Potential ISA Limits

[thebarns]

I asked a couple of people I know with defined benefit pensions, plus the replies on here, plus some more digging on Google……

And I think it is unlikely/rare for any lump sum to be paid/remain with the estate of a deceased defined benefit pension member, once they have started drawing their pension.

So this does appear to be the opposite to a defined contribution pot.

A pot will remain on death of a defined contribution scheme - this currently can be inherited tax free by the recipients if the deceased dies pre 75 and if post 75, the recipients can receive a lump sum/income at their own marginal rates of income tax.

So I think all relatively clear re the distinction between the two types of pension scheme.

Broadly and simplistically, the defined contribution pension pot belongs to the deceased’s estate, whereas the defined Benefit pot doesn’t actually belong to the deceased, it really belongs to the total defined benefit pension scheme, of which the member was just one tiny part.

Taken to the extreme the defined benefit pension scheme, which by and large pays out more generous pensions than an equivalent defined contribution pot can manage, is effectively using the run down of the overall capital of the scheme to afford more generous terms, whereas the instinct of most with their own defined contribution pot would be to maintain the capital as far as possible, at the expense of a smaller income drawdown.

In an ideal world as defined benefit pension schemes get smaller and smaller as members die and no new entrants are allowed, then the actuary/trustee should be trying to run down the assets as members reduce to the last member standing, and thus have paid out capital as well as income along the way.

[scrumpyjack]

Rather OT for an ISA thread, but just to clarify: there is no 'pot' for a defined benefit pension. There is simply a liability for the pension fund to make pension payments over the years in accordance with the terms of the scheme. What assets may be held by the scheme does not affect that liability and the pensioner has no right other than to receive the specified future stream of payments. So in that respect it is totally different to s DC pension. To compare the DB pension value with the LTA an arbitrary multiplier of 20 x the annual pension is used (which is usually a gross underestimate of what that pension right would cost to buy on the market), but again there is no 'pot' of assets belonging to an individual pensioner.

Compared to the capital values of pensions, a limit on ISAs of 100k would be extremely harsh, if such a comparison is valid.

[Lootman]

Rather OT for an ISA thread, but just to clarify: there is no 'pot' for a defined benefit pension. There is simply a liability for the pension fund to make pension payments over the years in accordance with the terms of the scheme. What assets may be held by the scheme does not affect that liability and the pensioner has no right other than to receive the specified future stream of payments.

For a public sector DB pension plan, do any such assets exist?

Or is it like the ponzi state pension plan where contributions go to pay to current pensioners, and the idea of a "fund" or "assets" is a myth?

[scrumpyjack]

Rather OT for an ISA thread, but just to clarify: there is no 'pot' for a defined benefit pension. There is simply a liability for the pension fund to make pension payments over the years in accordance with the terms of the scheme. What assets may be held by the scheme does not affect that liability and the pensioner has no right other than to receive the specified future stream of payments.

For a public sector DB pension plan, do any such assets exist?

Or is it like the ponzi state pension plan where contributions go to pay to current pensioners, and the idea of a "fund" or "assets" is a myth?

I think some do and some don't have a specific fund of assets. Certainly for the state pension there is no fund. But HMG can always meet such liabilities by raising tax or borrowing and in the case of the state pension they can decide each year how much to pay (which could be nothing). I don't think us state pensioners have any right to specific future amounts of pension. The amounts are simply what parliament determines from year to year.

[JohnB]

The state pension comes from the ring-fenced National Insurance Fund, https://en.wikipedia.org/wiki/National_Insurance_Fund

I think of a DB pension is like an annuity, the scheme combines the actuarial data for all members to ensure the scheme can afford to pay out, and the host organisation tops it up when needed (or weasels out of its obligations...)

Pensions should be like annuities, they pay income during retirement. When you die your retirement stops!

