Unsually for them, the Telegraph* have published an article largely based on facts and logic rather than their own hysterical view of the world.
Example: how public-sector workers could find themselves hit with an unexpected tax charge:
• Mr Smith been a member of his [final salary] pension scheme for 30 years. He builds up 1/60th of his final salary for each year he is a member of the scheme. His salary at the beginning of the year is £55,000, which increases to £60,000 at the end of the year as he has been promoted.
• So at the start of the year he is on track to retire on a pension of £27,500 – which is 30/60ths (or a half) of £55,000. With most pension schemes this is now revalued in line with inflation (as measured by the consumer prices index), so it will be worth £28,188.
• But at the end of the year his pension is now set to be £31,000 (which is 31/60ths of his new salary, £60,000). This means that his pension will have increased by £2,812 over the course of the year (that is, £31,000 minus £28,188).
• In order to calculate the equivalent amount that would have to be invested in a notional fund to produce this kind of increase, this increase in pension is multiplied by 16. This gives an annual pension “contribution” of £44,992 [16 x £2,812], which will be above the new annual limit of £40,000.
• This means that this teacher or doctor would face a tax charge on the excess. In this case it would be a £1,997 tax bill (40pc of the £4,992 by which he is over the threshold).
Please note, the public sector worker in question has received a nine per cent pay rise, which seems very generous.
And, I think, that is the whole point of this tax charge (which the last Labour government invented, the Tories were bold enough to increase the multiple from 12 to 16), it's not really on the pension at all, it is there to discourage public sector workers on already good salaries from awarding themselves even better salaries.
But it is still worthwhile giving yourself a hefty pay rise, in the above example, Mr Smith is little better off in the first year (extra £5,000 salary minus 42% tax and NIC minus £1,977 tax on pension), but so what? In future years he will be a lot better off. Maybe they should increase the multiple to 40, which implies an annuity rate/return on pension assets of 2.5%?
* Emailed in by MBK.
Sunday 9 December 2012
Good bit of maths in The Telegraph
Subscribe to:
Post Comments (Atom)
10 comments:
I agree with the 40 multiple for State employees pensions as they are notionally funded by Index linked gilts which give about a 2.5% return...I bet that'd make me popular if I was in power...which clearly I am not.
L, so you'd agree with a multiple of 40, implied yield 2.5%?
That must be the correct answer, mustn't it, in which case our public sector worker in the example would end up with a tax bill of £29,000-odd.
So he would probably turn down pay rises for the rest of his career, job done!
Whay hay! Result.
I've been banging on about that for years. But, as its the same entitlement seekers (aka rent seekers) that set the rules it doesn't get me anywhere.
What also worries me is that most of my peer group have no bloody idea at all about all this. Which is what I suppose you'd expect since they can charge high fees for interpreting the 'word of god'. It's a giant scam.
L, it is indeed a scam, but somebody somewhere and somewhen will have to pay for it... oh, that would be the under-40s...
MW - I keep telling my children that (ages 22 to 31). I can tell you that they are not happy...
L, ta, tell them to sign up to YPP and stand in next year's local elections, it doesn't actually cost anything (£80 for leaflets if you can be bothered delivering them).
My youngest is an argumentative child (wonder where she gets that from...?) and would do well in politics. I'll give her a nudge.
I've wondered about public pensions since the autumn statement, thanks for clarifying it. I had worried that state sector staff would avoid the tax by not have an actual pension pot so I am please they do not.
Apparently a relatively recent change is that (some) public sector employees have their pension "contribution" printed on their pay slip so they can see how incredibly generous the rest of us are.
BE
"Apparently a relatively recent change is that (some) public sector employees have their pension "contribution" printed on their pay slip so they can see how incredibly generous the rest of us are."
I doubt it. When I was in the civil service, one of the gripes was that, because our pension was non-contributory, our gross pay was smaller than if it had been contributory (as the gross would have included the pension contributions) and this affected our ability to borrow money on a mortgage, because the maximum amount was calculated on a multiplier of gross pay.
Post a Comment