Strange logic - losing out because tax rate drops from 22% to 20%

pension

But the reduction in basic rate tax is being made up for by the 10% abolition and NI rises.

No, IIRC anyone earning between about 8000 and 18000 will end up paying more income tax, and getting less pension tax relief.

So that's a problem with what the pension is invested in, not with pensions as a financial instrument.

The only reason he did was the fear of abuse, either intentional or due to misunderstanding. Eg some people were daft enough to think they could use the SIPP to buy a second property which they could use as a holiday home etc.

Don't forget to deduct the tax on this income and the CGT on the eventual disposal to help level the playing field.

And anyway, 21/2 years is nowhere near enough time to make a proper judgment of one investment over another.

Rob Graham

Some people were daft enough to think that it would beneficial to put their first house in one. I remember at least two people asking about it here.

And back to your other point, some *advisors* were daft enough to think that it was going to be worthwhile putting a holiday home in one. That's how badly HMG realised that they were going to be sold.

tim

Agreed. So as well as the non-earners, anyone who is paying enough into their pension to be paying in the earnings taxed at 10% will also be worse off. But that's (mainly) not as a result of the basic rate of income tax changing to 20% but because the 10% band is being abolished.

I can understand the first part of that but not the second. Why does someone earning 18000 pa who was paying 100GBP gross into their pension end up worse off due to receiving less tax relief on their pension

That is true, although I can only go with one pension provider if I want to collect my employers contribution.

I think he was also worried about people in my situation as well - let property with no mortgage on it. I put the property into a SIPP and immediately get 40% of its value back in cash. The following year I buy another property and put that into the SIPP so now I've two properties and the second property has only cost me 20%. (Yes I know there are income limits on pension contributions)

I don't know what the tax position of the income from the property would then become. Obviously it would have to stay in the pension but I guess it would then not be subject to tax. This wouldn't work for people who are using the income for something but I hold property as another string of my long term retirement planning. My biggest worry would be the minimum age for taking a pension being put up again.

Tim.

But if the property was in a pension then that woudn't apply

That is true but I'd still be better off now (excluding employer contributions) if I'd just put my pension contributions net into a high interest savings account and then used them today to buy the pension pot that I have.

I remember a few years ago there was a share dealing competition. I can't remember the details but a bunch of school kids managed to beat all the expert fund managers. And their technique was to jump in quick on every bit of news and ride it up and then sell again pretty quickly. I remember one commentator saying that although they'd won some other fund manager was much better positioned for the future. But the school kids could now follow exactly the same strategy as he would and they'd be starting with a bigger pot.

Tim.

Indeed. But it's no proof that their system works. In any competition like this where winning is all, and there is no difference between finishing 2nd or last, you have to take the biggest risks, otherwise you cannot possibly win. Sometimes, if you take the biggest risks, your gambles come off and you win as the schoolkids did, and you get all the fame and glory. If they don't come off, as is usual, you lose heavily, but there are no consequences. You're never heard of again and it doesn't matter.

'Expert fund managers' cannot afford to gamble all on the biggest risks because there is a real difference to their clients (or to their reputations if it's just notional) between finishing 2nd and last. Such competitions will therefore always be won by a lucky gambler.

As an analogy, most clients would prefer their expert fund manager to put half their money on red and half their money on black rather than all on no

1. However, if you have a large number of competitors, those who have put all their money on 18, or whatever number comes up, will win. Most of them, though, will lose.

"Norman Wells" wrote

What would be the point in that? If either red or black come up, the client is just *even*. But if Zero comes up, then the client loses everything.

"Norman Wells" wrote

The "expected return" will be the same as the red/black 50:50 situation, but here the client could come off *much* better (if 18 comes up)...

Could such competitions be designed so as to weed out the extreme risk-takers, perhaps by making the contestants apply their strategies in parallel to 10 different market sectors, and by selecting the *worst* of the each team's results for comparison with the other teams?

Ignore zeros. It's just an analogy

But there's a 35 in 36 chance that the client would lose everything if it's just a one-off bet, so the 'expected' return is in fact zero.

