How much does the average retired person need to live off.

[Snow1964]

Sounds a bit like where I work. The Government removed any restrictions on when you could amend payments into your company pension ages ago but mine still says you can only do it in September each year or due to a "life event" (marriage, divorce, redundancy etc.).

Company pensions are run by Trustees. Their rules are usually for practical reasons and to minimise admin costs. They don't want people messing about asking to put an extra fiver in one month, then changing it again next month. So once a year or a life event is simply to save admin time and cost.

Companies usually cover the system admin costs of their company pension, unlike a private pension where it is taken from the pot, so for small pensions value can go down to keep it running. That's why not normally sensible to have lots of small pensions rather than consolidated ones because pay multiple admin fees which erodes value.

 

[Broucek]

Sounds a lot like my previous employer - they only let you make changes to any of the benefits (ShareSave/DirectShare, critical illness, pension, holiday sell/buy, etc.) once a year. It was super-annoying.

My current employer allows changes at any time, though they do say it can take a couple of pay cycles to take effect depend on when you make the request.

I've just learned that we CAN change pension at any time

The windows are annoying although there are reasons. For example it's normal to restrict insurance benefits to a once-a-year window to avoid "selection risk" - e.g. taking out critical illness because I'm worried about a lump I just noticed... And restrictions on holiday and share save changes exist to make the plans easier to administer.

 

[swt_passenger]

Are you making an assumption about your state pension, or have you checked it on Government website and checking you have sufficient NI years. You need 35 years (nearer 39 if you were contracted out), anything less and it will be prorated. Once hit max any extra years contributions just wasted as a free gift to Treasury, as state pension wont prorate up

I put my own real world figures in post #18, I’m in exactly this position and my 35 years contracted out contributions get me about £8000 this year. I’m about £1500 down on the generally publicised “full new state pension”…

 

[Bald Rick]

It really isn't it is just a bung to higher earners, and a needless reduction in tax revenues at a time when tax revenues need to be increased.

It isn’t a bung for high earners. Before yesterdays announcement it was the exact opposite - an additional charge (of up to 55%) on pensions above a certain amount. This caused two things:

1) it encouraged people to give up work to avoid paying more into the pension above this limit (encouraged some occupations more than others)

2) it was a disincentive for some people to make pension contributions at all, based on an erroneous understanding of the way it works.

Because the lifetime limit was not being lifted by inflation, and with inflation at the current high levels, the number of people liable was getting progressively and exponentially larger each year.


The annual limit on pension contributions remains, albeit at a higher level, and effectively means the lifetime limit is now in the region of £2m - £3m, although you’ll be hard pushed to find anyone contributing £60k per year into their pension whilst in the first decade of their career.

 

[Broucek]

It isn’t a bung for high earners. Before yesterdays announcement it was the exact opposite - an additional charge (of up to 55%) on pensions above a certain amount. This caused two things:

1) it encouraged people to give up work to avoid paying more into the pension above this limit (encouraged some occupations more than others)

2) it was a disincentive for some people to make pension contributions at all, based on an erroneous understanding of the way it works.

Because the lifetime limit was not being lifted by inflation, and with inflation at the current high levels, the number of people liable was getting progressively and exponentially larger each year.


The annual limit on pension contributions remains, albeit at a higher level, and effectively means the lifetime limit is now in the region of £2m - £3m, although you’ll be hard pushed to find anyone contributing £60k per year into their pension whilst in the first decade of their career.

Agreed. Any the full £60k annual limit only applies if your taxable earnings are less than £260k in which case you probably can't afford to put that much in anyway....

 

[Hadders]

It isn’t a bung for high earners. Before yesterdays announcement it was the exact opposite - an additional charge (of up to 55%) on pensions above a certain amount. This caused two things:

1) it encouraged people to give up work to avoid paying more into the pension above this limit (encouraged some occupations more than others)

2) it was a disincentive for some people to make pension contributions at all, based on an erroneous understanding of the way it works.

Because the lifetime limit was not being lifted by inflation, and with inflation at the current high levels, the number of people liable was getting progressively and exponentially larger each year.


The annual limit on pension contributions remains, albeit at a higher level, and effectively means the lifetime limit is now in the region of £2m - £3m, although you’ll be hard pushed to find anyone contributing £60k per year into their pension whilst in the first decade of their career.

I agree with all of this.

Labour would do well to remember that the biggest pension raid of all time was introduced by Gordon Brown in 1997 when he restricted the dividend tax relief that pension funds received on their investments. It’s estimated that this cost 9pension funds £5bn a year.

 

[brad465]

I agree with all of this.

Labour would do well to remember that the biggest pension raid of all time was introduced by Gordon Brown in 1997 when he restricted the dividend tax relief that pension funds received on their investments. It’s estimated that this cost 9pension funds £5bn a year.

