LTA - another simple generalisation

harlequin95

Notwithstanding the huge uncertainties that exist, consider 2 investors, both of whom are going to exceed the LTA. (They may or may not know that at this point, it doesn't matter).

They are both 40% tax payers now. They both make a single lump sum contribution today.

Put the clock forward a few years. They are now both retired and drawing on their pension funds. They have already exceeded LTA. What do they get back out against that lump sum?

One is paying 20% income tax in retirement. Even after LTA charge, he can expect to get a reasonable return.

The other is paying 40% income tax in retirement. He could very well get less back from that lump than he paid in.

Unless I'm getting the rules or the sums wrong, this second chap needs, say 5% growth for 6 years, (or 3% growth for 10 years or 1% growth for 30 years) to break even. By contrast 5% for 6 years would give the other guy 34% net return.

So my simple generalisation. If you expect to pay only 20% tax most of the time you are retired, reduced LTA may not mean you should divert all your planned pension investment elsewhere ASAP. If you expect to pay 40% tax while you are retired, then it is highly likely that you should run screaming from making further pension contributions, as soon as it seems likely you will hit the LTA at all.

I'd be very grateful to hear whether people see it broadly the same way. It's taken me a while to get to this view, and it's not something I've seen put in those terms in the media.

mania112

Well £1,000,000 at age 65 will almost certainly make you a higher rate taxpayer, whichever way you withdraw it.

Daniel54

If they take the amount excess of the LTA as income,they both pay the 25% surcharge and then pay either 20% or 40% tax on drawdown.

For the 40% taxpayer,he may as well take it as a lump sum ( 25% +(40% x 75% ) = 55%

The 20% tax payer would be better taking it as income .The same calculation as above gets you to 40% total tax paid in that instance.As I understand it,the 20% taxpayer would still pay 55% if he takes it as a lump sum

coyrls

mania112 wrote: »

Well £1,000,000 at age 65 will almost certainly make you a higher rate taxpayer, whichever way you withdraw it.

Well you can take 25% (£250,000) tax free for a start. At a 4% withdrawal rate you can take £30,000 per year from the £750,000, keeping you below HRT.

harlequin95

Daniel54 wrote: »

If they take the amount excess of the LTA as income,they both pay the 25% surcharge and then pay either 20% or 40% tax on drawdown.

For the 40% taxpayer,he may as well take it as a lump sum ( 25% +(40% x 75% ) = 55%

The 20% tax payer would be better taking it as income .The same calculation as above gets you to 40% total tax paid in that instance.As I understand it,the 20% taxpayer would still pay 55% if he takes it as a lump sum

Exactly so. Do you broadly agree with my conclusion as to the relative impact on the two guys? The really short version being: 20% guy - some impact; 40% guy - bit of a disaster.

fizio

Unless you are DB scheme then surely anyone with a large pot would want to keep their income to just below the 40% threshold anyway - thats my strategy..

harlequin95

haf63 wrote: »

Unless you are DB scheme then surely anyone with a large pot would want to keep their income to just below the 40% threshold anyway - thats my strategy..

Well, yes I'd want to too, but I'm expecting substantial inescapable outgoings in retirement.

Interestingly your perspective leads to another putative rule of thumb, probably leading to the same kind of decision making as in my OP:

"In general you should not aim to amass a pot large enough, after tax-free PCLS, to provide an income greater than the higher rate tax threshold".

To put these ramblings into perspective, I've spoken to a couple of IFAs this week whose broad view is that despite these LTA changes, Pension Savings remains the best bet for me now. Frankly I am far from convinced.

fizio

personally I agree that maximising the pension pot to LTA is the most tax effecient way of investing. I intend to exceed LTA as part of my pot is DB so will reduce based on early retirement. My calculations imply i can get to 1.5m but crystallise at 1.25 by going a few years early

harlequin95

Yes I'm quite convinced that despite various raids by chancellors etc, pension saving has worked for me so far. My personal situation is that with LTA at 1.25 it was possible that I'd exceed it, but probably not by much. At 1M, then unless bad things happen, It's much more likely that I'll exceed it, possibly by quite a lot. All DC.

So I'm seeking to limit the potential damage, complicated by the fact that I get employers contributions which, over the remaining time I hope to work would be more than the potential tax exposure that may be avoided by taking FP16 assuming it's available, but not a whole lot more.

As a mentioned on another forum, I think I really will have to toss a coin.

Daniel54

harlequin95 wrote: »

Exactly so. Do you broadly agree with my conclusion as to the relative impact on the two guys? The really short version being: 20% guy - some impact; 40% guy - bit of a disaster.

The conclusion is that neither option is great - the bit that needs workng out is the employer contribution,assuming this cannot be taken as salary in lieu

In comparison ISas are very compelling ( 40% in,0% out) as are contributions to a spouse's pension.

I already have fixed protection and the buffer I left has been overtaken by strong investment performance in recent years.It will most pobably be a matter of timing crystallisations at opprtune times in the market and also waiting to see what the LTA is in 15 year's time ( main pensions are DB so can't do much about those)