Labour intentions for pensions

[airbus330]

It seems likely Labour will win the forthcoming General Election, perhaps with a massive majority.
General reading about the state of the economy indicates that the exchequer has little to no headroom for spending.
Labour have so far been economical with information about how they will fund the reforms to public services.
Some commentators have opined that the money invested in the nations pension funds is the only substantial pot that can be squeezed without hurting the poorer in society.
In my opinion, this is correct, but the question is, how hard will they squeeze.
The danger for me, being in year 5 of retirement, is the loss of all or some of the 25% tax free element. I have, to date, released about 10% of my accumulation fund via UFPLS and latterly FAP and have taken the tax free element of that 10%. The remaining acc fund would produce a significant 6 figure tax free sum, which under my current retirement planning would fund the bulk of the next 5 years income in addition to my state pension (which kicks in next year) and my ISA Income share portfolio. Thus my plan had been to be in a position to pay zero tax for the next 5 years.

So, I must make a decision very quickly on whether to remove the remaining tax free element from my pension. If I do, it is problematic as to where I can put it to avoid taxation on income generated. Even using several years ISA allowance will leave a substantial amount unsheltered.

So what else can I do to shelter the funds if I take them?
Do people think Reeves will go hard on the tax free element? Or just tinker with contribution limits?

My own opinion, subject to changing when a manifesto finally appears, is that Reeves will not tinker with the 25% tax free element because a) it will be deeply unpopular with the electorate. b) It will, presumably hit public sector workers with big pensions (like Doctors) unless she makes a separation in the rules between private and public sector pensions. c) It will be just too difficult for the creaking HMRC to oversee.
That is not to say she won't try. But politicians often find being in office a lot harder than they expected and many of the things they thought possible to raise money, are in fact, not possible.

[JohnB]

I expect the fiscal drag to continue to allow tax take to rise. With any whiff of TFLS changes those affected will be taking the money, so the change will be politically difficult and not raise much, so I can't see it being pursued.

I'm very close to the £250k ish TFLS now, and am considering taking it all at once, as its real value is only going to diminish. While it will be unsheltered it will be a clean pot for CGT and dividends. There is a threat those rates will rise given all other tax changes (including wealth taxes) are being ruled out, but it will take time for the CGT to build, so living off that capital is tax efficient.

[kempiejon]

We have seen many changes to the pension tax treatment and rules and limits. I do not remember any happening without notice so until someone says different the 25% or LTA or inheritance treatment or whatever will stay as is. Unless something comes out of the blue we've time to adapt. My SIPP is pregnant with an untouched 25% so changes would force my hand too.

So what else can I do to shelter the funds if I take them?

Off the top of my head we've got allowances of £2880 to SIPP, £20k to ISAs, £50k to premium bonds.
Short dated low coupon bonds, index linked gilts, gold coins, annuities, zero dividend preference shares - the only one I have is NB private equity. Growthy, low dividend shares and harvest the capital gains annually. How about Buffet's vehicle?
The dividend tax timetable made me move income producers to ISA and direct non sheltered to growth and in light of no ideas VWRL/VEVE at 1.6% income though any dividends are unhelpful with the very low limits, I can see capital gains diminishing too either by choice or fiscal drag.

When I've done all I can I remind myself that 8.75% for basic rate tax payers isn't that onerous. I am not going to be too bothered by tax until SP.

[Steveam]

I don’t think Labour will do much with pensions other than re-introducing some form of LTA ( but they will be very aware of the doctors). I think a much more likely target is ISAs. I can see Labour seeing that too many people have large ISAs (myself included) and are using them to shelter income producing assets so that there is no tax on the income. I, of course, don’t know what Labour might do but I suspect either a reduction in the annual allowance to say, £10k or some sort of limit to the value; perhaps both.

Best wishes, Steve

[airbus330]

Growthy, low dividend shares and harvest the capital gains annually. How about Buffet's vehicle?

