Pensions ISA = ROTH IRA

It looks like George Osborne is thinking about setting up a Pensions ISA where already taxed money is used to fund it, but the withdrawals are tax free. This looks just like a US ROTH account. I hope that this would qualify as a pension fund under the treaty the critical difference between it and an ISA is the withdrawal age limitation of 55.

http://www.theguardian.com/money/2016/mar/04/pensions-isa-what-is-the-chancellor-considering

I've been listening to the discussions on this on the BBC. All very interesting.

"Chancellor George Osborne has dropped plans to end or alter tax relief on pension contributions.

[.....]

The proposal to introduce arrangements similar to an Isa, with no tax relief on contributions but with withdrawals free of tax, would have given a significant short-term boost to the government at the expense of lower tax revenue later."

http://www.bbc.co.uk/news/uk-35732604

With the existence of the ISA the Pensions ISA struck me as a bit redundant. Before the UK tries more pension "reforms" it should make sure the last set of pension changes are actually being implemented and stop UK financial companies from taking liberties with their customers' money.

With the existence of the ISA the Pensions ISA struck me as a bit redundant. Before the UK tries more pension "reforms" it should make sure the last set of pension changes are actually being implemented and stop UK financial companies from taking liberties with their customers' money.

+1

I think the main reason behind the new pension ISA proposal was not the long term good of the individual but rather the bringing forward of when taxes are paid so that the budget can be balanced before the end of the current term as promised.  Removal of the tax relief on contributions was estimated to increase tax revenue by £20B/year

More uncertainties on this following todays Budget.

First, some general changes:
The personal allowance (£11,000 - 2016/17) to increase to £11,500 - 2017/18.
The 40p tax threshold (£42,385 - 2016/17) to increase to £45,000 - 2017/18.
The yearly ISA maximum contribution limit (£15,240 - 2016/17 to increase to £20,000 - 2017/18).
The capital gains tax has dropped, but not everywhere. (More info needed before discussing this.)

The New lifetime ISA
Whilst making clear that the 25% lump sum tax free amount on pensions would not go away, the Chancellor announced a new lifetime ISA which may include savings as a pension.

"From April 2017, any adult under 40 will be able to open a new Lifetime ISA. Up to £4,000 can be saved each year and savers will receive a 25% bonus from the government on this money.

Money put into this account can be saved until you are over 60 and used as retirement income, or you can withdraw it to help buy your first home."

The Guardian has also suggested:
"The Treasury says that like normal Isas it can contain a mixture of stocks and shares and cash."

Sooooo, the Chancellor referenced the US 401(k) plans when announcing this, but I see no comparison (tell me where I'm wrong, please). (ISA - taxed income in, tax free out; 401 - tax free income in, taxed income out). ISA - government top up of 25%, and age limits. ROTH w/ govt. contribution? Digestion time required.

http://www.bbc.co.uk/news/business-35820757

http://www.theguardian.com/money/2016/mar/16/what-is-a-lifetime-isa-budget-2016

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508117/Lifetime_ISA_explained.pdf




 

The Lifetime ISA has most in common with the ROTH IRA. The big difference is that there's no government match on a ROTH and there are income limits to the contributions. The fact that Osborne references the 401k plan which is a work place profit sharing scheme that has been co-opted to act as a retirement plan just confirms my opinion of the Chancellor.


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The personal allowance (£11,000 - 2016/17) to increase to £11,500 - 2017/18.
The 40p tax threshold (£42,385 - 2016/17) to increase to £45,000 - 2017/18.

Those comparative figures are actually 2015/16. For 2016/17 the personal allowance is £11,000 and the 40p threshold is £43,000.

It is not only tax rates, but the ease of savings and paying tax that is important. I thought one of the interesting things proposed in this Budget is a new pension's dashboard, described in the Red Book (https://www.gov.uk/government/publications/budget-2016-documents/budget-2016)

"Pension Dashboard – The government will ensure the industry designs, funds and launches a pensions dashboard by 2019. A pensions dashboard is a digital interface where an individual can view all their retirement savings in on place."

and 3.14 Understanding pension savings "As people work longer and change jobs more often, pension savings can become confusing. The average person will move employers 11 times over their working life, meaning they could end up with 11 or more private pensions by the time they retire. Research shows that over a third of people approaching retirement find it difficult to keep track of their pension pots. To help the next generation to clearly view their pensions savings, the government will ensure the industry designs, funds and launches a pensions dashboard by 2019. This will mean an individual can view all their retirement savings in one place."

It is also worth reading Section 4.11 Modernising tax collection, to read about the continuing plans for "Making Tax Digital programme", and extending HMRC customer service to 7 days a week.

