MSE News: Budget 2015: Pension lifetime allowance to fall to £1m

kidmugsy

madeinireland wrote: »

Sadly I can't take my SIPP just yet as I'm not 55 but I am 55 just before the end of next financial year 28th March in 2016 so hopefully I will be able to do it just before the new LTA comes in.

Good idea: that'll probably be before any Balls changes come in; I assume that changing pension law with immediate effect during a tax year would be daft.

Tell me; will you now aim to invest in low risk assets, just to avoid any risk of a collapse in value before you crystallise it? Or would you happily take that risk because in a sense it would be underwritten by the fact that a lower drawdown valuation in 2016 would allow you larger future contributions?

EdSwippet

kidmugsy wrote: »

Good idea: that'll probably be before any Balls changes come in; I assume that changing pension law with immediate effect during a tax year would be daft.

More accurately, dafter than changing it with just one year's notice for folk who were arguably on a fine glide path assuming just a handful of years of stability of current pension law. I find it touching that you have faith in politicians refraining from doing something simply because it is daft...

kidmugsy wrote: »

Tell me; will you now aim to invest in low risk assets, just to avoid any risk of a collapse in value before you crystallise it? Or would you happily take that risk because in a sense it would be underwritten by the fact that a lower drawdown valuation in 2016 would allow you larger future contributions?

I'm interested in this too, being on the glide path towards the current LTA.

I'm 55 this year, and while I haven't yet worked out the full ramifications of the (yet again) reduced LTA my options look like: (a) continue work but pay overall around £62k (25% of the LTA reduction) in extra tax on my pension pot when I retire; (b) continue work with fixed protection and, consequently, a 7% reduction in salary due to foregoing employer contribution matching; (c) or retire three or four years earlier than planned.

(a) looks distinctly unappealing. I'm edging towards (c).

kidmugsy

EdSwippet wrote: »

I'm 55 this year, and while I haven't yet worked out the full ramifications of the (yet again) reduced LTA my options look like: (a) continue work but pay overall around £62k (25% of the LTA reduction) in extra tax on my pension pot when I retire; (b) continue work with fixed protection and, consequently, a 7% reduction in salary due to foregoing employer contribution matching; (c) or retire three or four years earlier than planned.

(a) looks distinctly unappealing. I'm edging towards (c).

Does the 55% get exacted when ... well, when? What event triggers it? I can imagine someone splitting his pension in two, expecting to crystallise one bit and keep the other intact for his widow or children to inherit. Would that work as a way to avoid the 55%? Presumably the Treasury is quite bright enough to ensure it wouldn't work. OR maybe it's time to recycle the old joke about tactical divorces.

madeinireland_2

I agree this is just going to make me take my pension earlier to avoid going over the £1m mark - so from that point on pension saving for me will stop and I will concentrate on growing wife's pension or ISA's or something else.

jamesd

Or get clever and use VCTs when taking money out of the pension to make more in tax relief than you pay in tax on that money.

Snakey

I'm 42 and have a current pot of £670k (DC). I was hoping to retire (i.e. give up work) at the lowest possible age. At £1.8m and even £1.5m I was fairly happy that it was a limit I didn't have to worry about. Now I'm worried!

Should I apply for one of these things where you freeze the allowance amount at a higher figure? (Am I even entitled to do this?)

Is it worth making any more contributions? Is it still tax-efficient to make contributions (at 40% relief) if the extra money will fall entirely above the LTA limit on retirement? Or should I just stop, and try to find somewhere else for my money?

If I do manage to stay under the limit, would that give me enough to retire on at age 58? Or has that now been made impossible and I need to go back to the drawing board? Most of the forecasts/estimates I've seen have been based on a) being male and b) retiring at "State pension age". I don't have a feel for how much less I might get if I packed it in ten years before that.

Triumph13

Snakey wrote: »

I'm 42 and have a current pot of £670k (DC). I was hoping to retire (i.e. give up work) at the lowest possible age. At £1.8m and even £1.5m I was fairly happy that it was a limit I didn't have to worry about. Now I'm worried!

Should I apply for one of these things where you freeze the allowance amount at a higher figure? (Am I even entitled to do this?)

Is it worth making any more contributions? Is it still tax-efficient to make contributions (at 40% relief) if the extra money will fall entirely above the LTA limit on retirement? Or should I just stop, and try to find somewhere else for my money?

If I do manage to stay under the limit, would that give me enough to retire on at age 58? Or has that now been made impossible and I need to go back to the drawing board? Most of the forecasts/estimates I've seen have been based on a) being male and b) retiring at "State pension age". I don't have a feel for how much less I might get if I packed it in ten years before that.

You have a complex decision to take. An average real return of 4% gets you to £1.25M at 58 which would suggest taking the protection and stopping contributions. The question though is what employer contributions you would be giving up and whether you have the option to take an increased salary instead. If the employer contributions are particularly generous then it could be worth paying the tax charge.

jamesd

I suggest that you keep on paying in to get employer contributions and switch from pension investing to VCT investing for the rest. It appears that you have sufficient resources to handle quite a lot of VCT investing even though it's small companies. VCTs have three potential advantages for you besides the LTA:

1. Freely accessible after holding for five years. So you can sell VCTs to find retiring before you get access to pension money if you need to.
2. Tax free income, typically around 5% of the amount spent buying the VCT before allowing for the VCT tax relief at 30%.
3. After holding a VCT for five years you can sell and reinvest in another VCT, or the same one after a six month wait. So you can in total get far more tax relief than a pension would provide if you do this several times. Though this is capped at the tax actually paid and in your situation it may be worth just accumulating quite substantial VCT holdings to get the tax free income and long term growth.

Whether you'll have enough to retire at 58 depends on your income need. You can take around £40,000 a year using the use common 4% assumption and a million Pound pot size. You can go higher than 4% initially because your state pension will add another £8,000 or so ten years later. Add another £1,000 tax free a year for every £20,000 of VCT value you accumulate.

Snakey

Thank you both - that's really helpful, especially the estimates of pot size and likely income which I never know how to work out.

The advantage of having made massive AVCs is that I've been living (and saving up) on about half my "official" salary for years. Assuming no mortgage I'd be able to retire in luxury on £30k, although I'm risk-averse and would feel safer with more. Once you give up your earning power you can't always snap your fingers and get it back if something goes wrong.

It doesn't look like I qualify for the income protection, which takes that off the table. So I'll do matched contributions (for which I get - assuming all above LTA and with zero growth to keep the numbers simple enough for me - 45 out for every 30 in), and call it good. Keep up with the ISA, take a look at VCTs, and perhaps consider paying off some of the mortgage early if interest rates go up.

Another higher rate tax mitigation strategy I'd love to pursue is to go part time . But it does rather scupper your career prospects, so I need to at least pay off the mortgage first.

kidmugsy

Keep taking the employer contributions: for all you know you may be able to crystallise the pension when the stock market is low, and leave 75% behind to enjoy the recovery. Stock market returns never come as a steady growth rate.