Good point. My concentration has been almost exclusively Income, so this might be a good time to start researching growth and sell units as needed. Thanks

[monabri]

We have seen many changes to the pension tax treatment and rules and limits. I do not remember any happening without notice so until someone says different the 25% or LTA or inheritance treatment or whatever will stay as is. Unless something comes out of the blue we've time to adapt. My SIPP is pregnant with an untouched 25% so changes would force my hand too.

So what else can I do to shelter the funds if I take them?

Off the top of my head we've got allowances of £2880 to SIPP, £20k to ISAs, £50k to premium bonds.
Short dated low coupon bonds, index linked gilts, gold coins, annuities, zero dividend preference shares - the only one I have is NB private equity. Growthy, low dividend shares and harvest the capital gains annually. How about Buffet's vehicle?
The dividend tax timetable made me move income producers to ISA and direct non sheltered to growth and in light of no ideas VWRL/VEVE at 1.6% income though any dividends are unhelpful with the very low limits, I can see capital gains diminishing too either by choice or fiscal drag.

When I've done all I can I remind myself that 8.75% for basic rate tax payers isn't that onerous. I am not going to be too bothered by tax until SP.

8.75% dividend tax...rich folk ( ie anyone actually a shareholder, the temerity!) might be subject to taxation at their marginal rate. I can see limits on
ISA allowances being capped to say £100k ( 5 years allowance....so you MUST be well off!).

In addition, equalisation of CGT rates to income tax rates. The actual allowance is now so low that cancellation wouldn't be that big a deal.

Nope, I've no idea what this would generate but then I bet Labour won't have neither but it is the message that counts..." we are ALL poorer together".

Edit...CGT introduced for gilts..?

[SebsCat]

So what else can I do to shelter the funds if I take them?

• Premium bonds are tax-free, albeit the effective interest rate isn't great if you're a basic rate tax payer.
• Low coupon gilts can be effective since most of the profit is capital gain which is free of CGT.
• If you're a basic rate tax payer then there isn't a huge difference between dividend tax & CGT and - currently! - neither is especially harsh so I wouldn't worry about it too much (first world problem...)

Do people think Reeves will go hard on the tax free element? Or just tinker with contribution limits?

My gut feeling is that the Lump Sum Allowance is an easy target and one that won't affect the vast majority of people. As I've said before, the Tories have made it trivially simple for this to be reduced (since there is no longer any link to a LTA and even if Labour do introduce the LTA they are unlikely to reintroduce the PCLS at 25% of it). It's the sort of change that won't even merit a mention in the Chancellor's budget speech and will be buried in the small print.

If it leads to a sudden surge in withdrawals before the change comes into effect then so much the better for the Treasury. It will either be spent (VAT) or produce taxable returns from investments.

The one large proviso with reducing the LSA is that it should be done relatively gradually. It would be unfair to penalise those who are relying on the tax-free amount to pay off mortgages.

Overall, I'm still hoping that despite what has been said that they won't reintroduce the LTA. Once a SIPP is much over £1m it becomes rather hard to actually access it without ending up paying higher rate tax anyway. So why not let it get to £2m (which is roughly where the LTA would be anyway if Osborne hadn't slashed it) or more?

My own take on what Reeves should do is:

• Keep current contributions but have a flat rate tax relief of 30% (*). This argues against building up a huge pot so negates the need for a LTA. It also boosts pensions for lower earners.
• Find a means to limit the use of SIPPs as inheritance tax avoiders. Pensions should be there to produce an income during retirement, not to avoid IHT.

* - 30% is a sample figure. The actual value should be one which will be essentially neutral to revenues. IIRC, the IFS did a report on this and I think they came up with 30% although it might have been 25%.

Disclosure: my own SIPP is trivially small. My wife has a significant SIPP and crystallised the full LTA amount when she retired so has already taken the full tax-free amount. If the LTA was reintroduced as before then she'll need to take steps to avoid triggering the tax charge at 75.

[SebsCat]

Edit...CGT introduced for gilts..?

That would make it easy to generate large capital losses...

[monabri]

Edit...CGT introduced for gilts..?

That would make it easy to generate large capital losses...

No change to the rules regards losses on the tax return for Gilts. Heads the. GOV win, tails you lose.

