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  • FIRST POST
    • JamTomorrow
    • By JamTomorrow 15th Jul 17, 11:19 AM
    • 73Posts
    • 14Thanks
    JamTomorrow
    Pension contributions at 60% marginal rate of tax
    • #1
    • 15th Jul 17, 11:19 AM
    Pension contributions at 60% marginal rate of tax 15th Jul 17 at 11:19 AM
    I'm 41 and with my current pension pot and future contributions I am on a trajectory to have a fund value around the LTA at age 57 when I can currently take my pension.

    For tax year 17/18 and future I am likely to have a small amount in the 60% rate and can't decide whether I should take net of tax and invest in an ISA, or put into my pension with a high risk that it would be taxed at 55% when I crystallise my pension.

    I'm leaning towards the latter, to make hay whilst the sun shines, and from a numbers perspective it has the highest expected outcome :

    1. £5k into pension. Using rule of 72 assume doubles twice over 20 years. Therefore £20k less 55% tax = £9k net in 20 years.

    2. Take £2k net. Doubles twice over 20 years. £8k in tax free ISA in 20 years.

    Given that future contributions or return or returns aren't guaranteed I think number 1 but for the sake of £1k extra the flexibility of option 2 is also there so not an easy decision.

    I've exploited other options to reduce income below £100k and short of giving to charity or trying to get unpaid leave (unlikely) can't see any other options.

    What would you do?
Page 1
    • TomSurrey
    • By TomSurrey 15th Jul 17, 11:34 AM
    • 20 Posts
    • 16 Thanks
    TomSurrey
    • #2
    • 15th Jul 17, 11:34 AM
    • #2
    • 15th Jul 17, 11:34 AM
    I'm finding this scenario hard to model through too, truth is this is probably one of the scenarios where you need a financial and tax planner to work it through for you. Most models say that pensions saving is almost always the better vehicle for saving in BUT they don't account for your scenario of paying marginally higher tax in retirement.

    If you're going to have a very large pension pot and close to the life time allowance I'd probably just start putting money into ISA saving, it reduces your political risk to pensions or income being taxed harder. It would also allow you to retire earlier and use your ISA savings prior to 57 to move part time or retire all together.
    • Dazed and confused
    • By Dazed and confused 15th Jul 17, 12:05 PM
    • 1,706 Posts
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    Dazed and confused
    • #3
    • 15th Jul 17, 12:05 PM
    • #3
    • 15th Jul 17, 12:05 PM
    As there is no actual 60% tax rate I presume you are referring to the reduction of personal allowance over £100k.

    You don't need to reduce your actual income to less than £100k for this so pension contributions are usually the most favoured route (unless you are very generous charity wise) as although your income remains above £100k you still get your personal allowance and the higher rate tax relief on the pension.

    Providing you meet all the other rules etc (see recent pension thread from amc1 for a sorry tale!!)
    • bostonerimus
    • By bostonerimus 15th Jul 17, 12:32 PM
    • 879 Posts
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    bostonerimus
    • #4
    • 15th Jul 17, 12:32 PM
    • #4
    • 15th Jul 17, 12:32 PM
    When presented with a similar choice I just put half of the amount into both alternatives.
    Misanthrope in search of similar for mutual loathing
    • EdSwippet
    • By EdSwippet 15th Jul 17, 2:39 PM
    • 548 Posts
    • 513 Thanks
    EdSwippet
    • #5
    • 15th Jul 17, 2:39 PM
    • #5
    • 15th Jul 17, 2:39 PM
    What would you do?
    Originally posted by JamTomorrow
    You have clearly understood the dilemma that these heinous tax rates represent. Personally, I would hold my nose and make the pension payments, and so avoid the effective 60% tax rate.

    Here is my thinking (though of course you're free to reject it!):
    • The likely 55% LTA excess rate is less than 60%. And you could well get away with less than 55% LTA rate. The calculation is actually 25% LTA charge and then marginal tax rate on the remaining 75%. So if you can wriggle into basic rate tax on withdrawals that comes out to 40% combined and not 55%. (The flip side, and worst case, would be if you are in the 60% band on withdrawals over the LTA. Here you pay 25% + .6 * 75% = 70% tax, ouch!, so one to definitely avoid there, then.)
    • The LTA might eventually be scrapped. Perhaps not likely, at least in the shorter term, since scrapping it would be much too sensible a move for this government. But it's a faint possibility. 55% LTA tax in future is only probable, whereas the 60% effective tax on income above £100k now is definite.
    • If the LTA isn't scrapped, you might to avoid LTA problems in future anyway by simply retiring early. You say that you project you will hit it at age 57. In which case, stop work at 56 or 55, live off other savings for a while and let investment growth momentum take your pension up to the LTA and then crystallise it. This is what I have done (compounded in my case by taking out FP2016).
    • A pension is a useful inheritance tax shelter. This may or may not be of use to you.

