Early-retirement wannabe

gadgetmind

My wife is a self-employed "horticultural photographer" (she takes pictures of flowers!) so we pay voluntary Class 2 to keep her state pension healthy and her income (mainly from intellectual property of things I created in the 80s that I gifted to her) all goes into her SIPP for tax relief. This is usually a few £100 pa but someone out of the blue wanted a rights buyout for one of my "mind children" and offered 25kUSD. That was an interesting email to read over morning coffee. It nearly went into "Nigerian Prince" bin but the cash arrived nicely!

VDOT47

Not being in a profession where I'll likely get any chance of a DB pension, it will have to be DCs all the way.


My worry is also about tax on getting the money out, as almost all the pension pot is likely to be in my name as OH runs her own business and earns enough to contribute a decent amount to our monthly expenses (which indirectly allows me to save more I suppose) but not enough to put anything in pensions (so far).


I suppose the question is, are we better to get 40% relief on the way in and swallow the 20% tax on the way out, or restructure things so that money also gets paid into a pension in OHs name now which will mean only 20& relief on the way in, but easier to get tax free on the way out by utilising personal allowances??


Too much to think about!

lisyloo

Anonymous101 wrote: »

:beer:
Perhaps the people contributing £40k per year are just prioritising saving rather than saving as a bi-product of being "rich"?

Oh I agree.
We are maximising savings for a comfortable retirement and are not rich.

But there does have to be a limit somewhere no?
We do need some people paying tax to support the NHS, care homes, disabled etc.

We benefit from tax breaks (salary sacrifice, dividend 0% band, dividend 7%) and pay very little tax and benefit from these breaks a lot more than people that cannot afford to do so.

I’m just saying there do need to be limits and I don’t think the £40k annual limit and LTA £1 million + could be described of punitive as most people can only dream of such amounts.

Some people need to contribute otherwise the welfare state, NHS falls apart.

hugheskevi

I’m just saying there do need to be limits and I don’t think the £40k annual limit and LTA £1 million + could be described of punitive as most people can only dream of such amounts.

An individual with long-service in a final salary scheme who gets promoted from, say £50,000 to £60,000 could easily find themselves with a tax charge to pay. That would be a pension input of about £100,000.

It isn't clear to me what was wrong with just having the LTA as the limit?

The LTA is a clear limit on the amount of tax relief available to an individual over their lifetime, regardless of when the individual makes those savings, the level of their income or how their income fluctuates over time.

Having both the Annual Allowance and the LTA imposes a limit about how contributions are distributed, favouring a balanced amount of contributions over irregular contributions. It isn't clear to me why this is a sensible restriction given the existance of the LTA to limit the tax relief available.

Having a tapered Annual Allowance effectively prohibits higher earners from making sufficient pension provision by limiting their contributions to £10,000 p/a.

The current regime favours those with good but not great levels of income which are consistent over time. Regular incomes of about £75,000 to £100,000 p/a allow maximum exploitation of tax advantages without exceeding the Annual Allowance and then the tapered Annual Allowance.

I'm not convinced the current limits encourage saving behaviour with a coherent set of incentives. In particular, it is difficult to see why the level of an individual's income in a single year is so important in the context of a product that is about lifetime savings.

EdSwippet

hugheskevi wrote: »

The LTA is a clear limit on the amount of tax relief available to an individual over their lifetime ...

... for DB pensions. The effect of the annual allowance on a DB scheme member with a sizeable salary rise is heinous, as you say. Not really true for DC pensions though, since the LTA encompasses both tax-relieved (strictly tax-deferred) contributions and all of the compounded growth on those contributions. In effect, it punishes careful investing.

In real terms, the LTA is now less than half the value it had when first introduced 13 years ago. The sensible way to arrange things would be for only the LTA to apply to DB schemes, and only the annual allowance to apply to DC ones. Best not hold your breath waiting for an outbreak of common sense at Number 11, though.

Anonymous101

hugheskevi wrote: »

An individual with long-service in a final salary scheme who gets promoted from, say £50,000 to £60,000 could easily find themselves with a tax charge to pay. That would be a pension input of about £100,000.

It isn't clear to me what was wrong with just having the LTA as the limit?

The LTA is a clear limit on the amount of tax relief available to an individual over their lifetime, regardless of when the individual makes those savings, the level of their income or how their income fluctuates over time.

Having both the Annual Allowance and the LTA imposes a limit about how contributions are distributed, favouring a balanced amount of contributions over irregular contributions. It isn't clear to me why this is a sensible restriction given the existance of the LTA to limit the tax relief available.

Having a tapered Annual Allowance effectively prohibits higher earners from making sufficient pension provision by limiting their contributions to £10,000 p/a.

