Doesn’t sound right to me

Two hundred thousand oblivious savers are too late to avoid pension tax bills of up to 55pc, and at least a million more are sleepwalking into the same problem.

Telegraph Money has previously reported that front-line health, police, fire service and Armed Forces personnel are for the first time being penalised by lifetime limits on pension savings after successive governments cut the allowance from £1.8m to £1.03m.

Researchers have now calculated the number of savers affected. More than a million face losing hundreds of thousands of pounds from their savings when they retire.

Healthcare unions expect an exodus of senior staff from hospital wards and a decline in patient care if the Treasury…

I know GPs are being affected. But service salaries and pensions tend t#not to be high enough. For technical reasons just been looking through father’s RN Captain’s pension. Wouldn’t have been affected at all. Not with the usual way that a DB pension has its capital value calculated anyway.

26 comments on “Doesn’t sound right to me

  1. Long time since I did the calculations but from memory, they just use an (annual value) x20 + lump sum calculation. So to hit £1.8m required an annual pension of around £90k, whereas £1.03m only requires just over £50k. Still lots to you and me but for those on the generous public sector final salary pensions, there will be quite a few in management affected.

  2. They haven’t got the problem correct: it’s annual allowance that’s the issue, not lifetime allowance. It still only affects relatively highly paid people, but a jump in pensionable pay can lead to large tax bills. They are catching people by surprise at the moment, because its a relatively recent change in the taxation.

    Certainly at GP/hospital consultant level it is already leading to people working less/retiring early. Think some of the military have the same issues as well

  3. Pensions are so incomprehensible I can’t understand them at all, but surely with zero interest rates the value of any low-risk asset that generates a return is essentially infinite?

  4. surely with zero interest rates the value of any low-risk asset that generates a return is essentially infinite?

    The Revenue use an arbitrary figure of 20x the pension to calculate the present value, but if you actually look up what it costs to buy a civil service pension – RPI protected, 50% to surviving spouse, etc, – it’s more like 40x.

  5. surely with zero interest rates the value of any low-risk asset that generates a return is essentially infinite?

    It’s not the interest rate that matters, but the annuitisation rate (as in you give us a a lump sum of x, and we will pay you y% of that per year as an annuity). 5% is probably a bit high these days, but that’s where Chris Miller’s 20x figure comes from.

  6. It’s easier to get sucked into this tax grab than you may think. 20 years ago paying into AVCs was touted by the financial services industry as a means of retirement savings, so many followed this advice and following the precedents on pension wrecking established by Brown, the present administration has continued their assault on the pension savers. It’s practically impossible to plan for the future for people in their 30’s today when we can expect the fiscal goalposts to move every 4-5 years as the civil service try to balance the books.

  7. “surely with zero interest rates the value of any low-risk asset that generates a return is essentially infinite?”

    Well exactly. Hundreds, maybe even thousands, of middle-ranking public ‘servants’ are retiring each year and being awarded pensions that equate to a pot value of 1-2m pounds.

    It’s amazing really – FTSE CEO level bonuses for teachers, army officers, civil servants.

    But because it’s pensions no-one makes a fuss.

    Plus they cheat using their 20x multiplier, which hasn’t been realistic for a decade now. It’s basically one rule for the public sector and another rule for everyone else.

  8. “Pensions are so incomprehensible I can’t understand them at all, but surely with zero interest rates the value of any low-risk asset that generates a return is essentially infinite?”
    With pensions you skip tax when contributing, but pay tax when collecting. Nice, if you avoid higher rate tax but then only have to pay basic rate tax on your pension income.
    But if you have to pay tax both in and out, then it’s a bad deal.

  9. Interest rates may be close to zero but inflation isn’t. For those on DC figuring out how long your pot will last is a nightmare if you don’t want to buy an annuity.

  10. “Plus they cheat using their 20x multiplier, which hasn’t been realistic for a decade now. ”
    Too low – benefits them by understating the value of their pension relative to the lifetime allowance?
    Each case is different. I am nowhere near the lifetime limit, and I wasn’t in the public sector, and my DB scheme is frozen now.
    And I would still like a larger multiplier, because I will get back most of my subsequent DC contributions tax free as 25% of the total value. Increase the nominal value of the total, I get a bigger tax free lump sum.

  11. Don’t forget you save on the NI as well. So if you are a high rate tax payer for every after tax £1 you give up to salary sacrifice you get almost another £1 added in to your pot.

  12. “Don’t forget you save on the NI as well.”
    That is true with some “smart pension” systems. However, I am not sure the public sector pension schemes do anything quite so, um, evasive.