[airbus330]

The one large proviso with reducing the LSA is that it should be done relatively gradually. It would be unfair to penalise those who are relying on the tax-free amount to pay off mortgages.

.

A good point.
There would also be a lot of unsold Motorhomes/Caravans, which seems to be a popular choice for PCLS money, according to my local dealer

[scrumpyjack]

I don’t think Labour will do much with pensions other than re-introducing some form of LTA ( but they will be very aware of the doctors). I think a much more likely target is ISAs. I can see Labour seeing that too many people have large ISAs (myself included) and are using them to shelter income producing assets so that there is no tax on the income. I, of course, don’t know what Labour might do but I suspect either a reduction in the annual allowance to say, £10k or some sort of limit to the value; perhaps both.

Best wishes, Steve

The number of people with very large ISAs is very small so any change here would not raise much. I don't think they will do anything there.

Restricting pension contribution relief to the basic rate of tax could raise a LOT!

Other changes I think likely include abolishing the IHT relief on AIM shares and cutting back on business property relief for IHT. The latter could raise a lot.

[dingdong]

The tories have baked in huge spending cuts into the forward plans so whatever party wins is going to have to find ways to increase tax revenues.

The current spending plans are completely unrealistic as the public will simply not put up with the huge cuts in public services that are required to balance the books... and the tories have not been clear on the size of cuts they have passed onto the next government to bring debt back down to a manageable level.

Whichever government gets in you can therefore expect tax rises of some sort unless we have a huge increase in growth which is unlikely. The 25% tax free limit will not rise with inflation so will become less valuable over time. Higher-rate pension tax relief would be another easy benefit to cut saving billions, and perhaps a combined contribution limit across ISAs and pensions each year given the well-off benefit disproportionally from these benefits currently.

Given we have an ageing population, with pensioners making increased demands on an economic and social system that can barely cope as it is, it is only fair that pensioners help contribute to solving the problem rather than the burden falling only on those still in work.

[1nvest]

Whichever government gets in you can therefore expect tax rises of some sort unless we have a huge increase in growth which is unlikely.

Post pandemic and Ukraine and large increases in growth are a good prospect IMO. The US has seen much flight to safety (US dollar/assets), relatively pulled ahead, as fear subsides so large amounts of capital might flight the US towards greed/growth elsewhere (non-US, and where the UK has some pretty good value figures at recent levels). A push away factor would be Labour increasing taxes, a attraction would be a Labour government that left taxes as-is or even reducing them, at least for the first year to see how growth panned out.

Public spending is a mess, too many with tablets pressing buttons than front line and is riddled with waste. GP waiting times could be considerably reduced by lowering nurse practitioners required qualification level. Councils are typically awash with pen pushers on six digit salaries.

Fundamentally a role reversal flip, Tories not trusted with the economy - more Labour-like than Labour, Labour being more Tory-like. Perhaps even with the LD's in opposition, 70+ MP's versus 40 or less Tory MP's.

Establishing a Sovereign wealth fund could be a revenue source. Legislate that the 5000 tonnes of other peoples gold that the UK (BoE) secures becomes under the Treasury's responsibility, with the Bank of England the custodian. Also establish the BoE as SWF manager, initially loaded with the 600Bn of Gilts it already holds, supplemented with 1.2Tn of gold certificates issued by the Treasury at a £4.25/ounce rate (Sovereign coin Pound gold content value, as per fixed between 1717 to 1940). Whilst largely its not the UK's gold that is little different to how a brokerage is nominee nowadays, buys stocks in its name rather than individual investors name and may lend out shares/assets. But even safer when backed by the Treasury. With a £1.8Tn wealth fund the BoE should be able to source a sustainable 2% or 3% revenue to the Treasury (that grows in real terms), provided invested wisely (and hence fund management separation from the Treasury). Given lawful 'insider trading' potentials maybe even 4% or 5%.

