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

Triumph13

One thing that no-one seems to have mentioned is that the LTA issue is not always quite so dreadful for higher rate taxpayers, particularly if you can benefit from salary sacrifice.
The 55% 'punitive' tax charge on amounts over the LTA only applies to cash taken out as a lump sum. If you use the excess for income instead, then you pay 25% on crystallisation and your normal tax on the income when drawn. This only comes to the same 55% total charge if you are a 40% tax payer in retirement. (£75 x 60% = £45 income from your original £100 so effective rate 55%).


If you are only going to be a basic rate tax payer in retirement (entirely possible if you are only just breaching the new limit. Pretty well certain if you're buying an indexed annuity) then the sum becomes £75 x 80% = £60 so effectively a 40% rate - so although higher rate taxpayers lose all the tax relief you got on the way in, you don't actually get 'punished'. In my case I have a salary sacrifice where the employer splits the employer's NI savings so £106 of contributions only costs me £58. After an effective 40% tax on the £106 for breaching the LTA I'm still left with £63.60. That's a 9.66% gain which is still much better than the 6.25% net gain someone paying basic rate tax on the way in and the way out normally gets.


I'm planning on early retirement with my DB scheme deferred to normal retirement date. A big chunk of my DC funds will be funding the gap before the DB fund and SP and so will have to be very conservatively invested so I should stay well below the HRT threshold. Unless I've got my sums wrong, I think it makes sense for me to keep maxing out my contributions and deliberately breach the LTA!

EdSwippet

Triumph13 wrote: »

... so although higher rate taxpayers lose all the tax relief you got on the way in, you don't actually get 'punished'.

Pretty much. The 55% rate appears designed with the intention of unwinding the 40% relief on contributions.

The (seemingly never-ending) reductions in LTA are however 'step functions' that throw spanners into the works.

Someone five years from retirement and with around £900k in a pension may well be better off taking fixed protection -- assuming it's offered this time around -- and stopping contributions now. Investment gains alone will take this pension up to £1.25m. Continuing contributions could produce small gain, but any gain is overwhelmed by the £62k increase in tax liability (£250k more of the pension is exposed to a 25% 'tax charge' by not taking fixed protection).

Bootsox

Is the LTA not due to rise by RPI at some point?

Earliest private pension access rises from 55 to 57 in 2028 (which, depending on which side of the fence OP's DOB falls, may effect 42 year old).

57-42 = 15 years

Say nominal RPI of 2.3% over 15 years

(1.023)^15 = +40%

So, does the £1m become £1.4m?

Triumph13

Due to rise by CPI rather than RPI and from 2018. Don't bet too much on them not skipping the occasional year's indexation though!

westy22

Does anyone know what would happen to an uncrystallised pension in excess of the LTA in the event of death before age 75? Does the beneficiary of the pension pot pay tax on the excess over the LTA if inheriting as a lump sum?

Triumph13

EdSwippet wrote: »

Someone five years from retirement and with around £900k in a pension may well be better off taking fixed protection -- assuming it's offered this time around -- and stopping contributions now. Investment gains alone will take this pension up to £1.25m. Continuing contributions could produce small gain, but any gain is overwhelmed by the £62k increase in tax liability (£250k more of the pension is exposed to a 25% 'tax charge' by not taking fixed protection).

If only life were that simple. As well as the uncertainty on the investment gains you need to factor in the size of employer contributions foregone and what your tax rate will be in retirement. You really need to do a careful calculation taking into account all your individual circumstances and do some sensitivity analysis for different levels of investment return.
Many people will end up having to pick a trade off between maximising tax relief if returns are low and minimising tax charge if they are high. I plan to retire 2 years before I can even start crystallising my funds and 10 years before I finish doing so which really brings some guesswork into it!

kidmugsy

Triumph13 wrote: »

Unless I've got my sums wrong, I think it makes sense for me to keep maxing out my contributions and deliberately breach the LTA!

Why not put part of your pot into something high risk? If it shoots up, you won't mind paying the tax. If it drops, you'll avoid the tax. The taxpayer is making the bet asymmetrical in your favour. Hurray!

TheTracker

Snakey wrote: »

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.

Probably the best tax mitigation strategy for a high earner is to incorporate your services as a limited company. This allows you to disburse funds at your will and command, not your employers, and of course comes with other more immediate tax benefits. Of course it comes with balancing disadvantages not least the likelihood of leaving your current employer.

I'll hit the LTA well before retirement. I'm not slowing down in contributions, hoping common sense will reign one day. If it doesn't, I'll extract the retained earnings from my LtdCo through other tax efficient means.

jamesd

Bootsox wrote: »

Is the LTA not due to rise by RPI at some point?

Yes. CPI rather than RPI. Doesn't really help because long term growth of the UK stock market has averaged around 5% plus RPI inflation.

Bootsox

jamesd wrote: »

Yes. CPI rather than RPI. Doesn't really help because long term growth of the UK stock market has averaged around 5% plus RPI inflation.

Say we were were to use a conservative 1.1% CPI figure and re-run the calcs:

(1.011)^15 = +18%

Which equals another £180,000 worth of allowance.

Whether the 5% long term growth will be achieved (or bettered) over the next 15 years is debatable but the potential £180k worth of allowance must help the OP's cause?