It didn't exactly cost Labour electorally though, as they went on to win in 2001 and 2005, suggesting it wasn't a big issue then (or at least not the biggest). Much like everyone mocking Brown for selling off gold at a historical low price, this was in his first term and didn't have a negative political impact, except in hindsight after the 2008 GFC. It's possible Labour have made a bad judgement call here, but it's also possible that their target voters (swing voters in swing seats) disapprove of the lifting of the pension cap (or are no more than apatheic to it), and unlike under Corbyn they have been trying a lot harder to appeal to swing voters recently.

 

[Broucek]

It's possible Labour have made a bad judgement call here, but it's also possible that their target voters (swing voters in swing seats) disapprove of the lifting of the pension cap (or are no more than apatheic to it), and unlike under Corbyn they have been trying a lot harder to appeal to swing voters.

It's clear from here and elsewhere that most people don't understand how the (extremely complicated) pensions tax regime works and the unintended cosequences that it creates (and why should they?). "Person with £1m pension" sounds like someone with 3 homes and a helicopter, rather than someone in the public/para-public sector with long service and a £80k ish salary...

 

[Ediswan]

Why should doctors be treated differently? What about other jobs and professions like train drivers, headteachers, supermarket managers, electricians etc.

I recall this being discussed on R4 a few years ago. If I recall correctly, there is something specific to the way their NHS pension scheme works which can make the effective marginal tax rate on extra hours worked close to (over ?) 100%. For whatever reason, the same problem does not apply to other high earners. If I can find the details, I will provide an update.

 

[Bald Rick]

It's clear from here and elsewhere that most people don't understand how the (extremely complicated) pensions tax regime works and the unintended cosequences that it creates (and why should they?). "Person with £1m pension" sounds like someone with 3 homes and a helicopter, rather than someone in the public/para-public sector with long service and a £80k ish salary...

Indeed. I know many people who would have been caught by this, most of whom had no idea that they would be until I told them. In addition to people I work closely with, this includes train drivers, driver managers, operational controllers, engineers; and outside the industry (amongst others) middle managers in medical research, healthcare, IT, local authorities, events management, logistics, telecoms… and a dentist.

I recall this being discussed on R4 a few years ago. If I recall correctly, there is something specific to the way their NHS pension scheme works which can make the effective marginal tax rate on extra hours worked close to (over ?) 100%. For whatever reason, the same problem does not apply to other high earners. If I can find the details, I will provide an update.

The basics are in another thread, which I shall now dig out. EDIT: Point 2 is the issue.

Those options are not available to doctors in the NHS.

1. Their pension scheme is defined benefit, not defined contribution, so their benefits bear no relation to what they put in. This is unlike most current private sector schemes;
2. Their contributions are based on tiered contributions with the percentage based on total pay - so in some cases a £1 pay rise can mean several hundred pounds of additional pension contributions, with no benefit;
3. Their scheme is mandatory - it is part of the terms and conditions of the job.

The absurd way that governments over the years have set up the NHS pension scheme, and the issues within it, are usually conflated with the standard pension scheme taxes and reliefs, which themselves are as stated by others above, and are (to a large extent) more sensible, and lead to more options.

 

[Richardr]

It should be said that there was a separate consultation announced this week to mitigate some of the specific issues with the NHS pension scheme:

https://www.gov.uk/government/consu...anges-to-nhs-pension-schemes-regulations-2023

The changes to the lifetime allowance will make little change to the numbers who remain in work - the OBR calculate it will keep 15,000 people in work - no more than a rounding error.

The biggest incentive for people not working at that age is the ability to take a quarter of their pension pot out tax-free from the age of 55 (age can vary for a few job types).

 

[Hadders]

When the lifetime allowance was introduced in 2006 many people would not have realised the impact. People at that time with large pension pots or those approaching retirement were protected by transitional arrangements (protection) so the impact on them was limited. What has happened since the lifetime limit was introduced is that people who didn't think it would affect them are now closer to retirement and suddenly realise this is a big issue. £1.073 million sounds a lot but it really isn't and if nothing had been done fiscal drag would mean many middle earners would get dragged into paying tax of 55% on pension pots above the £1.073 million lifetime allowance.

When you access a Pension Pot you can normally take 25% of it's value tax free. The Lifetime Allowance is remaining in place as far as this is concerned so the maximum tax free amount of cash anyone will be able to take is £268,250 (25% of the current Lifetime Allowance of £1.073m). This is not going to increase.

What is being abolished is the punitive tax charge of 55% on the value of a Pension Pot above £1.073 million. When you take this money out of your Pension Pot it is treated as income during the year you take it out so you still have to pay tax on it at your marginal rate.

 

[jfollows]

When the lifetime allowance was introduced in 2006 many people would not have realised the impact. People at that time with large pension pots or those approaching retirement were protected by transitional arrangements (protection) so the impact on them was limited. What has happened since the lifetime limit was introduced is that people who didn't think it would affect them are now closer to retirement and suddenly realise this is a big issue. £1.073 million sounds a lot but it really isn't and if nothing had been done fiscal drag would mean many middle earners would get dragged into paying tax of 55% on pension pots above the £1.073 million lifetime allowance.