I am not aware that the IRS has any similar initiatives in the pipeline. I guess it is that the IRS is more poorly funded, the US prefers privatized tax calculation and collection, it is a bigger country, and has the complication of 50 states.

Rather than a pensions dashboard I would prefer that the UK pensions were far more portable. The fees, structure and restrictive policies of UK pension firms is ridiculous. It's a hangover from the time of annuities. Now that the UK is moving to a DC approach and people change jobs far more an now have non-work related ways to save for retirement they must also be able to move their savings easily and without fees. Also the idea that people should pay someone to manage their money is hopefully being undermined by the increasing number of low cost index and balanced index funds.


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Also the idea that people should pay someone to manage their money is hopefully being undermined by the increasing number of low cost index and balanced index funds.

Agreed regarding portability. This is what one can partly do with a SIPP. I recently opened one with Interactive Investors, where the cost is just £96 per year. If I am unhappy, I can move it to someone else, albeit at a small admin charge. The money I put in will stay there for just a few years until I retire, and because of tax relief will return 20% p.a., net of tax, even if the capital sum does not grow. I am thinking that a very low volatility place to park it would be the iShares £ Ultrashort Bond ETF.

Those comparative figures are actually 2015/16. For 2016/17 the personal allowance is £11,500 and the 40p threshold is £43,500.

I knew I'd screw it up.   

The figures come from here:
https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2016-17/tax-and-tax-credit-rates-and-thresholds-for-2016-17#bands-of-taxable-income-and-corresponding-tax-rates

For 2015/16:
Personal Allowance: £10,600
40% threshold: (10,600 + 31,786) = £42,386

For 2016/17:
Personal Allowance: £11,000
40% threshold: (11,000 + 32,001) = £43,001 (I was wrong on this.)
Are you saying this is now changed to £11,500 for 2016/17? The BBC article says:
"Tax-free personal allowance, the point at which people pay income tax, to rise from £11,000 in April 2016 to £11,500 in April 2017"
I read that as £11,500 being for 2017/18. Get the Chancellor on the phone and tell him to post here for clarification!
http://www.bbc.co.uk/news/uk-politics-35819797

It is also worth reading Section 4.11 Modernising tax collection, to read about the continuing plans for "Making Tax Digital programme", and extending HMRC customer service to 7 days a week.

The last time I called HMRC there was no wait. After the 'talking menu', I got straight through. Now, if they could only have the computer recognise yearly (continuous) foreign pension income and not screw up the tax code. I know I'm a Luddite, but I really don't like doing all this online. I hate doing FBARs and was tempted to ignore the FinCEN site. I hope HMRC retain the ability to file by snail mail.

As regards UK pensions, I've now lost track of the options available. Agree on portability as well.

For 2016/17:
Personal Allowance: £11,000
40% threshold: (11,000 + 32,001) = £43,001 (I was wrong on this.)

Yes, that's correct. I apologise for my faulty correction. So compared to 2016/17 the personal allowance for 2017/18 moves up £500 and the 40% threshold moves up by £2,000. The effect for a higher rate tax payer is £300 more tax paid at the 20% rate, and £800 less paid at the 40% rate, for a savings of £500.

A bit off topic, but does anyone understand how the new UK £5,000 tax free dividends allowance will work in 2016/17? Suppose one has £6,000 of UK dividends, and £1,000 of US dividends, on which 15% withholding tax has been taken by the US. Will the UK tax bill be 0.325*(6000+1000-5000) - 150? That is, will one be able to take a credit for the entirety of the £150 US withholding tax? Or will it be a different computation?

If one has income in the range just above £100k, where the loss of personal allowance kicks in to create a 60% marginal rate, will this reduction in personal allowance be computed on total income, including all dividends (before exemption of the £5,000 tax free amount?) I assume so, which makes the effective marginal tax rate on the taxable dividends to be 32.5 + 20 %.

I've not seen these issues explained on any of the accounting web sites. Perhaps HMRC is still working this out.

Agreed regarding portability. This is what one can partly do with a SIPP. I recently opened one with Interactive Investors, where the cost is just £96 per year. If I am unhappy, I can move it to someone else, albeit at a small admin charge. The money I put in will stay there for just a few years until I retire, and because of tax relief will return 20% p.a., net of tax, even if the capital sum does not grow. I am thinking that a very low volatility place to park it would be the iShares £ Ultrashort Bond ETF.

They need to extend the portability to workplace pensions too. There are just too many types of UK pensions with confusing acronyms. The US system where a 401k (workplace DC retirement fund), or any other DC retirement fund, can be easily moved to an Individual Retirement Account (IRA) at a bank or investment firm is great. I've have a number of jobs all with 401ks, and each time I've change jobs I've moved the 401k into my IRA....so I don't need a "dashboard" as all my retirement funds are in one place.