Business & Investment

Private sector pensions that are more taxed than the public sector system

According to a Moneymail survey, private sector workers receive only half the amount of pensions they receive before they are fined.

The lifetime allowance determines how large the pension pot can be before the saver has to pay taxes on the contribution.

With a cap of around £ 1.07 million, workers face a 25% tax bill on savings that exceed that limit. There is also a regular income tax on the cash that comes out.

Bias: Private sector workers receive only half the amount of pensions that public sector workers receive before they are hit by a tax bill that punishes them.

However, tax deductions are far more for private sector workers who have simple pension pot savings than for public sector workers who have payroll-linked transactions known as defined benefit (DB) pensions. Will cause great damage to you.

This is because the way tax collectors calculate the value of salary-linked pensions is outdated. Since DB pensions are more than just a pot of money, HM Revenue and Customs will multiply the annual income paid by the scheme by 20 times.

This formula was devised before the introduction of lifetime allowances in 2006 and was based on the pension rate at the time.

Annuity is an insurance product that can be purchased from pension savings and guarantees an income rate until death.

However, interest rates have plummeted in recent years, making it difficult for savers to get much of their retirement savings.

According to MoneyMail calculations today, the 65-year-old Defined Contribution (DC) Pension Pot is now able to secure a pension that pays only £ 25,000 a year without violating lifetime allowances. Pensions will rise with inflation and will pay their partners income even after they die.

However, according to financial adviser William Burroughs figures, public sector workers were able to receive a pension that would pay £ 53,000 a year for the same benefit before violating the allowance.

By comparison, when the lifetime allowance was introduced 15 years ago, retirees were able to purchase £ 55,500 of pension income without being charged taxes.

Pension tax: Lifetime allowances are capped at around £ 1.07 million, and workers face a 25% tax bill on savings that exceed that limit.

Pension tax: Lifetime allowances are capped at around £ 1.07 million, and workers face a 25% tax bill on savings that exceed that limit.

Savers on payroll-based pensions could earn £ 75,000 a year without invalidating their allowances, which was £ 1.5 million.

Tom Selby, senior analyst at AJ Bell, said: ‘This is yet another example of the yawning division of the pension clause that exists between the private and public sectors.

“This habit of the rules means that members of defined benefits can enjoy up to twice the lifetime allowance of their defined contribution counterparts.”

Burroughs of the retirement planning project said: “Reducing lifetime allowances is now affecting more and more people, including not only fat cat directors, but also ordinary middle-class professionals and business owners.”

Survey results show that last week’s Money Mail earned more than £ 10 for public sector workers saving £ 1 on their pension plans, while private sector savers earned only £ 3. It is after revealing that there is no such thing.

Payroll pensions are provided by major public sector employers such as the NHS and civil servants. Still, they are rarely available in the private sector, where basic auto-enrollment pensions are standard.

The Treasury is reportedly considering reducing its lifetime allowance to just £ 800,000 to resolve the social care crisis and recover from a pandemic.

Prejudice: Lifetime allowances do far more damage to private sector workers who save simple pension pots than to public sector workers who make salary-linked “defined benefit” transactions.

Prejudice: Lifetime allowances do far more damage to private sector workers who save simple pension pots than to public sector workers who make salary-linked “defined benefit” transactions.

Reducing the allowance to £ 800,000 leaves DB workers with an annual pension of £ 40,000 and DC Saver with an annual pension of £ 18,500.

Former pension minister Baroness (Ross) Altman said: This is another example. It penalizes primarily private sector people who cannot hope to achieve as good a pension as public sector people.

Baroness Altman says the savings cap punishes people in the private sector who have saved hard and invested well, and people in the public sector have been granted generous pensions. She adds: “It’s one rule for them, one rule for everyone else.”

She says the move to further reduce allowances would be an “absolutely scary” policy decision.

Workers are no longer allowed to save up to £ 40,000 each year in their pensions before losing their tax exemption. Baroness Altmann suggests that this annual allowance should be the only limitation on DC savers.

Lifetime allowances peaked at £ 1.8m in 2011, but were gradually reduced before reaching a low of £ 1m in 2016. It has been frozen for 5 years now.

Figures released last week show that 7,130 savers violated their lifetime allowances in a year, up 1.4% year-on-year and handing HM Revenue and Customs £ 283 million, 5% more than last year. I will.

Jamie Jenkins, Head of Policy for Royal London, said: ‘When these calculations were first set, the pension rate was high and a £ 1m pension pot could have provided nearly £ 50,000 a year.

“But pension rates have fallen sharply in the last few years, which contributes to this anomaly.

If the lifetime allowance is further reduced, it is most likely to apply to both DC and DB pensions, unless the rules change, but this can be even more complicated for savers.

Nigel People, policy director of the Pension and Life Savings Association, said the discrepancy had no substantive effect, as few DC savers have reached a lifetime allowance.

He states: “Nevertheless, this is another good reason why the government should not reduce its lifetime allowance or actually reduce the level of financial support for pension savings.

“Most people, especially those with a defined contribution plan, don’t save enough for retirement, so they need more, less, but help.”

b.wilkinson@dailymail.co.uk

Top SIPPS for DIY Annuity Investors

Some links in this article may be affiliate links. Clicking on them may incur a small fee. This will help fund This Is Money and make it freely available. I have not written an article promoting the product. We do not allow commercial relationships to affect editorial independence.

Private sector pensions that are more taxed than the public sector system

https://www.dailymail.co.uk/money/pensions/article-9760995/Private-sector-pensions-taxed-harder-public-sector-schemes.html?ns_mchannel=rss&ns_campaign=1490&ito=1490 Private sector pensions that are more taxed than the public sector system

Back to top button