According to the Daily Mail, 'middle class' means you're the sort of person who contributes more than £50,000 a year to his or her pension scheme.
FFS, £50,000 is more than 95% of people earn every year, let alone have as disposable income and even the article admits that it will only affect 100,000 people.
Actually, this is just the finishing touches to a cunning wheeze introduced by Labour to clobber civil servants in final salary schemes, as follows:
1. Let's say somebody's current salary is £50,000 and his notional pension pot is worth £500,000 (calculated actuarially)*.
2. If he gets a £10,000 pay rise, the value of his pot goes up to £600,000, so the notional contribution is £100,000.
3. He therefore gets taxed on the notional contribution of £100,000 minus the new upper limit of £50,000 x 40% = £20,000 tax to pay.
4. So by going from a salary of £50,000 to £60,000 such a person would be £14,000 worse off in the first year. He keeps 60% of the £10,000 pay rise after tax and has another £20,000 to pay.
This all sounds rather splendid to me as it discourages civil servants from taking pay rises of more than £5,000 a year (or whatever the figure is). The Daily Mail just don't seem to get it though.
And yes, there will be some collateral damage with higher paid people in private sector final salary schemes, that's just tough. I suppose a good way of using all or part of that £4 billion 'saving' would be to get rid of the 50% top tax rate and all the other nastiness that happens when your income goes over £100,000.
* UPDATE: Rational Anarchist left some more precise calculations in the comments, which tie in with some 'research' quote in yesterday's FT. The actuarial value of the pot appears to be calculated as salary x X/60 x 16, where 'X' is the number of years service, for example:
i. Salary at start of year £96,000, years service 30, so notional pot = £768,000 (A).
ii. Salary at end of year £105,000, years service 31, so notional pot = £868,000 (B)
iii. The notional pot brought forward is increased by 2.5% inflation = £787,200, which is deducted from new notional pot B to give a notional contribution of £80,800.
iv. The 'tax free' figure of £50,000 is deducted from this to give a taxable amount of £30,800.
v. The FT said that this would be taxed at 40% = £12,320 (although the additional income tax in this case would actually be slightly higher than that because above £100,000 gross you start losing the tax-free personal allowance).
Good Stuff
1 hour ago
13 comments:
I suppose there will now be a rush for the exits from some jobs, as people old enough to still have membership of defined benefit schemes take early retirement/redundancy/voluntary severance to ensure that their years of credit in the schemes get topped up under the current rules.
The incentive will be particulalrly strong for members of those schemes where contributions will be under less favourable terms from 06/04/2011 onwards.
What about when granny dies and leaves me her house? £250,000 would not be atypical these days for a property owned by someone at the end of their life.
Throughout the rest of my life I will never get anywhere near this sort of windfall; but if I choose to save it for my retirement and put all £250,000 in a pension I will be penalised.
I applaud the principle: that people with £50,000 a year to put in a pension don't need help, but they've done it in a way that can punish us normals too.
(To preempt you: I fully accept that LVT would sort this problem out by removing all the allowances and stealth taxes in such a situation)
D, we'll see, won't we.
OP, you'd be daft to put £250,000 into a pension scheme in one year.
If you actually trust these people, you would chip in enough each year to wipe out your higher rate tax liability, or even better arrange a salary sacrifice with your employer so that you get two layers of NIC relief as well (which doubles your tax saving).
But agree on last point. If there were no income tax or NIC, we wouldn't be having this debate :-)
Trouble is it does nothing to eliminate the pension deficit built up over the years from too many civil servants on too high a pay, all promised generous pensions at young ages.
These scams of getting more current revenue to fund current pensions do not address the real problem but simply defer it a while, to bite our children etc.
AS, this is but a pin prick, but the tide has to start turning somewhere.
One thing worth noting (according to ft.com, anyway) is that:
"people will be able to carry forward any unused allowance from the past three years to offset this tax bill."
So you'd not pay quite as much tax on that £250k investment as you'd think. Still makes more sense to spread it out over a few years, or invest in something else.
On a not-quite-related note (but still affecting pensions), I see that the Advocate General of the EU has said that Insurers shouldn't be allowed to offer different annuity rates to men and women as this is discrimination.
Back in 1990, the European court brought forth the Barber judgement - someone had complained that his pension scheme allowed women to retire at 60 but men had to wait until 65. That's jolly unfair, said the EU and made a law that said everyone had to have the same retirement age. Most schemes promptly changed the retirement age for women to 65... I'm guessing that if they pass this new judgement into law, the same thing will happen, and men will get a worse deal while women get the same deal as they do now...
link to advocate general piece: http://curia.europa.eu/jcms/upload/docs/application/pdf/2010-09/cp100093en.pdf
Incidentally, having run the numbers quickly (and roughly) for a final salary scheme on 60ths accrual, I note the following:
New employees (members with 0 years service) on £240k per year would need to receive a pay rise of 30% in their first year before they'd pay this tax charge. Someone on £290k would face a charge if they received a 5% pay rise - so higher earners may want to either take less pay rises or not bother with final salary pensions. And on £310k or above you pay a charge each year without needing a pay rise.
By the time you have 5 years service, you only (!) need to be on £110k to face a charge on a 30% rise. You need to be on £240k to get a charge with a 5% rise.
With 10 years service and a 30% rise, you need a salary of around £70k before you pay extra. We're also down to just £200k for a charge if you get a 5% rise.
At 20 years, the numbers are £50k (at 30% rise) and £150k (at 5% rise).
At 40 years, they're £23k (with a 30% rise) and £100k (with a 5% rise).
Bear in mind that you can carry your allowances over for the past three years as well, and it seems clear that they're not really gunning for the little guys here, and there seems to be little chance for them to be caught in the crossfire.
I still think it's a bad idea, mind - most pension schemes are a massive liability to the company running them - the main reason they're still around is because it means the higher earners get a nice nest egg - the added plus of this being that their employees also get something out of it. Get rid of the benefit for higher earners and they'll get rid of the schemes...
So, it's 1/60th-per-year final salary, and the x16 is the current cost of buying an annuity...
I remember the multiplier being x14 when I was at BT in 2006, which would imply a ~14% increase in pension costs over four years, above and beyond the inflation-matched civil service salaries. Gold plated much?
KOW, 14 and 16 are arbitrary numbers. You could take them to be influenced by average life expectancy (the longer people live, the higher the multiple) and discount rates (the lower the rate of return on investments, the higher the multiple) so it would be quite easy to justify anything between 10 and 20.
Hi Mark!
Agreed that it's arbitrary, particularly for more than a couple of years ahead, but presumably there is some sort of mark-to-market for what it costs today? The taxation is mostly going to affect people with at least a couple of decades of contributions and at the peak of their earning power - i.e. retiring soon.
It also raises the question, of course, that if the multipliers are arbitrary then how is the notional contribution on a final-salary pension going to be calculated in order to tax it? Won't people just use the lowest multiplier they can get away with?
KOW, of course there's a mark to market, because there is such a concept as a 'buy out' of pension funds, where the purchaser works out what the likely current surplus or deficit is (so it might be a 'sell out' of a pension fund as much as a 'buy out').
The factor of 16 will be used to tax it, as the examples illustrate. All tax is arbitrary, and Those Are The Rules, which quite cleverly clobber civil servants on big salaries or with big pay rises (albeit £50,000 is far too high, £10,000 would be more like it). They're perfectly entitled to turn down the pay rise, aren't they?
Just like they turn down Honours? ;)
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