[scrumpyjack]

The state pension comes from the ring-fenced National Insurance Fund, https://en.wikipedia.org/wiki/National_Insurance_Fund

I think of a DB pension is like an annuity, the scheme combines the actuarial data for all members to ensure the scheme can afford to pay out, and the host organisation tops it up when needed (or weasels out of its obligations...)

Pensions should be like annuities, they pay income during retirement. When you die your retirement stops!

A big problem is that the present actuarial value of a large number of future pension liabilities can vary hugely as assumptions about future inflation and interest rates change. So a scheme can go from being overfunded to having a large deficit in a few years without the employer having done anything naughty. I think that is what happened to the BHS scheme (Philip Green!). That is why having a DB scheme is a massive and unwise risk for an employer.

[mc2fool]

Broadly and simplistically, the defined contribution pension pot belongs to the deceased’s estate...

No, it (normally) does not belong to the deceased’s estate, it (normally) belongs to a discretionary trust, which is the way most DC pension schemes are set up. It's because it (normally) isn't part of the estate that it's not subject to inheritance tax.

[thebarns]

I appreciate this is not really on the opening topic of ISA limits, though there is some tenuous linkage when looking at comparative benefits/limits/amounts as they apply to both defined befit and contribution schemes as most people will rely on one or a combination of the three for their retirement.

One other thing that I don’t think should be underestimated when comparing the very favourable terms and benefits of a defined benefit pension scheme versus say both defined contribution pensions and share Isas.

Defined benefit pension schemes are managed by a combination of actuaries, trustees, investment managers and have potential access to further emergency funding from sponsoring companies/government funding etc. There is virtually no work/stress/knowledge/risk involved for the recipient of the defined benefit pensioner.

Contrast that to the recipient of a defined contribution pension or someone managing share iSAs for their retirement - it is only a tiny percentage of the population, most of whom are on boards like these, that have a passing knowledge/interest/ability to vaguely understand how to properly manage and drawdown on said defined contribution pension pot or shares ISA. There is great potential for unintentional mistakes in the management of these pots, such that does not exist with a defined benefit pension.

By and large the defined pension recipient will get their, say, £20-€30k pension, index linked, which will increase year on year, with absolutely no risk/management/involvement by he recipient.

The same person relying on a defined contribution pot or share ISAs will need to manage a fund of, say, £700-£800k ish, know what they are doing and try and increase that income each year to keep up with inflation.

[JohnB]

But DB schemes are susceptible to fraud and hollowing out, changing the rules post-hoc, or having constraints (like capped inflationary rises) that don't appear to matter until they do. A friend with a Debenhams DB pension seems unconcerned, not sure I would be.

[SebsCat]

But DB schemes are susceptible to fraud and hollowing out, changing the rules post-hoc, or having constraints (like capped inflationary rises) that don't appear to matter until they do. A friend with a Debenhams DB pension seems unconcerned, not sure I would be.

The Pension Protection Fund offers a decent level of protection for cases of individual scheme fraud or failure. It's questionable how the PPF could possibly have covered a systematic failure such as might have occurred due to liability driven investments last Autumn, but I suspect that the government would step in at that point. That said, government involvement would become less likely over time as DB pensions are wound down and there would be increasingly less political pressure for action.

[scrumpyjack]

But DB schemes are susceptible to fraud and hollowing out, changing the rules post-hoc, or having constraints (like capped inflationary rises) that don't appear to matter until they do. A friend with a Debenhams DB pension seems unconcerned, not sure I would be.

The Pension Protection Fund offers a decent level of protection for cases of individual scheme fraud or failure. It's questionable how the PPF could possibly have covered a systematic failure such as might have occurred due to liability driven investments last Autumn, but I suspect that the government would step in at that point. That said, government involvement would become less likely over time as DB pensions are wound down and there would be increasingly less political pressure for action.

