LTA - when would you stop?

Snakey

I have £750k-ish and I'm 44.

Someone said to me this morning that I would probably be over the LTA by the time I hit 57 never mind 67.

I'd assumed I had a fair way to go before I needed to worry about that, what with the LTA being indexed and all. But maybe not?

If I apply for the protection I won't be able to make any more contributions. (Could always change my mind in the future and lose the protection of course, but in the meantime the chances are they'll have abolished higher rate relief.)

Anyone got any thoughts on this?

Without any pension contributions at all, my income for the current tax year would probably be a shade under £100k, so I'd need to start thinking about PA clawback and all sorts of new things.

zagfles

Well just the £750k with growth of 2% above inflation would get you close to £1million at 57 with no further contributions!

I don't think it's too tragic going over the LTA though. If you go a bit over, and it's your only income in retirement, you'll probably be able to drawdown without paying HRT, in which case the effective tax rate is 40%. If you got 40% or more tax relief going in then it's no worse than using an ISA.

Even if you pay HRT when drawing down - the effective rate is 55% which is still better than paying 60% if you're in the PA withdrawal band.

RickyB2000

Do you need more? What is your number and how close are you?

Perhaps consider reducing days, retiring early or just take the tax hit and enjoy spending some money.

jamesd

Snakey wrote: »

I have £750k-ish and I'm 44. ... Someone said to me this morning that I would probably be over the LTA by the time I hit 57 never mind 67.

Takes just 33% growth to get there and long term average for the UK stock market has been a bit over 5% a year plus inflation, which in ten years would get you growth of 71%, well over just inflation-linked LTA.

Snakey wrote: »

Without any pension contributions at all, my income for the current tax year would probably be a shade under £100k, so I'd need to start thinking about PA clawback and all sorts of new things.

PA clawback and the marginal tax rate that implies means that even with the LTA penalty you may be better off making pension contributions in that range.

Salary sacrifice can help if that's available to you, since the NI gains from that help particularly if there is any sharing of the employer NI.

You can reduce the effect of the LTA by choosing to take pension benefits when stock markets are low, to reduce the percentage of the LTA used. A 40% stock market drop could still do the job of keeping you out of the LTA charge.

Beyond that you might start looking at VCT and ISA investing so that you can retire before pension money is available to you.

You might even be able to retire now if you wanted to. Depends on your debt obligations and whether you have the non-pension assets to use to live as desired until pension money becomes available. If you can't do that and you're interested in retiring early now's the time to get really strongly active in non-pension investing.

TheTracker

What other savings/investments do you have? Potentially make your ISA and unwrapped savings the riskier equities and fixed or defensive holdings in the Pension, subject to access needs for non-pension holdings before pension drawdown age. With 100k income like yours and age 44 and maybe retire early 50s Id still keep contributing for a while, maybe to 850+. I do hope they raise the LTA when common sense returns but not holding my breath.

Snakey

Thanks guys. This has been where my pessimistic assumptions have come back to bite me - I've always worked on the assumption that what's in there now is what I'll have (in real terms) when I retire and so I'd have merrily carried on putting in £40k a year indefinitely. It was an informal chat with a friend who's a wealth adviser that made me think differerently. He says they're advising people in my position to stop making contributions and go for the protection instead.

I've got £15k in cash ISA, £75k in an S&S ISA which I'm about to invest in... something (still dithering over that one, first-time investor nerves), and about £8k in current accounts bearing interest.

Nothing else. I have a fair amount of equity in my flat, but Plan A involves me leaving here in a box (ideally not before about 2072) so I'm mentally discounting that - it just means no housing costs in due course.

I'd free up around £20k net per year if I stopped pension contributions altogether.

Early retirement does sound attractive, especially since they might raise the pension access age between now and when I get there. I could pay off most of the mortgage when the fixed rate runs out in 2019, and that would open up loads of options to me (part-time etc) much earlier than I ever anticipated.

I could always stick the freelance in a company to take my total income below £100k although I'd have to do some fast research (is it possible to put only *some* of a sole trade into a company, does the dividend allowance add to your total income for PA clawback etc).

This is a lovely problem to have, I know, but I'm nervous that hindsight will tell me that I could have carried on... I need to decide really quickly, because I need to get March's contribution cancelled before my employer pays it over (which is most likely this week) since that would otherwise hit the pot in April and invalidate my protection.

Or... carry on, on the basis that with salsac, NI uplift and the employer contribution (only 3%) I'm getting an effective 50% relief on the way in and so who cares if the whole lot comes out taxed at 55%?

My "number" isn't huge. Living in London I've no need for a car. Without a mortgage I'd need less than £10k a year for basic living expenses and everything else can go on holidays, days out, hobbies, gym membership etc. I was aiming at an income of just below whatever the higher rate band would be (so, say, £45k in today's money), but not for any particular reason.

TheTracker

You're an excellent example of what wrong with the LTA. Prudently saving into a pension for years, almost all your net worth in the pension, and now trapped with a situation where you're looking at retirement even though the pension is only enough to get you a 30k/yr income, and not accessible for years to come.

I suppose today's government would challenge that you've had it good with all the tax reliefs up until now, so future savings shouldn't have such reliefs applied. The trouble is it is such a 'step down' that people make behavioural decisions like working less, retiring out of the workforce, not seeking career/salary progression, or taking alternative steps (like incorporation) to pay less tax. You have a high income, but not crazy high, so can hardly accuse you of being a fat cat.

Not wanting to return to the LTA debates, but I always felt about £1.5m was a good limit, enough to furnish a 50k+ income, and unappealing for withdrawal tax reasons much higher.

I really can't see them lowering it again, but I was wrong before (twice).

aldershot

jamesd wrote: »

Takes just 33% growth to get there and long term average for the UK stock market has been a bit over 5% a year plus inflation, which in ten years would get you growth of 71%, well over just inflation-linked LTA.

This is a dangerous assumption for long term future planning. 5% real rates may have been available in the past but current long term IL gilts are negative and there is no sign of a let up in financial repression in the medium term (say 5-10 years). My assumption is for zero real rates and anything above is a bonus.

coyrls

Snakey wrote: »

He says they're advising people in my position to stop making contributions and go for the protection instead.

If you want to go down this route and take the £1.25M protection, you must make sure that you make no pension contributions this tax year (and all future years), if you make a contribution this tax year you will lose the ability to get the £1.25M protection.

However it's not necessarily the right course of action, as you will lose your employer contributions unless they have a scheme where they divert their contributions to your (taxable) pay. It may well work out better to reduce your contributions to the minimum required to retain your employer contributions and ulitmately take the LTA hit. Also the LTA limit is supposed to increase each year by inflation but not for the next three years, I think.

kidmugsy

Tell us about your employer contribution.

Snakey

3% non-contributory (no requirement to match). Anything I put in is done by salary sacrifice with a 13.8% uplift for the employers NIC.

It's a small firm and quite informal. I think that if I ran to the office manager, who I get on well with, she'd be able to cancel the March contribution (not sure how this would work - whether she'd need to re-do my March payslip or just pay me the extra this month) and throw the salary sacrifice letter in the bin (lifestyle change or whatever).

Obviously if she can't/won't do this then I'm dead in the water and will continue with Plan A. But I was hoping to decide whether I wanted to do it before asking, so as not to waste her time.

I honestly don't know whether they'd pay me the 3% as an extra on the salary. I can think of good arguments that they might make in both directions.