Early-retirement wannabe

Anonymous101

Seabee42 wrote: »

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.

That would be my preference too. I think it makes most sense.

VDOT47

Ex Pat and Gallygirl - thank you for your comments. It is interesting to look at the potential figures involved to get a feel for the benefits of splitting pension contributions into two pots.


So to get a pot of £100k, you'd be looking at putting in about £70k and using tax relief and annual growth to get up to £100k?

ex-pat_scot

VDOT47 wrote: »

Ex Pat and Gallygirl - thank you for your comments. It is interesting to look at the potential figures involved to get a feel for the benefits of splitting pension contributions into two pots.


So to get a pot of £100k, you'd be looking at putting in about £70k and using tax relief and annual growth to get up to £100k?

You've got to work backwards from the "answer" to get to the right approach.

1. how much do you want in retirement?
2. what's the tax efficient way of doing this? (hint - make full use of personal allowances x 2; avoid HR tax if at all possible - remember state pension of £8,500 (max) at some point)
3. what pot values will be required for this?
4. when would you like to retire? (and when do the State Pensions kick in?)
5. that then gives you a time horizon and calculation of the amount required to be invested
6. can you afford the required amount? If not, then what would be the impact of investing at a lower amount? either time horizon extends, or pot value reduces.
7. cross check to ensure you don't fall foul of Annual Allowances or Lifetime Limit
8. adjust the approach between contributions for you and your wife, and rerun the calculations to see how the results pan out.

Most of this is thought process rather than calculation.

In terms of assumptions, you will need to look at time, inflation, returns for each asset class you are invested in, future cash /income levels etc.

This all should come together to give you a plan.
it will most certainly turn out to be wrong, but a decent stab.
It will give you some peace of mind that your journey is heading in the right direction, and that the money (and investment strategy) you are dedicating to this today will be sufficient.

Then re-run the models, assumptions, targets from time to time.

Triumph13

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.

Your person on £50k, if they were in a 60ths scheme, would have £80k of carry forward to deal with the impact of that pay rise. If they've used it up on DC contributions on top then I don't have that much sympathy. If I was in charge, I'd simply ban anyone who is getting DB accruals above a certain size from getting tax relief on DC contributions in the same tax year. Trying to equate them to DCs for tax doesn't really make sense.
The LTA is a dog for anyone with DC as it requires you to guess, possibly decades in advance, what future investment returns will be. AA is so much simpler and more sensible and only becomes a mess when you try to artificially value DB schemes as if they were DC. The move toward revalued career average also takes away the problem of DBs with big pay rises.
As to the size of the AA, provided sufficient carry forward exists to allow for smoothing of income, I personally find it hard to justify morally any figure that is above median earnings. How can anyone believe the government has a duty to give them tax breaks to enable them to save more than the average person earns?

ex-pat_scot

Triumph13 wrote: »

As to the size of the AA, provided sufficient carry forward exists to allow for smoothing of income, I personally find it hard to justify morally any figure that is above median earnings. How can anyone believe the government has a duty to give them tax breaks to enable them to save more than the average person earns?

Hmm.
It's allowing individuals to smooth their income across their working and retired lives.
There are lots of circumstances where income can be very lumpy.
There's a study (no memory of where it was) that pointed to the few years that high earners actually hit the peak earnings, and where it would make most sense to be saving for retirement.
Similarly many of us have one income for the family, which has to serve as salary and retirement provision for the couple.
The tax break is a deferral (and a bit of arbitrage in that the rate paid hopefully is lower in retirement than it would be whilst earning).


At the moment there's a deliberate nastiness aimed at higher earners and retirement provision. The whole notion of tapered allowance over £150k is pointless and petty. The loss of personal allowance is similarly deliberately nasty.
Tax can never be truly fair, as it is seen from 30 million different vantage points of taxpayers, but there are a number of points where this unfairness cannot be avoided through the only real legitimate tax planning tool of a pension nowadays.

Triumph13

I agree that the various clawbacks are stupid because they give marginal tax rates which are too high to drive the behaviours we want. I would also like to see more steps towards the option to be taxed as a couple, but I fail to see why the government needs to offer significant opportunities for 'tax planning' - other than to mitigate their own stupid rules that give silly marginal rates.
The purpose of giving tax breaks on pension contributions is to encourage people to save to support themselves rather than relying on the state. The idea that it's unfair to have a £1m LTA because that 'only' translates as £40k pa isn't going to play well with the vast majority of the population who can't even dream of earning that much when they are working, let alone having it NI-free on top of state pension.
I have no problem with people earning big salaries and believe we should have a simple tax system that doesn't discourage them from keeping on earning them - I certainly don't think anyone should ever face marginal tax and NI above 50% and preferably lower than that. I have no problem with them saving money from those salaries to support retire incomes higher than most families have when working. I don't see the need for everyone else to subsidise those lifestyles through tax breaks.