I gather HMG made a £3.5 bn profit out of the LDI panic, the cost being borne by the pension fund forced selling at low prices
https://www.bloomberg.com/news/articles ... f=mwlrlP7l

[AF62]

I asked a couple of people I know with defined benefit pensions, plus the replies on here, plus some more digging on Google……

And I think it is unlikely/rare for any lump sum to be paid/remain with the estate of a deceased defined benefit pension member, once they have started drawing their pension.

The civil service pension DB scheme will pay a lump sum if someone dies within five years of retiring, but it is the difference between what they would have received in five years and what they had already received by way of pension between retirement and death.

https://www.civilservicepensionscheme.o ... -benefits/

That is in addition to the survivor’s pension.

[Alaric]

The civil service pension DB scheme will pay a lump sum if someone dies within five years of retiring, but it is the difference between what they would have received in five years and what they had already received by way of pension between retirement and death.

That's sometimes expressed as a minimum annuity payment period of 5 years. It is or was a common feature of defined benefit schemes, or for that matter annuity purchases under pension rules.

[yorkshirelad1]

Sharesoc article
"Proposals on Limiting ISAs"
Published 2023-01-24 23:20:58
https://www.sharesoc.org/blog/taxation/ ... ting-isas/

(I have no connection with sharesoc other than as a member)

[Alaric]

Sharesoc article
"Proposals on Limiting ISAs"
Published 2023-01-24 23:20:58
https://www.sharesoc.org/blog/taxation/ ... ting-isas/

From the article

I struggle to justify such large tax incentives that only the super wealthy can fully utilise.

It's easy enough to raise the funds to meet the £ 20,000 annual contribution if there's wealth outside tax shelters. You just sell enough in a taxable account to transfer, It isn't necessary to be "super wealthly". Anything taxable above £ 20,000 in value is enough.

[GeoffF100]

Sharesoc article
"Proposals on Limiting ISAs"
Published 2023-01-24 23:20:58
https://www.sharesoc.org/blog/taxation/ ... ting-isas/

From the article

It's easy enough to raise the funds to meet the £ 20,000 annual contribution if there's wealth outside tax shelters. You just sell enough in a taxable account to transfer, It isn't necessary to be "super wealthly". Anything taxable above £ 20,000 in value is enough.

I have a taxable income of about £40K, and can afford to put £20K into an ISA out of that income. That does not make me "super-wealthy". My income is just a little above the average, and I do not spend much.

[scrumpyjack]

... I struggle to justify such large tax incentives that only the super wealthy can fully utilise.

I thought they were talking about civil service DB pensions for a moment

[GeoffF100]

... I struggle to justify such large tax incentives that only the super wealthy can fully utilise.

I thought they were talking about civil service DB pensions for a moment

I did not write that.

[scrumpyjack]

I thought they were talking about civil service DB pensions for a moment

I did not write that.

Apologies but posts get so so long if not chopped down and so I put the ... there to indicate the surgery!

[1nvest]

There are only 1,480 ISA millionaires according to HMRC who disgorged the information in response to a FOI request

https://ifamagazine.com/article/hmrc-th ... olatility/

Hardly worth fiddling with as there are so few. It surprised me that 40 of these have ISAs worth £4m + (average £7.9 million !)

There are trading means to migrate funds - such as from SIPP into ISA PV (click the assets tab/button and imagine SIPP=SDS, ISA=SSO).

Pretty sure there are many more millionaires who hold tax exempt portfolios but not solely within ISA due to the other taxation risks so doing entails (IHT).

Restricting SIPP's/LTA just reduces GDP. The 1% that pay a third of the income tax take just find alternatives, even if that means flight of capital to elsewhere that "isn't punitive". Such flight would just leave the rest having to find/pay 50% more in taxes to fill the hole. Better instead to double or even treble that 1% set. But that's a historic UK issue, critique the successful, push money/investment away. The US do the opposite to good effect/benefit. US citizens for instance can pass on in excess of $10M without any inheritance tax (Estate Duties). If you retain wealth across generations then the children are more inclined to have their education and medical care funded privately, spend lots (so pay taxes in other ways) ...etc.