Another Pensions blow

[Satch]

Over lunch I was bemoaning how many of those still lucky enough to be in a defined benefit (i.e. Final Salary) pension scheme (which include those higher earners in the Public Sector BTW) may to forced to exit the scheme on pure economic grounds next April.

Met with puzzled faces and "that cannot be right" type responses. So back to the office and at a meeting this PM raised same issue. Same response.

Sent this article around and everybody is aghast. Span by the Labour Govt. as only hitting those "earning" more than £130K but that failed to make it clear that your "earnings" for this purpose include employers contributions multiplied by an age factor and the whole lot is then treated as a taxable benefit in kind. The figures given below would become a recurring and (increasing) annual tax charge for as long as you stayed in the scheme, not one off charges.

Mad or what!

If CGT changes sound bad, wait for pensions


"The problem is how you claw back relief from final salary schemes. Labour had chosen to do so by taxing 50% taxpayers on their employer contributions through the self-assessment system, creating a fiendishly complex arrangement.

If this were adopted by the Lib Dems to claw back 40% relief, as they have suggested, middle to high earners would face eye-watering bills, as figures from Andrew Tully of Standard Life, the asset manager, show.

Take a 48-year-old who has been working for the same company for 21 years and sees his salary rise from £57,000 to £60,000. The value of his final salary pension benefits would therefore rise from £19,285 to £21,000, assuming he is in a scheme that pays 1/60th of final salary for each year of service.

This increase of £1,715 would be deemed by HM Revenue & Customs (HMRC) to be worth £25,725 based on an extremely complex formula that I will not go into here. The worker is deemed to have received 40% tax relief on the contribution, so would need to pay back 20% under the Lib Dem proposals — a tax charge of £5,145.

A 54-year-old earning £90,000 who has been in the scheme 27 years would face a tax charge of £11,210 — probably equivalent to their mortgage repayments.

As Tully said: “The likely outcome is that these people will simply leave their defined benefit pension scheme, reducing long-term saving in the UK.”

If CGT changes sound bad, wait for pensions - Times Online

 

[Londonscottish]

Final salary pensions stopped in my line of of work many many years ago.

Welcome to the real world

 

[Howard]

I don't understand pensions to be honest.

I am lucky enough to be in a final salary scheme one , but will never be a high enough earner for any of that to affect me i suspect.

 

[Rory]

Take a 48-year-old who has been working for the same company for 21 years and sees his salary rise from £57,000 to £60,000. The value of his final salary pension benefits would therefore rise from £19,285 to £21,000, assuming he is in a scheme that pays 1/60th of final salary for each year of service.

Much of that article appears to be nonsense. eg: how could someone work for a compnay in the kind of job that would command a £57K salary and only progress to £60K after 21 years?

This increase of £1,715 would be deemed by HM Revenue & Customs (HMRC) to be worth £25,725 based on an extremely complex formula that I will not go into here. The worker is deemed to have received 40% tax relief on the contribution, so would need to pay back 20% under the Lib Dem proposals — a tax charge of £5,145.

Taxing the contributions that fund the increase makes no sense at all. The increase is purely a fraction of increased earnings. I could understand the whole pension contribution being taxed, but what has the increase as salary increases got to do with anything?

 

[Satch]

I don't understand pensions to be honest.

I am lucky enough to be in a final salary scheme one , but will never be a high enough earner for any of that to affect me i suspect.

That may be true but on current estimates 300,000 people will and the administration associated with all this for the pension fund manager/trustees/employer will simply force many schemes to close faster than they are already.

So even those who are not within the earnings limits are going to suffer indirectly.

You really could not make it up, especially as all this was forced through as Schedule 12 to the pre-election Finance Act 2010 with absolutely no debate in Parliament or Committee.

Nothing whatsoever and nothing has been said since, perhaps because it applies to Public Sector pensions as well.............

 

[Sp!ke]

Much of that article appears to be nonsense. eg: how could someone work for a compnay in the kind of job that would command a £57K salary and only progress to £60K after 21 years?

I asumed the article meant that his salary increased from 57 to 60 this year, not over a 21 year span.

 

[Dryce]

Sent this article around and everybody is aghast.

Extremely poor article.

Basically - it says if a formula, which they won't go into, is applied to other taxpayers to whom it doesn't currently apply, then you're screwed.

It then goes on to pluck some sample numbers out of a hat and generate some new numbers from them .... by the formula it won't go into.

Waste of space.

The system is however, perversely complicated, and I suspect very few people understand how it works except for the simplest of cases.

 

[Charles Morgan]

My former employer shut its final salary scheme in 1989. I am one of the last deferred members and have ceased to accrue any further benefits.

