LTA Protection

ffacoffipawb

The current LTA is £1.25m reducing to £1m in April 2016.

I understand I can keep the higher LTA if I register this with HMRC and pay no future contributions after April 2016.

Question is, should I.

I am 51 years old.

I have a preserved DB of currently £12k payable from age 60. Current notional LTA value is x20 = £240,000

I also have £500,000 approx. in a SIPP and £100,000 in my current employer's stakeholder group pension (been with them just over 2 years) so you can see I am already up to nearly £850k.

I pay in the maximum £40k every year (stakeholder plus SIPP) so could easily reach £900k by April 2016.

Having written this down, keeping the £1.25m LTA is a no brainer isn't it.

I earn £60k so would lose all child benefit from April 2016 if I were to do this. Seems a lot of swings and roundabouts.

Wife is in employment with a pension of her own and we get no tax credits as our incomes are too high despite my £40k pension contributions.

Thoughts?

jamesd

I suggest that you take the risk of continuing and crystallise after the next 20-40% market correction following you reaching 55. Assuming one happens in time to be useful to you for this purpose. and not too soon, something which is quite likely, but maybe there won't have been a full recovery by the time you hit 55.

CB loss, possibly some employer matching loss, maybe some NI salary sacrifice loss, you might well end up better off by paying some LTA penalty.

If your wife is in fine shape and higher rate tax payer an alternative might be to direct some pension contribution money for her contributions.

kidmugsy

ffacoffipawb wrote: »

The current LTA is £1.25m reducing to £1m in April 2016. ....

I pay in the maximum £40k every year (stakeholder plus SIPP) so could easily reach £900k by April 2016. ....

I earn £60k

Why contribute so much? Once you've "earned" your maximum employer contribution, and avoided higher rate income tax, what is the point of paying in any more if it might give you problems with the LTA?


In your shoes I'd consider keeping the employer contribution running, and cope with your problems by (i) drawing the DB pension early, whereby the actuarial reduction would reduce your total valuation, and/or (ii) stopping assuming that the value of the assets in your DC pensions is bound to keep increasing. Why not just wait for a downturn and crystallise then?

jamesd

taking DB early could be good. So far as downturns go, one way to exploit that is with staged drawdown, so even if it takes a while to happen there's still uncrystallised pot around to use.

ffacoffipawb

Good advice, thanks all.

Large contributions were to be able to retire early at 55 comfortably. Reductions in LTA are scuppering that somewhat.

EdSwippet

Okay, I'll go against the crowd here and inject a note of possible caution to carrying on contributions. Depending on how you plan to retire, the figures for not retaining the higher LTA -- assuming it's offered this time round -- look somewhat dismal to me.

If you have £900k by April next year, the traditional 7% annual growth assumption alone (no further contributions) gets you to £1.25m in just five years, so right about when you hope to retire.

If you take fixed protection and then your full 25% lump sum when you hit £1.25m through portfolio growth, you receive all £312k.

If you pass on fixed protection and take your full 25% lump sum at the same time, when you hit £1.25m, 20% falls over the LTA and is taxed at 55%. That's an unattractive and avoidable £34k avoidable tax hit. Or you could take a smaller £250k lump sum when your portfolio hits the lower LTA of £1m. No tax, but £63k less in tax free lump sum, so also unattractive.

And that's just the lump sum. From there on, more avoidable tax hits with each taxable withdrawal. Not as visible as with the lump sum because the withdrawals themselves are taxed at your marginal rate. And mitigated by the (*) LTA inflation uplift. But avoidable tax hits nevertheless.

You'll want to be absolutely certain, then, that all of this doesn't more than negate the gains from continuing contributions after the LTA drops.

I'm not in your position, but relatively close, and I'm definitely leaning towards taking fixed protection and stopping contributions from here on. The gain from continuing contributions for two or three years would have to be very large to compensate for £63k less return.

UK pension and tax law is now completely unmoored from logic and common sense.

(*) Proposed. Promised. Pledged. Doesn't matter. Believe it only when it is written into pensions law. And even then, believe it only for today. Also be assured that even if it materializes, any LTA inflation uplift will be much, much lower than the average and anticipated 7% growth rate on pension portfolios.

ffacoffipawb

EdSwippet wrote: »

Okay, I'll go against the crowd here and inject a note of possible caution to carrying on contributions. Depending on how you plan to retire, the figures for not retaining the higher LTA -- assuming it's offered this time round -- look somewhat dismal to me.

If you have £900k by April next year, the traditional 7% annual growth assumption alone (no further contributions) gets you to £1.25m in just five years, so right about when you hope to retire.

If you take fixed protection and then your full 25% lump sum when you hit £1.25m through portfolio growth, you receive all £312k.