    All this assumes that you don't greatly value instant access on an ISA. After all, it is quite a long time to wait from age 41 until 55, 56, 57. And as already mentioned, the government definitely has it in for folk who save decent amounts into pensions (no matter how much general hot air they come up with around "encouraging pension saving"), meaning than an even more muddled pensions regime than what we have now could be on the cards for the future. Political risk indeed.

    Also, as suggested above, this isn't necessarily an all-or-nothing proposition. You could split the difference. Sometimes this is a good way forwards if both of two options seem equally appealing (or equally unappealing, as is so often the case where tax is involved).

    Finally, if earning over £100k/year looks like a regular possibility, consider reducing work to a four-day week. Once you add in employer's NI your general salary deductions at the margin are going to border 75% to the government and 25% to you. Basic self-respect suggests that you should reject that proposition!
    • kidmugsy
    • By kidmugsy 15th Jul 17, 2:39 PM
    • 9,629 Posts
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    kidmugsy
    • #6
    • 15th Jul 17, 2:39 PM
    • #6
    • 15th Jul 17, 2:39 PM
    at age 57 when I can currently take my pension.
    Originally posted by JamTomorrow
    That's not the current law, though, is it? Of course it might be by April, but currently (I understand) the age for drawing a pension remains 55.

    Personally I'd "bank" the 60% while it's still available.
    • ex-pat scot
    • By ex-pat scot 15th Jul 17, 11:09 PM
    • 205 Posts
    • 224 Thanks
    ex-pat scot
    • #7
    • 15th Jul 17, 11:09 PM
    • #7
    • 15th Jul 17, 11:09 PM
    In the same situation.
    Frankly in 17 years the LTA rules will be unrecognisable from today, one way or another.
    Do it under sal sac and it's 62% (or more if your employer will credit you with some of the saved ers NIC).


    I'm maxing the pension contributions to bring my effective gross to a smidgeon under £100,000.


    If you breach the LTA early, then there's nothing (under the present system) to stop you from stopping at 55 rather than 57, and hence avoiding a 55% charge.
    • JamTomorrow
    • By JamTomorrow 16th Jul 17, 8:36 AM
    • 73 Posts
    • 14 Thanks
    JamTomorrow
    • #8
    • 16th Jul 17, 8:36 AM
    • #8
    • 16th Jul 17, 8:36 AM
    You have clearly understood the dilemma that these heinous tax rates represent. Personally, I would hold my nose and make the pension payments, and so avoid the effective 60% tax rate.
    Originally posted by EdSwippet
    Thanks for all the helpful input. I've decided that I'll use sal sec to make additional pension payments and bring me just under £100k of taxable earnings.

    Here is my thinking (though of course you're free to reject it!):[LIST][*]The likely 55% LTA excess rate is less than 60%. And you could well get away with less than 55% LTA rate. The calculation is actually 25% LTA charge and then marginal tax rate on the remaining 75%. So if you can wriggle into basic rate tax on withdrawals that comes out to 40% combined and not 55%. (The flip side, and worst case, would be if you are in the 60% band on withdrawals over the LTA. Here you pay 25% + .6 * 75% = 70% tax, ouch!, so one to definitely avoid there, then.)
    Originally posted by EdSwippet
    Under current rules I will try and plan to withdraw up to the start of the 40% tax rate but I suspect I will need to withdraw some funds in the 40% rate so that the value of the fund I have crystallised isn't taxed again at age 75.

    [*]The LTA might eventually be scrapped. Perhaps not likely, at least in the shorter term, since scrapping it would be much too sensible a move for this government. But it's a faint possibility. 55% LTA tax in future is only probable, whereas the 60% effective tax on income above £100k now is definite.
    Originally posted by EdSwippet
    I find this a strong argument to make the payment into pension now and have a chance of a 55% tax rate versus a certainty of 60% tax rate today.

    Finally, if earning over £100k/year looks like a regular possibility, consider reducing work to a four-day week. Once you add in employer's NI your general salary deductions at the margin are going to border 75% to the government and 25% to you. Basic self-respect suggests that you should reject that proposition!
    Originally posted by EdSwippet
    This isn't a realistic option at the moment as I'm in a new role which is a struggle to get through in a 5 day week. It is however something I will actively consider in my early 50's when work should become optional. At this time there is a chance that I will be funding 2 kids at University so rather than retire early and use our ISA savings I may look to work a 3 or 4 day week for a few years.
    • JamTomorrow
    • By JamTomorrow 16th Jul 17, 8:37 AM
    • 73 Posts
    • 14 Thanks
    JamTomorrow
    • #9
    • 16th Jul 17, 8:37 AM
    • #9
    • 16th Jul 17, 8:37 AM
    That's not the current law, though, is it? Of course it might be by April, but currently (I understand) the age for drawing a pension remains 55.

