Pension annual allowance taper for high earners

aktivemac

Hello! I've got a few questions about the pension changes that came in on 6th April this year & was hoping someone might be able to offer some advice.

I'm in the extremely lucky position of earning more than the £220k upper limit, with the effect that my annual pension allowance has now dropped to only £10k per year with the latest tapering for salaries >£150k since April 2016. I'm 32 and have a pension pot of just over £130k, so presume with this new limit very unlikely (even with investment gains) I'll now get anywhere close to the £1m overall limit, so don't need to concern myself with that.

Also, the amounts I contributed in last 3 years (aggregate of employer % contributions + my contributions) has been less than pre-April 2016 £40k limit, so have some "carry over" amounts that I can use to boost the £10k limit this year.

Few questions:

1) How does all this get calculated? Do I leave it for my self assessment? Presume my income will flag as part of SA highlighting that tapered £10k limit applies, but how does my carry over amounts get deducted? Do I have to note these somewhere on SA form, or does pension provider or HMRC track all this?

2) Going forward, once my carry over amounts are exhausted (probably next year) I'm going to have to get my employer to reduce the amount they pay into my pension and pay me as additional taxable income instead. Any other suggestions on efficient ways to approach this with my employer, or is it literally just get them to pay difference as additional gross income?

3) Does anyone have any sensible suggestions as to what to do in place of paying into my workplace pension (for amounts above the £10k limit)? I invest generally in shares/funds. But is there some other strategy/investment product that pension advisors are now suggesting to anyone in my situation & which I should investigate? Or is it simply a case that its prudent to now setup a lower risk investment platform (vs. my other equity investments) and pay the same amount that would have been contributed into my pension into low-risk funds/gilts instead? Or alternatively just increase my relatively more risky equity/fund investments given my age & fact probably sensible to have higher risk appetite?

Really appreciate any guidance on this.

Thank you!

jamesd

It gets calculated by you (1, 2, 3 say how in various ways) and you tell HMRC about it in self-assessment only if you have gone over the combination of limit and available carry-forward for a year.

Salary sacrifice can help by reducing the NI bill. Your employer's payroll people should already be aware of the taper but they won't be aware of any carry-forward allowance that you have available so you may need to tell them this year how much you have and use to beat them telling you that you need to watch out for the taper.

It's worth considering whether you should delay using some of the available carry-forward to allow employer contributions to continue at a higher level for longer. Depends on how much the employer is adding out of their own pocket compared to how much you're adding yourself.

VCTs particularly but also EIS have useful tax relief, though the VCTs have some that have relatively lower risk than typical EIS options. One nice thing about these is that the tax relief is available more than once on the same money, since you can invest, wait the required time, sell and use the same money to invest again. You probably don't have the savings to do it yet but it's possible to mostly eliminate your income tax bill using these each year. In the VCT case you might buy enough to eliminate it each tax year at the front end and five years later take out the money as deferred income by selling. Long term that would leave you with five years worth tied up and consistently lower ongoing net tax cost.

aktivemac

Many thanks jamesd - very helpful. I'll go through the links you provided in detail tomorrow. I've pulled together a quick spreadsheet, but not sure if right - sure these links will help clarify.

Can you expand on your point about potentially delaying the use of my available carry forward? My employer currently contributes 12% of my base salary (core 6% and 6% matched against 6% I contribute). I then contribute an additional 4% to bring it up to 22% total. Is there a most efficient way to use my carry forward in coming years?

I have considered VCTs in the past as a tax-efficient investment, but not looked into them in detail. I'll take another look.

Again, thanks for all your help!

jamesd

Ensure that you have enough unused carry-forward to allow the full 6+6 level for the three years (this one plus the next two). No harm to use the rest and you can't go beyond three years due to the three year carry forward time range.

colesy

I'm in the same situation but I think you get to the £10k maximum contribution at £210k, not £220k.

This tax year I'm using up most of my carry forward which is allowing me to contribute a lot more than £10k. Next tax year, I will be using up the last of my carry forward and will have excess funds looking for a home. The advice I've had from both my accountant and IFA is max out my S&S ISA and anything above that, start using my DW's allowances to fund her S&S ISA. Finally start a second pension for the DW as a last resort for anything left after everything else is funded to the max (she's a basic rate taxpayer so it's not such a great deal and is already in a DB scheme).

I did think about VCTs but they are a little above my risk tolerance.

aktivemac

Thanks colesy - yes you're right on the £210k limit.

Sounds like maximising S&S ISAs of both me and my wife is the first step (mine already, but not hers). Also sounds like we need to make sure we boost her pension contributions to the £40k limit as not an additional rate tax payer.

VCTs do sound interesting, just need to get a better feel for the risks involved.

Thanks again everyone

colesy

aktivemac wrote: »

Thanks colesy - yes you're right on the £210k limit.

Sounds like maximising S&S ISAs of both me and my wife is the first step (mine already, but not hers). Also sounds like we need to make sure we boost her pension contributions to the £40k limit as not an additional rate tax payer.

VCTs do sound interesting, just need to get a better feel for the risks involved.

Thanks again everyone

VCTs the upside

30% tax back when you buy, but only for new issues.
All gains free from CGT on sale.
All dividends free from income tax.

VCTs the downside

Must be held for 5 years or you have to pay the tax back.
Can be illiquid, may not be a ready market when you want to cash out.
The fees are high, ongoing and on entry, and often include a percentage of the gains, in addition to standard percentage of portfolio value.
A significant percentage of the portfolio will make no money, offset in theory at least by one or two superstars - that the bit that takes me out of my comfort zone.

jamesd

VCTs vary a lot. Some are high risk, some do something akin to asset-backed P2P lending and have most of the portfolio always contributing. It's usual for the VCT manager to buy back shares of the VCT at a minimum price that can typically vary between net asset value minus five percent and minus twenty percent, depends on the specific VCT.