Anonymous101

Triumph13 wrote: »

I agree that the various clawbacks are stupid because they give marginal tax rates which are too high to drive the behaviours we want. I would also like to see more steps towards the option to be taxed as a couple, but I fail to see why the government needs to offer significant opportunities for 'tax planning' - other than to mitigate their own stupid rules that give silly marginal rates.
The purpose of giving tax breaks on pension contributions is to encourage people to save to support themselves rather than relying on the state. The idea that it's unfair to have a £1m LTA because that 'only' translates as £40k pa isn't going to play well with the vast majority of the population who can't even dream of earning that much when they are working, let alone having it NI-free on top of state pension.
I have no problem with people earning big salaries and believe we should have a simple tax system that doesn't discourage them from keeping on earning them - I certainly don't think anyone should ever face marginal tax and NI above 50% and preferably lower than that. I have no problem with them saving money from those salaries to support retire incomes higher than most families have when working. I don't see the need for everyone else to subsidise those lifestyles through tax breaks.

I stand by my comment that the £1m LTA is relatively low. I didn't have £100k+ earning executives in mind when I made that comment. I was thinking about the middle class worker at the bottom end of the higher rate bracket that wouldn't ever be classed as rich but could through a series of good decisions and hard work exceed the current LTA.

As the vast majority of people will not have the nous or discipline to be paying 1/3 to 1/2 of a £60k salary into a pension for 30 years so that they can continue to live off £40k a year for the rest of their days. I'd not expect Joe public to identify with this person but if someone is willing to go to that level of financial planning they shouldn't IMO be penalised for it.

Perhaps its selfish. I earn £65k and Mrs Anon. £20k. I save £20k+ pa into a pension plus bonus' etc where paid. This increases every payrise as we're pretty comfortable living off £60k total, that makes us rich in some peoples eyes but not so in mine. This level of contribution could eventually see my pension pot exceed the current LTA which I think punishes our diligent and responsible approach to saving.

Triumph13

Anonymous101 wrote: »

I stand by my comment that the £1m LTA is relatively low. I didn't have £100k+ earning executives in mind when I made that comment. I was thinking about the middle class worker at the bottom end of the higher rate bracket that wouldn't ever be classed as rich but could through a series of good decisions and hard work exceed the current LTA.

As the vast majority of people will not have the nous or discipline to be paying 1/3 to 1/2 of a £60k salary into a pension for 30 years so that they can continue to live off £40k a year for the rest of their days. I'd not expect Joe public to identify with this person but if someone is willing to go to that level of financial planning they shouldn't IMO be penalised for it.

Perhaps its selfish. I earn £65k and Mrs Anon. £20k. I save £20k+ pa into a pension plus bonus' etc where paid. This increases every payrise as we're pretty comfortable living off £60k total, that makes us rich in some peoples eyes but not so in mine. This level of contribution could eventually see my pension pot exceed the current LTA which I think punishes our diligent and responsible approach to saving.

My preferred solution of abolishing the LTA and pegging the AA to 100% of median earnings sounds like it would suit you perfectly. In my own case it would have meant I would have paid more tax already as I wouldn't have been able to put £40k away each year, and I'd probably be paying more tax in the future as I may well have retired later if I hadn't hit the LTA.

bluenose1

At the other end of the scale people on low income who want to contribute to their pension pot lose the benefit of salary sacrifice if it takes them below National Minimum Wage. In my view it should be a choice they can make themselves, rather than imposed.
Oh well as we all know life isn't fair. We just have to make the best if a flawed system.

michaels

bluenose1 wrote: »

At the other end of the scale people on low income who want to contribute to their pension pot lose the benefit of salary sacrifice if it takes them below National Minimum Wage. In my view it should be a choice they can make themselves, rather than imposed.
Oh well as we all know life isn't fair. We just have to make the best if a flawed system.

Although with AVC you do get 'tax relief' on tax you never actually paid because of the personal allowance. And when taking the pension the fist 3k is likely to be tax free again due to the personal allowance which obviously helps those with small pensions proportionately most.

EG suppose you earn 11.5k and thus pay no income tax but manage to contribute 80k from income to your pension (2k pa for 40 years), this will be grossed up to 100k, take 25k as tfls and then draw down at 4% of the 75k and you pay no tax on the 3k pa either even on top of state pension.