    Personally I'd "bank" the 60% while it's still available.
    Originally posted by kidmugsy
    I'm working on the assumption that it will be 10 years less than state retirement age. Is this the best assumption to take for planning purposes based on information available?
    • michaels
    • By michaels 16th Jul 17, 10:01 AM
    • 19,264 Posts
    • 88,330 Thanks
    michaels
    What is wrong with paying 60%? I earn just over the personal allowance and face a maginal effective rate of 73% and I suspect at our relative income levels each extra pound makes a much bigger difference to my lifestyle than yours.

    I use salary sacrifice of course to mitigate as much of the burden as possible because with employer ni contribution of 9.6% passed back to me by my employer each £1 of pension contribution costs me only 17p of take home pay.
    Cool heads and compromise
    • Snakey
    • By Snakey 16th Jul 17, 1:22 PM
    • 995 Posts
    • 1,209 Thanks
    Snakey
    I'm in a similar position except that I stopped contributions before 6 April 2016 in order to have the extra £250k of LTA (and PCLS if needed). My income promptly shot above £100k - nice problem to have, right enough, but a bit of a system shock when a couple of years earlier I hadn't even been paying higher rate tax and suddenly I'm looking at 62% at the margin.

    For me there's a significant extra cost of putting just £1 into that pension... I could take the chance of the rules changing, but...

    Still waiting for confirmation about the 55-moving-to-57 thing. My date of birth indicates that I will be caught if they transition it in to always be ten years below the State pension age, but not caught if they bring it in overnight when the State pension age reaches 67. The condoc wasn't entirely clear, and it was only a condoc and we have a different pensions minister and chancellor now. However, my IFA said assume 57 and anything else is a bonus. At 41 you will definitely be caught unless they drop the idea altogether.

    My personal ideal would be a new Taxed-Exempt-Exempt system (with "old-style" pensions being closed to new contributions - lol and they can abolish the LTA if they like, too). It would be like an extra ISA allowance only with an uplift that I wouldn't otherwise get, at the cost of delayed access. It also has the advantage that it would suit younger/lower-income people better, although I'd be lying if I said that was my primary reason for liking it.
    • Cygnus Alpha
    • By Cygnus Alpha 16th Jul 17, 9:14 PM
    • 187 Posts
    • 307 Thanks
    Cygnus Alpha
    I would do the salary sac to just below £100k. As the last poster mentioned, it is actually a 62% tax rate including NI. Anything could happen between now and age 57. Your job could be replaced by a robot and your earning power could wane as time goes on. Worse case scenario is you stop contributing when you are in your 50s.
    • jkwer521
    • By jkwer521 16th Jul 17, 10:51 PM
    • 14 Posts
    • 5 Thanks
    jkwer521
    Given the the option of avoiding the marginal rate of 62% now, I would probably go for the pension option also.

    However, have you thought about a LISA? Not sure how much exactly you're talking about - maximum £4k per year, but in the example you gave, the £2k net would be made up to £2.5k by the government and would end up at £10k after 20 years. A disadvantage would be that you would only be able to withdraw at 60. I'm also in danger of exceeding LTA at some point, so I've decided to open a LISA to partially mitigate.
    • EdSwippet
    • By EdSwippet 16th Jul 17, 11:51 PM
    • 548 Posts
    • 513 Thanks
    EdSwippet
    However, have you thought about a LISA?
    Originally posted by jkwer521
    You have to be under 40 to open a LISA. The OP is 41. :-(
  • jamesd
    Given your income you might also look into making some use of VCT investing. These give income tax relief of thirty percent in the tax year of purchase, capped at actual tax due. Have to repay if you sell within five years. Tax exempt dividends and no CGT, though dividends are how most at the lower risk end deliver their returns.

    You can sell after five years and invest again to get another thirty percent.

    You'd probably have an excessive amount invested to completely eliminate your income tax bill but they are still a useful extra tool.
    • michaels
    • By michaels 17th Jul 17, 9:42 AM
    • 19,264 Posts
    • 88,330 Thanks
    michaels
    Sorry to hijack but how do VCT and pension through salary sac with employer NI contribution of 9.6% compare for basic rate tax payers?
    Cool heads and compromise
  • jamesd
    More initial income tax and NI relief from the salary sacrifice but you only get it once. VCT is only smaller company investing while pension can be much more diversified but pension is only accessible from 55 so not as useful for plans to retire before that.

    Ongoing tax exempt dividends from the VCT could beat the pension after some years via the lack of tax on that income. For example the Albion VCT pays 7% of the amount initially invested so for basic rate that's an extra income tax saving of 1.4% of the amount invested each year.
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