  13. “..civil service pension – RPI protected ..”
    Is this still so? As the recipient of pensions from my service in the British Army and a county Police force (for which I had to pay 11.5% of my salary as a contribution), increases in those pensions became based on CPI calculations, which saved the Government millions.
    Following this, I wrote to my MP to ask if this new calculation would be used for all taxpayer funded pensions, including MPs, who still used the RPI calculations. I’m still waiting for a reply. Can I stop holding my breath now?

  14. Pensions are gigantic pots of money just lying there and whispering “come get me, big boy” to the government. For people who lie routinely, why would stealing your pension (by stealth now, but soon openly) faze them?

  15. @Penseivat

    AFAIAK, all public sector schemes pay post retirement increases based on “Government Revaluation Orders”, which changed from RPI to CPI in about 2010.

  16. @Rob

    ‘“Front-line” staff in the public sector have pension pots worth well over £1m?’

    The NHS surgeon who performed open heart surgery on me a few years ago was pretty front line. I hope his pension pot is well over £1m.

  17. If the buggers taxed us in the way into pensions you can guarantee they would then change the rules when you came to draw it that meant you need to pay tax on way out as well. I don’t trust them so would like the tax relief up front thanks very much.

    The annual allowance taper is a pain in the proverbial.

  18. “..civil service pension – RPI protected ..”

    Moving from RPI to CPI is a trend in many pensions schemes, I don’t know how far it has gone in the numerous civil service schemes (all with their own rules). But it doesn’t make a huge difference to the cost if you wanted to purchase one from a private provider, so my 40x multiplier is in the right ballpark, irrespective.

  19. It would be massively beneficial and help sooth the anger of those on DC pensions if the public sector pensions were valued at what they would cost if purchased I.e. simple online calculator what would my pension cost me if purchased, all the pension companies have online calculators that do this sum in seconds. Employer must use a publicly available calculator and state value of pension scheme annually.
    If they are worth more than 40K well boo hoo, private DC scheme members have been treated this way for years and a level playing field would be nice.

  20. Penseivat – forgive me, but you didn’t pay 11.5% into your Police pension. You paid 11.5% minus tax relief at your highest marginal rate – more like 7% net. Neither rate of contribution was more than a droplet in a bucket compared with the cost of meeting the (comparatively) extremely generous scheme benefits. Which is why the final salary 1987 scheme closed in 2006, replaced by an average career earnings scheme (which also snookered the old boys’ network game of engineering promotions before retirement dates).

    The large “Employer’s Contribution” necessary came (and still comes) more or less directly from taxpayers.

  21. Gasman may be correct, I suspect it’s the £40k annual limit that’s the problem.

    Works like this:

    – Say you’re on a two thirds final salary scheme and you get a £3,000 pay rise.
    – That increases your future annual pension by £2,000 (note 1).
    – On the official 20x multiple (note 2), that means the deemed value of your notional pension pot goes up by £40,000.

    £40,000 is now the maximum annual contribution (or, for final salary schemes, the maximum annual increase in the deemed value of the notional pension pot), so in this example any pay rise over £3,000 is going to result in pension tax charges.

    Note 1 – this won’t have such a big effect on younger workers, because most public sector pension schemes are now based on average earnings rather than final salary. But it will affect the older ones, for whom most of their pension is still on a grandfathered final salary basis. Which would explain why they are taking early retirement.

    Note 2 – as others have said, 20x is a ridiculously low valuation method, but that’s the official rate, written into the rules by the self-serving civil service to protect themselves and their chums. On any realistic valuation, the salary increase to take the annual change over the £40,000 limit would be even lower.

  22. Hasn’t anyone noticed that none of the ex-Torygraph “victims” actually *work* in the private sector. It is weeping over the fact that some government employeees might actually pay some tax!
    Oh dear!
    Officially exempting civil servants from income tax and publishing their income compared to the take-home pay for private sector workers might be a good idea as “sunlight is the best disinfectant” – even better would be to compare everyone on the basis of take-home pay including the real value of pensions (which would show the true gender gap in pay per hour that favours women – ask Bravefart if you don’t believe me).

  23. The £40k limit is the annual cash contribution not the annual increase asset value.

  24. @sneeze*3

    “10.1 Defined benefits arrangement
    Your pension savings amount under a defined benefits arrangement is the increase in the value of your promised benefits over the tax year.

    The increase is the difference between the value of your promised benefits immediately before the start of the tax year (the opening value) and the value at the end of the tax year (the closing value). The difference is found by taking away the opening value from the closing value. If the difference is a negative amount then your pension input for the arrangement is nil.”
    https://www.gov.uk/government/publications/pensions-tax-charges-on-any-excess-over-the-lifetime-allowance-annual-allowance-special-annual-allowance-and-on-unauthorised-payments-hs345-self/hs345-pension-savings-tax-charges-2018#how-to-work-out-pension-savings-for-a-defined-benefits-arrangement-or-a-cash-balance-arrangement

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