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Chancellor might ruin my plans!

Discussion in 'Retirement' started by HannahD16, Sep 6, 2020.

  1. HannahD16

    HannahD16 New commenter

    Having spent the last couple of years reviewing and researching the best way to prepare for my exit from the teaching profession, I made a number of significant financial decisions over the last 2 years which were based on the premise of “pain now, gain later”.

    I opted for faster accrual for a year, I opted for additional pension to be paid over ten years and got stuck back into my AVC (dormant for many years).

    As I am a 40% taxpayer, this all made good sense given the tax relief on these deductions. This morning however we read that the govt may be considering a flat rate for deductions at 20% but still a higher rate of 40% when drawing down pension if your FS falls into that tax bracket.
    Does anyone know if this idea will be imposed immediately or will there be a time lag of a few years in which to take advantage of my tax bracket before changing to 20%?

    One thing is for sure, I will definitely not be a 40% taxpayer just prior to retirement if this turns out to be true. Any thoughts welcome
  2. jonnymarr

    jonnymarr Occasional commenter

    I don't get it and haven't been able to find the article. Is it the one behind The Times paywall?

    How can they propose to tax you @ 40% on your pension based on your pre-retirement FS earnings? Surely they can only tax you on your actual pension? Intrigued....
    frodo_magic likes this.
  3. Treacle3

    Treacle3 New commenter

    Yes. Remember, atm there are "ideas" being thrown out at random by the Government/Media on just about everything from every possible angle. I wouldn't worry about it unless it actually happens and every financial planning decision we make is always subject to change. We can only do our best to plan carefully and some you win, some you lose.
    emerald52 likes this.
  4. diddydave

    diddydave Lead commenter

    I've seen these articles as well. All part of the push on how to recover the money spent. Often these are put out to 'test the water' or soften you up for a less drastic change.

    My personal opinion is that such a change, in full, is unlikely as you don't raise enough revenue taxing a minority compared to taxing everyone. Politically it may be necessary. They may opt to do as suggested but with tax returns, and hence such tax relief processes, done annually it is unlikely that they will bring in such measures instantly so there may be some months to enable you to put away lump sums that would gain the tax relief for that year at least. I wouldn't say a lag of years though. However, as many tory supporters benefit from such relief there will be pressure not to take this measure - I would guess that it may still happen in some form, possibly not a single cut down to 20% for everyone (though that does make a good political reposte to accusations of one rule for the rich etc) but may be a year at 30% and then down to 20% for everyone.

    The vast majority of teachers are going to receive pensions well under £50,000 a year so the output tax is unlikely to be an issue...unless the tax thresholds come down (but the same political points about their support and 'fairness' apply too)

    Pensioners don't pay National Insurance and we already know that this tax is in line for a reform, particularly around the area of the self-employed but it may be that pensions are brought into paying it as well - possibly as part of the deal regarding care for the elderly.
    NoseyMatronType likes this.
  5. frodo_magic

    frodo_magic Occasional commenter

    I wouldn't believe any of the rubbish in the media or BBC at the moment. They need to generate news 24/7 and the only way to do that is to make up stories, quote anonymous 'experts', print rumours and try and attack the Government any time they can to generate denials.

    Interestingly, a lot of friends in the pub over the weekend have said they've stopped watching the news and just treat print like comics, such is the neverending doom laden twaddle being peddled.
    wayside34 likes this.
  6. Rott Weiler

    Rott Weiler Star commenter Forum guide

    It's all political speculation at the moment although proposals to reduce tax relief on pension contributions to the 20% basic rate for higher rate tax payers have been repeatedly floated for quite a few years but so far haven't become policy for any government. If it happens you are likely to get a fair bit of notice, there'll probably be at least a year's lead in time because employers, pension providers and HMRC all have to make a lot of IT changes. It's not like increasing duty on or wine or something which can be changed literally overnight. That might let you bring forward your retirement to avoid the changes.

    What do you mean by your "FS"?

    Once your pension is in payment your income tax rate depends on the amount of pension (and other income) you receive in that tax year. It's no different to when people are in employment in that respect. So if your total gross income after retirement goes over the higher rate threshold you pay higher rate on the amount over the threshold. Just as now, there was nothing in the leaked proposals which would have changed that. Your tax rate before retirement is irrelevant.

