LTA need I be concerned?

somethingcorporate

Thanks for reading.

I have seen a number of threads on the new LTA for people approaching retirement however, I am quite a long way from retirement and get conflicting information on whether I should be doing something different.

I am 30 years old, earn a £50k pensionable salary and put away 22% including my employers contribution with the intention to increase this to 25% over the next couple of years. I work in a FTSE100 company in a pretty secure job. I currently have £63k in my DC pension.

Putting these sums onto my spreadsheet it looks like I will get to a pension pot of somewhere between £700k with very pessimistic variables on salary inflation and investment returns and upwards of £2m with pretty optimistic variables if I retire at 65. Putting the numbers into the HL pension calculator it suggests I will get to a pot of only around £500k-550k. Should I be concerned about the LTA and consider reducing my pension contribution? I have more than maxed out my employer contribution so can afford to reduce the pension contribution with only losing the tax relief.

I have a fair spread of other investments (B2L, shares, cash) but the new LTA concerns me (although HL says it probably shouldn't...).

For context I have a wife who earns a similar sum with a similar pension contribution and slightly smaller pot. I also live in mortgaged house with no intention to move and plan to have no more children than my current one.

If anyone can suggest which numbers are more likely to be right and whether I should consider dropping my pension contribution to fill up ISAs (which we don't really do at the moment) then that would be great.

Thanks in advance!
SC

kidmugsy

Are your contributions done by salary sacrifice?

somethingcorporate

Yes, but I don't get any NI rebate from the employer to make it any more beneficial.

hugheskevi

Putting these sums onto my spreadsheet it looks like I will get to a pension pot of somewhere between £700k with very pessimistic variables on salary inflation and investment returns and upwards of £2m with pretty optimistic variables if I retire at 65.

I get a pension pot of around £2m (in cash terms) using pessimistic assumptions [contribution 22% as stated, growth 5% net of charges, earnings growth of 3%, CPI of 2%]. At age 65 the Lifetime Allowance would be £1.9m, assuming CPI uprating from 2018.

The problem is that the policy changes every year or so, making long-term planning very difficult. I think taking the most valuable incentives on the table is sensible (employer contributions, then higher rate tax with Annual Allowance) but certainly no more than that. I would also keep a close key on the extra amount contributed above that needed to max out employer contributions.

It wouldn't be foolish to dispense with all contributions above that needed to max out employer contribution. You may have taxable income above £100,000 or get access to better salary sacrifice in the future, but higher rate relief may be reduced in the future. A bit of a gamble, but personally I think I would take higher rate relief while it is there. I think it is a bit too early to be taking avoiding action when there are going to be many policy changes over the next 35 years. If you try to anticipate them all, you will end up with sub-optimal strategies and missing out. There is a lot to be said for taking what is on the table at any given moment and maximising what you can as you go along and things change.

Also consider options around early crystallization to reduce the burden - which in your case would be at least age 58 assuming stated Government policy is enacted in the next Parliament. That gives more headroom, but you would still be above the limit with 7% growth.

somethingcorporate

hugheskevi wrote: »

I get a pension pot of around £2m (in cash terms) using pessimistic assumptions [contribution 22% as stated, growth 5% net of charges, earnings growth of 3%, CPI of 2%]. At age 65 the Lifetime Allowance would be £1.9m, assuming CPI uprating from 2018.

The problem is that the policy changes every year or so, making long-term planning very difficult. I think taking the most valuable incentives on the table is sensible (employer contributions, then higher rate tax with Annual Allowance) but certainly no more than that. I would also keep a close key on the extra amount contributed above that needed to max out employer contributions.

It wouldn't be foolish to dispense with all contributions above that needed to max out employer contribution. You may have taxable income above £100,000 or get access to better salary sacrifice in the future, but higher rate relief may be reduced in the future. A bit of a gamble, but personally I think I would take higher rate relief while it is there. I think it is a bit too early to be taking avoiding action when there are going to be many policy changes over the next 35 years. If you try to anticipate them all, you will end up with sub-optimal strategies and missing out. There is a lot to be said for taking what is on the table at any given moment and maximising what you can as you go along and things change.

Also consider options around early crystallization to reduce the burden - which in your case would be at least age 58 assuming stated Government policy is enacted in the next Parliament. That gives more headroom, but you would still be above the limit with 7% growth.

Thanks, with those margins of errors then I will probably keep on with my plan rather than continuing to ramp up to 25% over the next few years as I get pay rises.

Thanks again for your help

Triumph13

While I was running the numbers hugheskevi said just about everything I was going to say!
The outstanding questions is what are your retirement plans and your career ambitions? If you expect to be earning shedloads in the future with big employer contributions that would turn you away from any extra contributions now above what was needed for maximum employer conts. Assuming that isn't an issue then your current numbers mean you will probably go over if you retire ay 65, but probably won't if you retire at 58. Which of those is more likely?
My personal view would be the same as hugheskevi - take the HRT relief while it lasts - and reassess a few years down the track.

somethingcorporate

Triumph13 wrote: »

The outstanding questions is what are your retirement plans and your career ambitions? If you expect to be earning shedloads in the future with big employer contributions that would turn you away from any extra contributions now above what was needed for maximum employer conts.

There will be scope for career and salary development but it really depends, I moved out of the south working in London to live in rural North Yorkshire when the finance function I work in is currently London centric to for the next 5-10 years I don't see rapid growth (3% PA is likely). I am not particularly ambitious and currently work from home so it would have to be a very generous offer to get me out of my current job!

At present the pension scheme is maxed out at a 9% employer contribution with anything over 6% from myself.

Triumph13 wrote: »

Assuming that isn't an issue then your current numbers mean you will probably go over if you retire ay 65, but probably won't if you retire at 58. Which of those is more likely?

It's an interesting question and not one I have a real answer for at the moment. Ideally 60 but my wife and I are quite cautious individuals so we'll probably only retire when we know we are sure to have financial security when we finally leave work. I expect if we build up enough outside of pensions, which we are currently aiming to do, we will leave sooner than 65.

Triumph13 wrote: »

My personal view would be the same as hugheskevi - take the HRT relief while it lasts - and reassess a few years down the track.

I think I will. It will also show how accurate my forecasting goes for the next 4-5 years.

Thanks for your input and suggestions, much appreciated.