When you access a Pension Pot you can normally take 25% of it's value tax free. The Lifetime Allowance is remaining in place as far as this is concerned so the maximum tax free amount of cash anyone will be able to take is £268,250 (25% of the current Lifetime Allowance of £1.073m). This is not going to increase.

What is being abolished is the punitive tax charge of 55% on the value of a Pension Pot above £1.073 million. When you take this money out of your Pension Pot it is treated as income during the year you take it out so you still have to pay tax on it at your marginal rate.

It's very messy and vastly complicated. I have FP16 protection which gave me a lifetime allowance of £1.25m, and the lifetime allowance has now been scrapped, but the FP16 protection also limits my tax free cash to £312,500 (assuming other limits are not relevant) so I presume this higher limit will remain for me and not the £268,250 figure. It's unlikely that I'll exceed the latter, but it's not impossible - I'll be taking my maximum amount of tax free cash in October 2024.
Years of fiddling and tinkering with the tax regime on pensions has been to blame for where we are today, and politicians love to fiddle with these things. It's then exacerbated by the inept HMRC, primarily as a result of lack of investment in people and IT over recent years. So I try to keep on top of the legislation and its repercussions on me personally because I don't trust HMRC to get it right at all. Oh well.

EDIT The Times on Saturday 18 March confirms my inference that the tax free cash limit for people taking out FP16 will remain at £312,500.

 

[Richardr]

Of course when first introduced in 2006 the lifetime allowance it was £1.5m and rose over the next five years to £1.8m. The government gradually reduced it to £1m, then increased it by inflationary increases to the exiting £1.07m, and now proposes to eliminate it entirely.

The constant changes and ups and downs to the parameters and tax treatment of pensions [of which this is just element] even by the same government means that people do not trust that it will remain as today, and is another incentive to take the tax free lump-sum before the treatment of that is changed.

 

[jfollows]

Of course when first introduced in 2006 the lifetime allowance it was £1.5m and rose over the next five years to £1.8m. The government gradually reduced it to £1m, then increased it by inflationary increases to the exiting £1.07m, and now proposes to eliminate it entirely.

The constant changes and ups and downs to the parameters and tax treatment of pensions [of which this is just element] even by the same government means that people do not trust that it will remain as today, and is another incentive to take the tax free lump-sum before the treatment of that is changed.

Agreed, and this brings me to two points:

1. The 2006 lifetime allowance of £1.5m, followed by "indexation" to £1.8m and then to around £2.4m today would seem reasonable to me, it's the Conservative government which has reduced it over time to raise more tax.
2. The likely reintroduction of the lifetime allowance by the likely Labour government is going to make many people retire before this happens, which is the opposite effect of what its abolition is claimed to achieve today.

 

[BrianW]

My 'take' is that Covid, and the fear built around it, reminded many of us 'useless old gits', 'confined to barracks', of the fragility of life- each day could literally be our last. Better to enjoy life while we can and SKI (spend kids' inheritance). More 'leisure travel' if only the trains were more reliable ...

 

[najaB]

My 'take' is that Covid, and the fear built around it, reminded many of us 'useless old gits', 'confined to barracks', of the fragility of life- each day could literally be our last. Better to enjoy life while we can and SKI (spend kids' inheritance).

And I really can't see anything wrong with that at all. And that's as one of the kids whose parents are currently spending any inheritance - they're off on another cruise in a few weeks!

 

[Broucek]

Of course when first introduced in 2006 the lifetime allowance it was £1.5m and rose over the next five years to £1.8m. The government gradually reduced it to £1m, then increased it by inflationary increases to the exiting £1.07m, and now proposes to eliminate it entirely.

The constant changes and ups and downs to the parameters and tax treatment of pensions [of which this is just element] even by the same government means that people do not trust that it will remain as today, and is another incentive to take the tax free lump-sum before the treatment of that is changed.

Possibly my single biggest criterion in making decisions on pensions and investments is political risk...

Thankfully, I work somewhere where I can pull the trigger on pension without stopping working.

Whilst possibly bad for me personally, I've always thought that there should be a limit on the tax free lump sum...

 

[westv]

Whilst possibly bad for me personally, I've always thought that there should be a limit on the tax free lump sum...

There is now. It will remain at a max of 25% of the current LTA.

 

[Howardh]

My 'take' is that Covid, and the fear built around it, reminded many of us 'useless old gits', 'confined to barracks', of the fragility of life- each day could literally be our last. Better to enjoy life while we can and SKI (spend kids' inheritance). More 'leisure travel' if only the trains were more reliable ...

Hobson's choice, spend now in case you die and then you stay alive without much cash for the rest of your life! I suppose once you have money tucked away in pensions and that gives you enough for your old age, then your savings can be spent without worry. However there are those who use savings interest as a top-up, useless when rates were rock bottom, but very handy now they have reached 4% or higher again.
Two years ago I got 0.6% on a savings bond, paltry rate but inflation was almost zero as were the bank rates. I now get over 2.5%, so my "income" has risen by nearly five times.When they mature I could get 4.5%, again my income nearly doubling. However the capital's value is reduced by inflation of course!!