    And post retirement your net payer is higher because you don't pay NI on pensions contributions or pay pension contributions. (It has been mooted in the past that NI should be paid on pensions and I wouldn't be surprised if that idea re-appears).

    What was in the leaked proposals was that the lump sum payment, currently tax free, should be taxed as income. Which would mean 40% if you are higher rate taxpayer immediately before retirement. Will that happen? Will it be as blunt as just imposing 40% immediately? Who knows. My personal view is that this government would find it politically impossible to go from 0% to 40% overnight on the lump sum and if it were changed it would have some sort of taper depending how close people are to retirement.
    Last edited: Sep 7, 2020
    NoseyMatronType likes this.
  7. Prim

    Prim Occasional commenter

    Is that when they are spreading Covid as well?
  8. Morninglover

    Morninglover Star commenter

    I think we can all assume that the costs of Covid-19 and Brexit will have to be paid through higher taxes for the rest of our lives.
  9. pauljoecoe

    pauljoecoe Occasional commenter

    FS = Final salary? - Can't see that happening. You are taxed on present income not what you used to earn.

    For a TPS pensioner to end up in the 40% tax bracket you'd need to have been earning well above £100K a year. Can't be many of those in UK schools - Headteachers of big schools only surely - and they'd be able to afford it!
    Prim likes this.
  10. Rott Weiler

    Rott Weiler Star commenter Forum guide

    It should have read....

  11. Sundaytrekker

    Sundaytrekker Star commenter

    I don’t think they’ll change NI on pension income but I see no reason why non pension income from jobs shouldn’t attract NI. I pay NI on part time teaching at the moment when it is over the thresholds as I have my teachers pension but haven’t reached SPA. Think of those actors or other well paid older presenters. Why shouldn’t they continue to contribute to NI via earnings?
    lizziescat likes this.
  12. a_venkatesh

    a_venkatesh New commenter

    I am a deferred member of TPS. If there is any chance of the lump sum becoming taxable, I should consider taking it early (actuarially reduced) to avoid losing up to 40% of what I had been expecting. How likely is this tax change? If this starts to become expected, there will be a mass 'cashing in' by those in their 50s I think.
  13. Morninglover

    Morninglover Star commenter

    I have no idea (in answer to your question), but if the Chancellor DOES decide to do this, he might do it from the day of a budget announcement or shortly thereafter, and you won't be able to avoid the tax. I did (should it happen) by taking the maximum lump sum I could some years ago.
  14. HannahD16

    HannahD16 New commenter


    Sorry if I have misunderstood the key points of this article and I realise it is based on speculation. Perhaps your reading of if it might put a different spin on it for me (tho it is Daily telegraph, so ... )
    jonnymarr likes this.
  15. PeterQuint

    PeterQuint Lead commenter

    Always remember, it’s only in income above £50,000 a year that you pay 40%.

    If your pension is going to be above £50,000, I’d suggest you don’t have too much to worry about.
    harsh-but-fair likes this.
  16. HannahD16

    HannahD16 New commenter

    Hello Peter. If only my pension was to be above that!!
    My interpretation was that if you were taxed at 40% at the end of your career that you would pay same level of tax on your pension income. I expect I’ve got that all wrong from my interpretation
  17. jonnymarr

    jonnymarr Occasional commenter

    Clearly written, non-ambiguous articles on personal finance, tax, pensions etc can be in the minority. You won't be the first or the last to be confused by them.
  18. NoseyMatronType

    NoseyMatronType Star commenter

    I am also a deferred member (living off personal savings until January 2022 when I can claim my pension).

    Am also wondering whether to go for an actuarially reduced pension before November because of this speculation.

    Any advice appreciated.
  19. Treacle3

    Treacle3 New commenter

    Well, as it is speculation, nobody knows the answer. You can only make a decision based on what you personally think is most likely to happen to you, your family, your finances etc. at any given point. I wish I'd had a crystal ball with the endowment mortgage mis selling back in the early 90s :)
    NoseyMatronType likes this.
  20. a_venkatesh

    a_venkatesh New commenter

    The big risk for me would be taxation of the lump sum as income. Would potentially make a huge difference to plans for life after retirement. Thinking of going for reduced early pension now to avoid this, but no idea how likely the change is.

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