If you pass on fixed protection and take your full 25% lump sum at the same time, when you hit £1.25m, 20% falls over the LTA and is taxed at 55%. That's an unattractive and avoidable £34k avoidable tax hit. Or you could take a smaller £250k lump sum when your portfolio hits the lower LTA of £1m. No tax, but £63k less in tax free lump sum, so also unattractive.

And that's just the lump sum. From there on, more avoidable tax hits with each taxable withdrawal. Not as visible as with the lump sum because the withdrawals themselves are taxed at your marginal rate. And mitigated by the (*) LTA inflation uplift. But avoidable tax hits nevertheless.

You'll want to be absolutely certain, then, that all of this doesn't more than negate the gains from continuing contributions after the LTA drops.

I'm not in your position, but relatively close, and I'm definitely leaning towards taking fixed protection and stopping contributions from here on. The gain from continuing contributions for two or three years would have to be very large to compensate for £63k less return.

UK pension and tax law is now completely unmoored from logic and common sense.

(*) Proposed. Promised. Pledged. Doesn't matter. Believe it only when it is written into pensions law. And even then, believe it only for today. Also be assured that even if it materializes, any LTA inflation uplift will be much, much lower than the average and anticipated 7% growth rate on pension portfolios.

Thanks.

Contributions can presumably continue for another year before I make my decision, but it looks like ceasing contributions may be the most tax efficient option to keep the £1.25m.

By the way the employer contributions is matching the employee up to a max of 6% with half the employer NI salary sacrifice saving on top.

EDIT: Does everyone need to edit every post to remove the double blank lines between paragraphs?

EdSwippet

ffacoffipawb wrote: »

By the way the employer contributions is matching the employee up to a max of 6% with half the employer NI salary sacrifice saving on top.

So by not contributing you forego, by my calculations, around £7160/year in matching and employer NI (calculated from: salary £60k, contributions £40k, so 60000×.06+40000×(.138÷2+.02)). Because this goes into pension and may be taxed on the way out at the more-than-LTA 55% rate, the benefit to you directly is around £3222/year.

This suggests it would take you just under 20 years(!) of additional contributions at this rate for the match and employer NI to make up the £63k lost to the lower LTA.

ffacoffipawb

EdSwippet wrote: »

So by not contributing you forego, by my calculations, around £7160/year in matching and employer NI (calculated from: salary £60k, contributions £40k, so 60000×.06+40000×(.138÷2+.02)). Because this goes into pension and may be taxed on the way out at the more-than-LTA 55% rate, the benefit to you directly is around £3222/year.

This suggests it would take you just under 20 years(!) of additional contributions at this rate for the match and employer NI to make up the £63k lost to the lower LTA.

Need to factor in the loss of child benefit of £50 per week approx. for 3 children, oldest 9 and youngest 4, for the 4 years until I give up work and income falls below £50k again.

Alternatively switch to 4 day week at £48k pro rata if possible from April next year when ceasing pension may be sensible. As this is under £50k full child benefit is retained.

EdSwippet

ffacoffipawb wrote: »

Need to factor in the loss of child benefit of £50 per week approx...

It seems like that adds £2600 of net benefit a year then (don't get child benefit, never have, and don't know the details). That would take you down to 11 years of contributions at these rates to make up the LTA reduction loss. Still more than the four you plan.

Retire earlier than 62 and it seems unlikely that you would make up the difference.

Retiring at or after 62 to break even on the LTA reduction also assumes that 'everything else is equal' until then. Lowering of CB? (Assured in one case, because your youngest passes age 16 before you reach 62.) Further lowering of LTA? Employer reduces match and/or NI rebate? Loss of job entirely? Early retirement due to ill health?

No way, of course, of weighing those probabilities. UK pension planning is now no more than a guessing game. A tarot deck is at least as likely as any financial planner to get you a better outcome. Probably more so, since the tarot deck has lower charges.

Sterlingtimes

EdSwippet wrote: »

No way, of course, of weighing those probabilities. UK pension planning is now no more than a guessing game. A tarot deck is at least as likely as any financial planner to get you a better outcome. Probably more so, since the tarot deck has lower charges.

This latest move seems to be designed to out-flank Balls rather than being part of a consistent policy.

It is certainly an anti-investment approach for those of us coming close to retirement necessitating the need to consider reductions in contributions and a variety of work-arounds.

So quite unnecessarily I am moving more of my SIPP into capped drawdown on Monday, I shall take my DB pensions earlier than planned and grab my 25% tax-free cash from my DC pensions while the going's good.

I am appreciate of having an IHT shield but even that could disappear.

The mentality created is that it is better to take what you can while you can (from your pension) because tomorrow's tax regulation may deny you of it.