If you're saying that you would make many bets on no 18, not just one, then that's just the same as covering all the individual numbers equally on one spin of the wheel, or of betting on both black and red simultaneously. Then the return will equal the outlay, no-one will complain much, and the person making the play will remain safely in the middle of the field. And that's the 'expert' fund managers comfort zone. If they gambled at odds of 36 to

But there's no fun in that. What you want is the headline 'Schoolkids beat experts', even if that is in fact inevitable.

It's no proof that their system will continue to work. Past performance and all that. But this wasn't a one off lucky buy that they did. It was repeated multiple times during the competition. They were making consistent small gains.

Tim.

And there were headlines from clueless journalists describing it as the "tax break of the century" or similar! It was never any more of a tax break than any other form of pension investment.

abolished.

Yes, and also as below....

Because the abolition of the 10% band will cost them more than the 2% reduction in the basic rate saves them. Then when it comes to pension tax relief, their 100 gross contribution will cost them 80, whereas now it costs them 78.

So like I said, more income tax, less pension tax relief.

because I

otherwise

savings

But you could put your own contributions elsewhere presumably.

disappointed

Only if your earnings are so high that the value of the property is covered by the amount of earnings you pay 40% tax on, ie you earn the value of your property plus about 40,000 pa.

In any case it wouldn't work quite like that, the SIPP would reclaim basic rate relief on your "contribution" and you'd claim HRT relief via your tax return.

properties

It's no different to making any other kind of contribution to the SIPP. You could say the same about any sort of investment you transfer into a pension. If you've got 100,000 in an ISA and transfer that into the SIPP the same applies. Same if you've got a pile of cash. Except it'll be easier to maximise the tax relief when you can transfer into the SIPP in bits, which may be hard with property.

Exactly like income from other pension investments.

It's unlikely. Not in the next few decades anyway.

You clearly don't use the same definition of "expected" as Tim does. The expected return is in fact the amount of the stake, not zero.

Even with only one spin of the wheel, the expected return is still the same, despite the fact that, *informally*, you would not expect to win at all, and therefore it doesn't matter how much you would win if you did, and therefore you would expect to lose everything.

This is because *formally* "expected return" is a technical term in statistics, defined as the sum, over all possible outcomes of the one spin, of the return of that outcome multiplied by the probability of that outcome.

So, ignoring zeroes, the expected return is the probability of 18 coming up (which is 1/36) times the return from 18 coming up (which is 36 times the stake), which equals the stake, plus 35 other terms which are all equal to zero times 1/36.

"Ronald Raygun" wrote

Wouldn't that just flip it from the likelihood of the winner being an extreme risk-taker, to the likelihood of the winner being an extreme risk-free player?

But surely it is meaningless to consider the net equivalent of the gross cost of the pension contribution. Someone earning £18k pa gross, and contributing £100 pm (£1200 pa) of that into a pension, simply gets taxed on a notional income of £16800. That the £1200 pension contribution has notionally "cost" him less net than it soon will, is really neither here nor there, is it?

Of course, but that's exactly my point. Cover all the bases by betting on

You will only win a competition, however, by gambling, and that involves too much risk for the average investor for whom an 'expert' invests. Anyone who makes a high return is a gambler, and any gambler can win over the short term. Over the longer term, they do not survive.

pension

whereas

Of course it is. That's how much the pension contribution has cost him, either directly (if he makes a contribution into a personal pension), or indirectly (if it's deducted from his pay, it's the pay he would otherwise have received).

"Norman Wells" wrote

Then it's a poor one! Betting on both red & black on the same spin (using a wheel with no zeroes), again & again, is like the fund manager continually actively working to make sure nothing happens -- 100% likely to stay the same. If s/he wanted that outcome, isn't it easier not to place any bets at all?

"Norman Wells" wrote

I refer you to RR's post : Expected value:- = [(35/36) x 0] + [(1/36) x 36S] = S, where S is the stake.

"Norman Wells" wrote

Err - NO, it's not. Simultaneously covering all possibilities on each spin (eg either covering all numbers -OR- both colours), will ensure your "wealth" always stays constant (exactly the stake is always returned).

But making many bets on 18 will ensure your "wealth" either increases (a lot) or decreases (a little) on each spin. That's inherently very risky!

"Norman Wells" wrote

Only if you cover all bases on *each* spin!

"Norman Wells" wrote

That's *exactly* what they'd be doing, if they "... made many bets on no 18" !!