Little different to what the US already does. 8000 tonnes of gold owned by the Treasury, gold certificates issued to the Fed at $42.22/ounce, so a 50x leverage factor when the market price of gold is $2111/oz. The Options/Futures market also has recent 124x more paper-gold than physical gold leverage factor, so conceptually massive levels of leverage (>6000x). A £1.8Tn SWF that sourced 6% real, retained half for growth, other half to the Treasury to spend = £54Bn additional Treasury income that alone would fill the £40Bn presently unfunded spending hole that Labour is indicating.

[LondonChris]

Advice is clearly impossible right now as many things could change. I expect:
1) The TFLS to remain unchanged and obviously just fall in real terms
2) The LTA to be reintroduced for all (ie no special doctors' deal) but at a higher value - anybody's guess where but say £2m
3) On CGT rates and equalisation it's complex. Clearly Sunak vs Starmer's tax returns highlighted the point, but recently R.Reeves has made noises about not wanting to deter capital investment. Directionally one would expect Labour to increase CGT rates, but not necessarily equalise. And let's face it, given that indexation was phased out many years ago and the annual allowance is practically worthless CGT has basically become an inflation tax.
4) Increasing dividend tax rates would be easy for Labour to do within their scope of their no income tax increases pledge - they could be equalised with income tax rates.
5) I would not expect ISA allowances to increase under Labour - remember Osborne did a huge ramp-up to £20k and it's easy for Labour to say that doesn't need to be increased if the base point is say 20 years ago. Labour might stop any new contributions on large ISA pots - say pots over £0.5m.
6) Re the TFLS, the question I think should be assessed in terms of are you at or close to the max (c£268k). Clearly any growth on that sum within a pension wrapper is going to taxed at marginal income tax rates when you try and extract the growth - and currently that tax rate is higher than the current CGT rates if you extract it from the pension wrapper and put it in a general a/c. Clearly to the extent that you can take the TFLS and phase it into an ISA that's even better still. But without knowing where Labour stand on the LTA, equalisation of IT and CGT etc etc. it's impossible to plan.

Uncertain times !

[moorfield]

My gut feeling is that the Lump Sum Allowance is an easy target and one that won't affect the vast majority of people. As I've said before, the Tories have made it trivially simple for this to be reduced (since there is no longer any link to a LTA and even if Labour do introduce the LTA they are unlikely to reintroduce the PCLS at 25% of it). It's the sort of change that won't even merit a mention in the Chancellor's budget speech and will be buried in the small print.

Yes spot on SebsCat. When the LTA was removed I thought it was immediately obvious that £268,275 would become just another threshold that can be fiddled with, and no doubt will be. I think Ms Reeves can pluck more feathers with that than another LTA adjustment which frankly is irrelevant to many pensioners. If the polls are right, Labour have a majority of 250+ quite possibly for the next decade - let the rich pensioners' pips squeak.

[Spet0789]

Whichever government gets in you can therefore expect tax rises of some sort unless we have a huge increase in growth which is unlikely.

Post pandemic and Ukraine and large increases in growth are a good prospect IMO. The US has seen much flight to safety (US dollar/assets), relatively pulled ahead, as fear subsides so large amounts of capital might flight the US towards greed/growth elsewhere (non-US, and where the UK has some pretty good value figures at recent levels). A push away factor would be Labour increasing taxes, a attraction would be a Labour government that left taxes as-is or even reducing them, at least for the first year to see how growth panned out.

Public spending is a mess, too many with tablets pressing buttons than front line and is riddled with waste. GP waiting times could be considerably reduced by lowering nurse practitioners required qualification level. Councils are typically awash with pen pushers on six digit salaries.

Fundamentally a role reversal flip, Tories not trusted with the economy - more Labour-like than Labour, Labour being more Tory-like. Perhaps even with the LD's in opposition, 70+ MP's versus 40 or less Tory MP's.