The current regime favours those with good but not great levels of income which are consistent over time. Regular incomes of about £75,000 to £100,000 p/a allow maximum exploitation of tax advantages without exceeding the Annual Allowance and then the tapered Annual Allowance.

I'm not convinced the current limits encourage saving behaviour with a coherent set of incentives. In particular, it is difficult to see why the level of an individual's income in a single year is so important in the context of a product that is about lifetime savings.

Good thought provoking post. I've never really thought about it in that way.

The government, to a certain extent are caught between the two perspectives. With the income tax system is largely based upon annual incomes so I can see the point in having a cap per year. Otherwise individuals could manipulate their income through salary sacrifice much more to benefit from high amounts of tax relief. Granted the LTA would be there as a cap on the total amount of tax relief. I agree though there perhaps ought to be one system not both in place.

Anonymous101

lisyloo wrote: »

Oh I agree.
We are maximising savings for a comfortable retirement and are not rich.

But there does have to be a limit somewhere no?
We do need some people paying tax to support the NHS, care homes, disabled etc.

We benefit from tax breaks (salary sacrifice, dividend 0% band, dividend 7%) and pay very little tax and benefit from these breaks a lot more than people that cannot afford to do so.

I’m just saying there do need to be limits and I don’t think the £40k annual limit and LTA £1 million + could be described of punitive as most people can only dream of such amounts.

Some people need to contribute otherwise the welfare state, NHS falls apart.

I'm glad we agree, I wasn't critising too much

My intention was to point out that if someone who was earning say £80k was saving quiet aggressively then they could easily want to put more than £40k pa into a pension if that was available to them. Granted someone earning that amount is on a decent salary compared to the average person however wouldn't necessarily be thought of as rich.

IMO the £40k pa is reasonable, given the higher income tax threshold, however I think the £1m LTA is a little low especially considering how it has been squeezed this last few years. Going off the 4% rule of thumb a £1m pension would yield £40k per year which is hardly a large income.

gallygirl

VDOT47 wrote: »

I suppose the question is, are we better to get 40% relief on the way in and swallow the 20% tax on the way out, or restructure things so that money also gets paid into a pension in OHs name now which will mean only 20& relief on the way in, but easier to get tax free on the way out by utilising personal allowances??

Personally I think you'd be sensible to pay into a pension for OH, at the very least to plan for a pension (or drawdown) equivalent to the tax allowance (unless she is likely to have other income on retirement). Putting all your eggs in one basket is always dangerous, especially if you pop your clogs - how would OH's finances be affected?

ex-pat_scot

VDOT47 wrote: »

Not being in a profession where I'll likely get any chance of a DB pension, it will have to be DCs all the way.


My worry is also about tax on getting the money out, as almost all the pension pot is likely to be in my name as OH runs her own business and earns enough to contribute a decent amount to our monthly expenses (which indirectly allows me to save more I suppose) but not enough to put anything in pensions (so far).


I suppose the question is, are we better to get 40% relief on the way in and swallow the 20% tax on the way out, or restructure things so that money also gets paid into a pension in OHs name now which will mean only 20& relief on the way in, but easier to get tax free on the way out by utilising personal allowances??


Too much to think about!

There are a couple of things to consider.


1. your contributions. If sal sac then getting 42% tax relief on the way in and paying 15% on the way out is a pretty decent equation (assuming BR with 25% tax free element, and you will have used up your personal allowance so it's all taxable).


2. your wife's contributions. This is where there are options. She should be ensuring she takes £12,500 as salary, to use up her personal allowance. After that, there are options.


- If she is running as a limited company, then she can either take the remainder of money as dividend, and will have an effective tax rate of 20% then 27%.
If she's taking the rest as salary, then she's suffering 25% NIC (ers and ees) and 20% BR tax.

- if she's a sole trader then it will be classed as income and she will be suffering different rates of NI and tax.


3. Retirement. I am presuming you have already enough pension to absorb all your annual £12,500 personal allowance, and so any additional pension savings would be taxed at BR on the way out.
If your wife does not yet have sufficient pension savings so as to be using up the £12,500 personal allowance (simplistically that would equate to £8,500 full state pension plus £4,000 pension income (which would require a total pension pot of £100,000)), then she would be getting 20% to 32% (or more) tax relief on the way in and pay nothing on the way out. That is a compelling approach.
Thus up to a pot of £100,000 plus SP, it is therefore highly advantageous to build the pot to that level.
(in practice, you might want to think about the pot being larger, so that you could retire early and run the pot down to £100,000 at the point SP kicks in).


If you pop your clogs, then you can largely pass your unused pension over tax free, and vice versa.

Seabee42

I will be honest I do not agree with having an LTA only limit. The limit should be on the annual allowance only. That way if you are in money purchase most are except the civil service if you get investment growth you are not penalised for it. This way it would also encourage little and often saving.