LTA - when would you stop?

kidmugsy

Snakey wrote: »

3% non-contributory (no requirement to match).

You mean that the employer pays 3% and you need pay nothing? In which case the 3% is still free money even if you eventually pay 55% tax on it, isn't it?


In your shoes I'd consider what alternative employer benefit I might like funded by sal sac. Or even by the 3% too.

Snakey

That's correct (free money) - although my thinking is that if getting that extra £2.5k a year means I lose £250k of LTA (assuming for the sake of the argument that my pot with no further contributions would reach £1.25m by the time I touch it), then it's quite an expensive freebie.

Apparently the payment has been authorised and goes across to Standard Life tomorrow (cannot be stopped at this point). SL then presumably, at least going by previous months' dates of the conts appearing in my fund, take a week or so to allocate it to everybody's personal accounts. I could possibly phone them now and see if they can refund it to me instead.

I am sure this wizard wheeze will, if successful, make me super-popular with the office manager who will really enjoy working through the admin/payroll issues. At least death benefits are tax free, should she shove me down the fire escape.

Good idea about salary sacrifice for other benefits. Hadn't thought that far. Extra annual leave would be quite nice if all else fails.

EdSwippet

kidmugsy wrote: »

You mean that the employer pays 3% and you need pay nothing? In which case the 3% is still free money even if you eventually pay 55% tax on it, isn't it?

But aren't you forgetting the effect of the step change in LTA? That exposes £250k of investment gain to a 25% punitive rate, but is avoidable if taking FP16. 3% of a £100k salary for 20 future years is a £27k gain after 55% tax, but 25% of the £250k LTA reduction is a £62.5k loss in additional tax.

Edit: Apparently Snakey already had this figured out. The LTA on its own is devilishly complex. The repeated reductions defy logic in many ways. (FWIW my employer repeatedly refused point-blank to offer any other benefit in lieu of forgone pension match due to LTA issues.)

kidmugsy

EdSwippet wrote: »

But aren't you forgetting the effect of the step change in LTA?

No doubt. I hate these sorts of fiendishly complex considerations influencing what ought to be a fairly simple business.

I'd much rather people criticised Cameron for presiding over two governments that have made this problem worse, rather than the non-existent scandal about Panama.

jamesd

aldershot wrote: »

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.

In this context, zero rates would be a dangerous assumption and above average rates safer. The risk being considered is ending up above the lifetime allowance and lower returns decrease that risk while higher increase it.

For actual drawdown type retirement planning I prefer to use something like cFIREsim with the Guyton-Klinger spending plan and assorted adjustments so that I get a much better handle on the potential sequence of return risks. You'll find a few walkthroughs of using that tool here if you do a search on the name.

I don't currently care that much about gilts or corporate bonds because I'm mostly out of those markets and equities are of decreasing importance to me at the moment as well, since I'm switching into P2P for at least a while.

marlot

I have no problem with a limit on tax relief on money going into pensions, but the LTA is evil. The fact that a 44 year-old (the OP) is having to wrestle with these issues 20 years or more before retirement is wrong.

coyrls

If you assume that the LTA stays at £1M increased by inflation and that there is a 2% inflation rate for 20 years, the LTA would be around £1.486M, which would be higher than your £1.25M protection.

jamesd

Snakey wrote: »

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.

It's good general advice but I think that timing based on a stock market drop should keep you in the safe range given your current numbers. Worth mentioning the magic phrases "staged drawdown" and "crystallise most during market dips" to the adviser.

Snakey wrote: »

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 rather like the range of 12% P2P options that are out there these days, though some prefer the 6% or so types and a blend can be interesting also.

Snakey wrote: »

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%?

You still have gain or at least neutral potential for a fair chunk of money so no need to stop quite yet. And full 13.8% employer NI added? Very nice!

With the personal allowance withdrawal for income between £100,000 and £122,000 you can be getting 60% just in income tax saving, plus the employee 2% NI and employer 13.8% NI on top. So something like this:

Sacrifice gross 22k to go from 122k to 100k. Before sacrifice you would have net income of £73,826.80 with income tax of £42,400, employee NI of £5,733.20 and employer NI of £15,716.54.

After sacrifice you'd have net income of £65,466.54 with income tax of £29,200, employee NI of £5,333.20 and employer NI of £12,680.54. In the pension you'd have the £22k sacrificed plus the £3,036 employer NI difference, a total of £25,036. For a net income drop of just £8,360.26.

Even if we pretend that the 55% LTA charge is on the whole lot taken as a lump sum, ignoring 25% tax free lump sum, 45% of the £25,036 is £11.266.20. Of course you might well instead take the money out as income and pay the lower 25% LTA charge plus income tax, since that probably would save you tax.

Snakey wrote: »

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.

So get on with upping the non-pension investing so you can get retired well before you can take the pension money. Then plan to take much of the pension pot just when there's a downturn, since you can easily do that by taking some each year if needed instead of crystallising all at once.

Snakey

coyrls wrote: »

If you assume that the LTA stays at £1M increased by inflation and that there is a 2% inflation rate for 20 years, the LTA would be around £1.486M, which would be higher than your £1.25M protection.

I hadn't even thought of that! (And I guess neither has my mate, unless there's something else he has in mind that we're not thinking of).

If I'm hitting the right buttons on my calculator I make it fifteen years at 2% inflation (assuming no indexing of the first three) before the £1m+ limit overtakes the £1.25m fixed limit. So (subject to inflation being different) fixed protection wouldn't be any use to anybody unless they could access their money before 2031? I'd only just be the right side of that line, so my saving would be minimal - potentially less than my lost employer contributions and lost ees/ers NIC savings over the years.

Taking the protection would protect me against them lowering the LTA again in the future, or freezing it. And not putting any more contributions in also helps me if the goal is to not exceed X, whatever X ends up being.

James makes a really good point about crystallising in a dip, which I would be able to hang on for if I had other savings by then - although I only have the one life and I am reminded here of those people who decided to rent until house prices crashed to 3x average income and there they are 20 years later, still waiting.

So maybe... I don't take the protection but cut down the contributions so that a) I can invest into things I can access before 55/57 (good thinking, James and Tracker) and b) I'm less likely to breach the LTA (or breach it by as much)?

Gah. I hate not having enough time to consider everything properly! I will try to unwind the imminent payment of March's contribution, and that will buy me some time to think.

marlot

coyrls wrote: »

If you assume that the LTA stays at £1M increased by inflation and that there is a 2% inflation rate for 20 years, the LTA would be around £1.486M, which would be higher than your £1.25M protection.

The LTA was £1.8m only six or seven years ago. By reducing it so far, its knocked my confidence that any index linking will actually happen - chancellors will always feel the temptation to let it drag. Or worse still, reduce it yet again.