Establishing a Sovereign wealth fund could be a revenue source. Legislate that the 5000 tonnes of other peoples gold that the UK (BoE) secures becomes under the Treasury's responsibility, with the Bank of England the custodian. Also establish the BoE as SWF manager, initially loaded with the 600Bn of Gilts it already holds, supplemented with 1.2Tn of gold certificates issued by the Treasury at a £4.25/ounce rate (Sovereign coin Pound gold content value, as per fixed between 1717 to 1940). Whilst largely its not the UK's gold that is little different to how a brokerage is nominee nowadays, buys stocks in its name rather than individual investors name and may lend out shares/assets. But even safer when backed by the Treasury. With a £1.8Tn wealth fund the BoE should be able to source a sustainable 2% or 3% revenue to the Treasury (that grows in real terms), provided invested wisely (and hence fund management separation from the Treasury). Given lawful 'insider trading' potentials maybe even 4% or 5%.

Little different to what the US already does. 8000 tonnes of gold owned by the Treasury, gold certificates issued to the Fed at $42.22/ounce, so a 50x leverage factor when the market price of gold is $2111/oz. The Options/Futures market also has recent 124x more paper-gold than physical gold leverage factor, so conceptually massive levels of leverage (>6000x). A £1.8Tn SWF that sourced 6% real, retained half for growth, other half to the Treasury to spend = £54Bn additional Treasury income that alone would fill the £40Bn presently unfunded spending hole that Labour is indicating.

Hmmmm. I suspect there’s 1% chance this scheme is genius and 99% chance it’s bat-poo crazy.

I think what you’re suggesting is that the U.K. govt expropriate the gold deposited at the BoE.

Good luck with that. I think the Zimbabwean central bank may have a job for you.

[airbus330]

Thanks for the thought provoking replies. Having sifted through the political news today Labour have vaguely indicated that a budget wouldn't be likely before September, which gives a little more thinking time. As was said above, historically there is usually a period of time before new tax regulation is implemented subsequent from its announcement. So, again, maybe just take another slab of tax free money to top up the ISA for the time being is my first move.

[Lootman]

The danger for me, being in year 5 of retirement, is the loss of all or some of the 25% tax free element.

Although I am not a fan of tax increases I have never really understood why pensions have a 25% tax-free payout. I am not aware of any other nation that allows for that. In the US for example 100% of your pension payouts are subject to income tax at your highest marginal rate, with no special relief.

Pensions are tax-deferred, not tax-free.

So if you held a gun to my head and told me to put up one tax, I'd abolish the TFLS giveaway. As the Guardian-reader in me might say, why should a billionaire get that?

[Spet0789]

The danger for me, being in year 5 of retirement, is the loss of all or some of the 25% tax free element.

Although I am not a fan of tax increases I have never really understood why pensions have a 25% tax-free payout. I am not aware of any other nation that allows for that. In the US for example 100% of your pension payouts are subject to income tax at your highest marginal rate, with no special relief.

Pensions are tax-deferred, not tax-free.

So if you held a gun to my head and told me to put up one tax, I'd abolish the TFLS giveaway. As the Guardian-reader in me might say, why should a billionaire get that?

For wealthier pensioners, the TFLS is the main reason to save for a pension. If you save tax at 40% on the way in but pay it at 40% on the way out, then there’s no point in a pension.

I think what’s far harder to justify are the IHT benefits of pensions. Expect them to go.

[Lootman]

Although I am not a fan of tax increases I have never really understood why pensions have a 25% tax-free payout. I am not aware of any other nation that allows for that. In the US for example 100% of your pension payouts are subject to income tax at your highest marginal rate, with no special relief.

Pensions are tax-deferred, not tax-free.

So if you held a gun to my head and told me to put up one tax, I'd abolish the TFLS giveaway. As the Guardian-reader in me might say, why should a billionaire get that?

For wealthier pensioners, the TFLS is the main reason to save for a pension. If you save tax at 40% on the way in but pay it at 40% on the way out, then there’s no point in a pension.

Part of the idea is surely that upon retirement you are likely to be in a lower tax bracket. So you got relief at 40% but maybe later only pay tax at 20%.

Also the deferral of taxes allows your pension pot to grow at a faster rate.

People still max out pension contributions in nations that have no TFLS.

I think what’s far harder to justify are the IHT benefits of pensions. Expect them to go.

It is certainly an anomaly that some kinds of pension pots can be inherited and some evaporate upon death. Making them all consistent seems reasonable, and that probably means none can be inherited. In which case IHT would be moot anyway.