All a-dither - your thoughts on keeping FP16?

Snakey · 12 February 2018 at 11:17PM

My DC pension pot is currently a shade under £1m and I'm 45. I thought I was comfortable with my decision to stop contributions in March 2016 and take Fixed Protection. At the time, there were rumours about the access age changing to 57, higher rate relief being axed, the LTA being reduced even further... funny to think this was less than two years ago and yet since then we've had the Brexit vote and the General Election and so much has changed including many of the people at the top who were involved with pensions.

The other thing that's changed falls under the heading of "nice problem to have", and that's that pay rises have put me inside the personal allowance clawback band with just my employment income. The knowledge that I'll only get to keep a third of any freelance I earn is stopping me from pushing hard to get that work, which feels wrong - this is the most earnings potential I'm ever going to have in my life, I worked years to get here, it could all stop at any time, and here I am not making the most of it because of... well, a fit of pique, I suppose, but I just don't feel motivated in the way I was when I was keeping 58% of it rather than 38%.

If the rules don't change - and that's a big "if" in a ten-year timescale - inflation should take the LTA above £1.25m by the time I get there, making my FP redundant. On the other hand, a future government could do any or all of: increase the access age, reduce the LTA, get rid of tax relief at marginal rate... all of which would leave me wishing I had left things as they are now.

Contributions could be made by salary sacrifice and if I do this my employer will uplift these by the full e'ers NI saving (on all the contributions). So I'd get £113.80 in there, at a net cost to me of £38 - although it's likely to be all taxed at 55% on the way out.

They will also put in 3%, which I currently take as extra salary so that's neutral really. I get the NI uplift on all of my conts, not just the ones above 3%.

Should I? If I get my skates on before the February payroll goes through, I can get two months in and sacrifice most of the way down to the £100k (I've yet to do the exact maths) without going below minimum wage.

And then for future years make "just enough" contributions to get me below £100k - I'm not going back to maxing out the AA, because of the LTA charge and because in terms of my overall investments I'm pension-heavy and if they move the access age in the ten years before I get there then it'd scupper any ideas of early retirement.

Your thoughts?

I could incorporate, but I'm less keen on that as it seems like a lot of faff and extra costs for what really isn't very high freelance income in the grand scheme of things (maybe £15-18k, hard to say). And it wouldn't sort me out for the current tax year anyway.

kidmugsy · 13 February 2018 at 1:12AM

Snakey wrote: »

My DC pension pot is currently a shade under £1m and I'm 45. I thought I was comfortable with my decision to stop contributions in March 2016 ...

Contributions could be made by salary sacrifice and if I do this my employer will uplift these by the full e'ers NI saving (on all the contributions). So I'd get £113.80 in there, at a net cost to me of £38 - although it's likely to be all taxed at 55% on the way out. ...

Should I? If I get my skates on before the February payroll goes through, I can get two months in and sacrifice most of the way down to the £100k ... then for future years make "just enough" contributions to get me below £100k

I'd do it. Even if you pay 55% it's a decent deal, and you may not pay 55% depending on how the stockmarket is doing when, say, you turn 55.

Snakey wrote: »

I could incorporate, but I'm less keen on that as it seems like a lot of faff and extra costs for what really isn't very high freelance income in the grand scheme of things (maybe £15-18k, hard to say). ...

Your company would pay corporation tax (currently less than 20%) and then in a few years you could close down the company and pay CGT with Entrepreneur's Relief, so currently only 10% CGT rate. You could also extract a couple of thousand a year in dividends tax-free, though that would have the knock-on effect of your contributing a further £2k p.a. to your employment pension to let you avoid the 60% tax band.

The_Doc · 13 February 2018 at 8:46PM

The LTA charge is only 55% if you take money from your pension as a lump sum. Its 25% if you take it as an income, but you pay then income tax on it, which may end up the same depending on your income tax rate.

However, if you want to reduce your income tax bill, you should consider VCTs. Get 30% tax reduction on the amount invested and tax free dividends. Need to keep them for minimum 5 years. This is a common alternative approach when pension pot gets near the LTA.

Snakey · 13 February 2018 at 11:13PM

I want to eliminate the income that falls within the 62% marginal rate rather than reduce my tax bill per se. It feels "better" to save £6k by putting £10k into a pension than by dropping £20k into a VCT, always assuming the rules don't (once again) change to my detriment in the future.

Oh for a time machine, since it would've been much easier just to have never stopped in the first place, but never mind - if I had a time machine this would probably only be about #986 on the list of Things I Would Have Done Differently If I'd Have Known anyway.

The_Doc · 14 February 2018 at 10:29AM

I am in a similar situation and do have FP16. But now being 55 and having been made redundant a couple of years back, its less of an issue for me.

Without a crystal ball, you cannot be certain, but I would probably do the same if I were you (use the very generous tax relief to its max and give up FP16).That wedge of 60% income tax just makes more people want to avoid it, and understandably so.

All a-dither - your thoughts on keeping FP16?

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