What this article highlights actually is how valuable such a scheme is to its recipients, and would merely equalise (within the bounds of the formulas used) the tax treatment between contributing to a money purchase scheme and receiving an increase in benefits from salary and annual accrual of a final salary scheme. As most recipients of the latter are now public servants and an increasingly limited number of private sector employees, I can't get too excited, and if people don't want to receive £25K of benefits for a tax charge of £5k then of course they should leave the scheme. The tax system should not discriminate between two different types of pension provision.

The only areas of debate in my mind is that this attributes all the increase in the value of the scheme as though it were entirely funded by the employee, whereas most defined contribution schemes have a blend of employer and employee contribution, and what happens if the final salary scheme is insolvent, as the amount of benefits deemed to be taxable wouldn't then become payable, which is problematic.

All of that assumes it is calculated on all higher rate taxpayers, rather than those earning above £130k. The chances of that I suspect are slim.

 

[iscaboy]

I remember when all this private pension / private health / home equity crap started, I didn't buy it or buy into it then, and still don't.

But then again I was raised by people who went through the great depression, and then a world war, and they had a different, far more practical, approach to things.

"Private pension" to them meant a mattress full of fivers, or land, or gold, not some fiat ponzi scheme that played the markets with your pension fund, where you could wake up one day and find yourself broke.

But then again I never bought into the whole "do a job you hate for all of your healthy life, so you can stop work when you're too old and decrepit to enjoy the free time" thing either.

 

[crockers]

Blame Thatcher and Brown for the death of final salary pensions.
1. No longer compulsory so youngsters don't join therefore the cost to employer skyrocketed.
2. Tax on pension dividends
3. Firms allowed to take pensions holidays when in surplus

Both parties screwed pensions and now we're all going to pay for it.

 

[Charles Morgan]

You miss the biggest reason, which is the massive and continuing increase in life expectancy.

In 1950, a male at birth had an average life expectancy of 66.5 years. A pension available at 65 only needed to fund 1.5 years of retirement out of contributions accrued over at least 45 years.

By 1990, that life expectancy had risen to 73.2 years. So in that time, average retirement funds needed to have risen to cover 8.2 years of retirement from a shorter working life.

By 2010, it is estimated that a male will have life expectancy of 77.6 years. So funding needs to be in place for 12.3 years from an even shorter working life.

There is nothing to suggest that life expectancy is going to stop increasing either, such is the pace of medical advance.

Few companies can afford the enormous increase in funding to cope with this life expectancy.

The withdrawal of ACT was an ill-thought through idea. Pension holidays were allowed to avoid funds building up tax free in pension schemes.

As to the structure of final salary schemes, they give little to those who change careers regularly, and are not in the least bit geared to contemporary mobility. That is the principal reason why young people didn't join. They were being screwed to pay for the immobile and the over-rewarded.

We will all have to work longer, but then, we live longer and in better health. I'd rather that than die of the emphysema that killed off my Grandfather at 68, contracted from having to go down a coalmine at 15.

 

[Benzowner]

You miss the biggest reason, which is the massive and continuing increase in life expectancy.

In 1950, a male at birth had an average life expectancy of 66.5 years. A pension available at 65 only needed to fund 1.5 years of retirement out of contributions accrued over at least 45 years.

By 1990, that life expectancy had risen to 73.2 years. So in that time, average retirement funds needed to have risen to cover 8.2 years of retirement from a shorter working life.

By 2010, it is estimated that a male will have life expectancy of 77.6 years. So funding needs to be in place for 12.3 years from an even shorter working life.

There is nothing to suggest that life expectancy is going to stop increasing either, such is the pace of medical advance.

Few companies can afford the enormous increase in funding to cope with this life expectancy.

The withdrawal of ACT was an ill-thought through idea. Pension holidays were allowed to avoid funds building up tax free in pension schemes.

As to the structure of final salary schemes, they give little to those who change careers regularly, and are not in the least bit geared to contemporary mobility. That is the principal reason why young people didn't join. They were being screwed to pay for the immobile and the over-rewarded.

We will all have to work longer, but then, we live longer and in better health. I'd rather that than die of the emphysema that killed off my Grandfather at 68, contracted from having to go down a coalmine at 15.

This is also a contibutory factor for the NHS sprialing costs. Do not think that final salary pensions are a province for the wealthy, I worked for an electricity board when they were a nationalised company, and we paid into a superanuation scheme, retirement age was then 60 and pension was two thirds final salary, what they have done since being privatised, I don't know, but I would suspect there are a number of "pensioners" enjoying that scheme. I beleive the police force are final salary scheme.