telling me how I will need to document it as an executor.

On the one hand, the money is of much more use to me and my brother now than in ten or twenty years time. On the other hand, it's a bummer that he's made all these arrangements based on one set of rules and now they've all changed. And it's a good thing he has a good understanding of the IHT system or his pension would have ended up relatively worthless.

-

I'm wondering if the LISA will be changed/abolished at any point soon  Mr SLTD and I have decided to use this extra money to help fund our LISAs, but it continues to be a bit of a punt on if the bonus is worth the restrictions for us.

[PhilB]

Your father's heirs would have to be very highly paid for his SIPP to lose 75% to tax.  Normally it will be:

• 40% if heirs have unused personal allowance
• 52% if they are 20% taxpayers
• 64% if they are 40% taxpayers

Drawing income and gifting it is definitely the way to go.

It has taken me a while to adjust to the change - it won't affect me as an heir, but it will be a huge bill when I pop my own clogs.  But, broadly speaking, I have to reluctantly agree with the changes.

[shelivesthedream]

I'm quoting him - I haven't done my own calculations. But my brother is a high earner. I'm certainly not!

Yes, I don't disagree with the changes as such. To be honest, I tend not to bace huge opinions on taxation. I'm just not sufficiently well-informed.

What I'm struggling with is how much notice I feel it's reasonable to give people. On the one hand, if the government thinks a change is right/necessary then its reasonable for them to want to enact it straight away, especially as they might not be in power for that long. No point making a change that will only come into play after you've left government!

On the other hand, I think it's reasonable for the government to present the rules of the taxation game and for people to attempt to plat by those rules (I.e. legally avoid (rather than evade) tax). And it doesn't seem very fair to change the rules mid-game on something that is a long-range plan. If my parents had known this was going to happen twenty years ago, I'm sure they would have done things differently over the past twenty years.

But as I said, I'm not really very well-informed about it all on either an individual or a sort of high-level national policy level   At least I know my opinions  aren't based on anything in particular??!?

[PhilB]

I know what you mean about changing the rules mid game, but, to be fair, there was a 55% charge at death on pension balances as recently as 2015.  I can forgive people for thinking the rules might not change as long as the Lifetime Allowance was a thing, but the instant that was abolished pensions became a gaping hole in the IHT regime that was pretty obviously going to be blocked somehow.

You might suggest to your Dad that he considers tweaking his inheritance plans to leave the pension to you and more of the rest of the estate to your brother to equalise it out after tax.  That could save quite a bit of tax.

[Affable Bear]

On the other hand, I think it's reasonable for the government to present the rules of the taxation game and for people to attempt to plat by those rules (I.e. legally avoid (rather than evade) tax). And it doesn't seem very fair to change the rules mid-game on something that is a long-range plan. If my parents had known this was going to happen twenty years ago, I'm sure they would have done things differently over the past twenty years.

But as I said, I'm not really very well-informed about it all on either an individual or a sort of high-level national policy level   At least I know my opinions  aren't based on anything in particular??!?

It is very frustrating when rules change, especially when pensions are one of the most important things to get right in life. I guess this is where having your money in various pots both pre-tax (pensions, sipps etc.) and post-tax accounts, that way at least if one rule changes you're not completely blindsided.

I am glad that a lot of the rumoured changes didnt happen though like reduced tax break for pension contributions on higher tax bands, lowering the amount you can put in your ISA each year etc.. I am under no illusion this could all change in the future though.

We have a small SIPP, company pension and decent sized ISA, our pensions are worth about double whats in our ISA's at the moment but we are putting more into ISA's because we think it offers the most flexibility especially as you can move it before any impending changes. Still paying a bit into pensions though too and I think a LISA is also worth paying into as part of this plan of having vairous pots in various tax advantaged accounts. Hopefully this way you can adapt a little easier to changes, its not perfect but its all we have.

We are expecting our first child in May and I really like the idea of a junior SIPP, it's probably one of the ways we hope to pass on wealth to the next generation efficiently although admittedly this isnt a massive amount of money every year (at least before compounding!!)

[shelivesthedream]

@Affable Bear : Please read this and ponder it: https://actionecon.com/building-generational-wealth/

I read it recently and it got me thinking. Mr SLTD and I have been talking about how my parents retired before my mother "got her inheritance" from my grandparents (grandmother lived a lookoong time) but also my grandmother gave away a lot of money long before she died, and it was very useful for me to have that extra money in my late teens/early twenties. We'd like to prioritise setting our children up in adulthood over giving them a big chunk when we die and they are already well grown up, while also balancing that with prudently saving for our own needs. I'm not yet sure how we'll choose to do that exactly, but that article points out the power of both compounding and of relievingfinancial pressure from your children when they are in young adulthood.

[Affable Bear]

@Affable Bear : Please read this and ponder it: https://actionecon.com/building-generational-wealth/

Wowza, I havent really thought too far ahead but seeing how much a trust fund can dilute over several generations is crazy! I really like the idea of passing the knowledge of MMM and investing on to your children and then they pass that on and they pass that on etc.. thats something definitely worth the effort I think.

Both of us want to provide help when they most need it though and being incredibly generous whilst we are alive I think is awesome too but we havent thought too much about estate planning yet. We are definitely adding this to our reading, thanks for the recommendation!

[Brit71]

Thought I'd put it on here as it's really a new subject but it is related

Looked at annuities just now. Last time I looked at them they were shockingly bad but this time the rates are surprisingly competitive with the 4% rule. I'm not yet able to get one out yet but by pretending that I was a couple of years older and only using one comparison engine I was quoted a bit over 5% for an unindexed annuity, almost dead on 4% for indexed and 3.5% for indexed with  two thirds survivorship.

The balance is still for keeping control of the pension pot, but the numbers surprised me.

[PhilB]

Thought I'd put it on here as it's really a new subject but it is related

Looked at annuities just now. Last time I looked at them they were shockingly bad but this time the rates are surprisingly competitive with the 4% rule. I'm not yet able to get one out yet but by pretending that I was a couple of years older and only using one comparison engine I was quoted a bit over 5% for an unindexed annuity, almost dead on 4% for indexed and 3.5% for indexed with  two thirds survivorship.

The balance is still for keeping control of the pension pot, but the numbers surprised me.

The current annuity rates are actually much closer to their traditional levels.  It may well be the period of 'shockingly bad' rates that proves to have been the anomaly, driven as it was by sky high bond prices / low bond yields.  We may be going back to a place where annuities once again become the obvious choice for most people, particularly with the IHT changes making pension assets less attractive as a means of passing on wealth.  I would certainly encourage people to look at using indexed annuities to cover their core spending if the state pension and any DB pensions or other income streams aren't already sufficient for this.