In danger of hitting LTA

saver_ali · 8 March 2018 at 11:29PM

My husband is currently at 89% of LTA and I’m wondering if we should stop contributing to his SIPP. I’m worried that with reasonable growth he will soon exceed the LTA.

He is 59, and our current thinking is that he will retire in about a year from now, in around Spring 2019.

He pays £10k per year into his employer’s DC scheme.

We have also been putting £25k (£20k + £5k top up) into a SIPP for the last few years, to maximise tax relief as he is a higher rate tax payer.

34% of the LTA is from a DB scheme, forecast to be £17k pa, that he can take in January 2024, aged 65.

He has about £550k in a SIPP and various DC pensions.

We haven’t made the 2017-18 SIPP contribution yet, but are about to do so. Is this sensible?

And should we aim to do the same for 2018-19, which will be his last year in work.

[I am already drawing from a £12k pa DB scheme, and have £70k in a DC scheme. We focussed on paying into my husband’s pension as he was a higher rate tax payer.]

Thanks for any suggestions.

TcpnT · 9 March 2018 at 12:00AM

The first two questions that occur to me are:

What is his employers contribution to the company scheme and is your husband maximising it?

Are you still working and if so do you have relevant earnings that would allow him to contribute to your SIPP?

His fund would need to hit 660K to hit the LTA - that's a 20% increase on it's present value. the investment gain in a year is pretty unlikely to be that much so I think you are safe enough to make this years SIPP contribution and probably next years as well. Barring significant market falls in the next year that should fill his SIPP quite neatly. If you do go slightly over the LTA it's not the end of the world as it's only going to be a small tax charge - or you could leave the excess uncrystallised and worry about it in the future. Maybe the rules will change and one day you will be able to access it LTA tax free.

saver_ali · 9 March 2018 at 12:19AM

Thanks very much for the reply.

Yes, he's maximising his employer contributions in his current job. The £10k includes the company contribution.

I stopped working a couple of years ago, so can only contribute the £2880 pa to my SIPP.

The LTA has only become a worry since the stock market rises last year.

Brynsam · 9 March 2018 at 12:43AM

saver_ali wrote: »

The LTA has only become a worry since the stock market rises last year.

It's a worry a lot of people would like to have.

If the value of all of your pension benefits, across all schemes, exceeds the lifetime allowance, any excess attracts a tax charge of 25% if it is withdrawn as an income (for instance from an annuity or a drawdown arrangement) or 55% if it is withdrawn as a cash lump sum.

Given the tax reliefs/employer contributions he will have received along the way, that isn't exactly a disaster if he does exceed the LTA. Only the excess is taxed like this. Keep an eye on the figures, make sure they are up to date and take a view on a regular basis. You have to decide which is 'worse' - not getting tax relief on his contribution to his SIPP, or paying a bit of tax if goes over the LTA. Neither is going to leave you penniless in retirement!

saver_ali · 9 March 2018 at 1:00AM

Thanks. That is reassuring. I appreciate we are in a fortunate position, but we have worked very hard to get here, paying in as much as we could afford. We're savers rather than spenders!
If we don't pay into his SIPP this year he will get a hefty tax bill, as his tax code assumes he will have paid into it.

kidmugsy · 9 March 2018 at 1:11AM

saver_ali wrote: »

My husband is currently at 89% of LTA and I’m wondering if we should stop contributing to his SIPP. ...

34% of the LTA is from a DB scheme, forecast to be £17k pa, that he can take in January 2024, aged 65.

If it becomes enough of a problem to vex you, surely he could simply draw his DB pension a little early?

Brynsam · 9 March 2018 at 2:01AM

saver_ali wrote: »

If we don't pay into his SIPP this year he will get a hefty tax bill, as his tax code assumes he will have paid into it.

Yes, but if you don't pay into his SIPP, you will have the money from that 'non-contribution' which will cover the tax bill several times over. He could always put a lower amount into his SIPP, which would both reduce the tax bill and reduce the chances of hitting the LTA.

EdSwippet · 9 March 2018 at 10:09AM

Brynsam wrote: »

saver_ali wrote:

The LTA has only become a worry since the stock market rises last year.

It's a worry a lot of people would like to have.

It's a worry that nobody should have.

saver_ali · 9 March 2018 at 10:43AM

Thanks kidmugsy. I did look at illustrations for taking the DB pension early but the annual amount drops at a horrendous rate. If he took it next year, which is 5 years early at 60, it drops from £17k to £10k per annum.

Brynsam · 9 March 2018 at 10:48AM

saver_ali wrote: »

Thanks kidmugsy. I did look at illustrations for taking the DB pension early but the annual amount drops at a horrendous rate. If he took it next year, which is 5 years early at 60, it drops from £17k to £10k per annum.

That doesn't sound right - it's a reduction of over 10% a year, which is way out of line with market rates. I'd check again and ask the scheme to confirm the early retirement reduction factor [the % reduction for each year the pension is taken early] and when this factor was last reviewed.

Triumph13 · 9 March 2018 at 11:17AM

What's the risk if you put too little in? You miss out on a 41.67% return on investment (£60 net becomes £100 in pension becomes £85 when withdrawn - assuming 20% tax in retirement)

What's the risk if you put too much in? As long as you don't end up being a higher rate tax payer in retirement (or tax rates go up) then you've tied up money in a pension scheme for no net benefit or loss (£60 => £100 => £75 after LTA charge =>£60 after 20% tax)

Definitely pay in for this tax year. Next year keep paying into work scheme to get employer's contributions, but maybe hold off paying to SIPP until near the end of the tax year just in case markets have performed incredibly well. Then when they haven't, pay the max in.

Once retired take the TFLS immediately to get any future above-inflation growth protected from the LTA charge (you'll need to move it into ISAs over several years). Then take the maximum possible without paying higher rate tax every year to run it down a bit to avoid a) higher rate tax once DB and SP on line and b) any LTA charge at age 75.

You've worked hard and saved hard so enjoy your retirement!

In danger of hitting LTA

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