Lifetime Pension Allowance - Will I be near it !?

darren72

I am currently 36 years old and have the following pensions. It is quite some time before I am due to retire, but with investments hopefully increasing in value between now and my retirement, how do I know whether I am going to go over the lifetime pension allowance limit ?

I would still like to make more contributions into my SIPP pension, but not if I am likely to be over the limit at retirement.

I currently have £275,000 in a SIPP (with Interactive Investor), and have a deferred local government pension which I have made additional contributions to. That shows the following:

At pension age (2047) - including additional benefits purchased.
Annual Pension: £13,000.00
Retirement Grant: £7500.00

So there are two points really:

1) How easy it is to put a 'value' on the local government pension when the figures quoted are a lump sum and annual pension ?

2) How can I tell whether I'm likely to be close to, miles away or over the lifetime pension allowance limit ?

Thanks in advance for any assistance and/or guidance.

xylophone

https://www.unbiased.co.uk/news/a-five-minute-guide-to-the-pension-lifetime-allowance-reduction/1700

may help.

jamesd

With 30 years to go the value of a defined contribution pot might increase by the UK stock market's average return of a bit over 5% plus inflation before charges. 5% a year would increase the pot value to 4.32 times its current value. Defined benefit pensions are valued at 20 times the annual income.

You would then have 4.32 * £275,000 + 13,000 * 20 + £7, 500 = £1,118,000 + £260,000 + £7.500 = £1,455,500.

That is above the current £1 million lifetime allowance so you are already on track to increase it even with no more personal pension contributions.

If growth in the iii pot was 4.5% plus inflation the value would be 3.75 times current, so £1,031,250. So still on track to be over the allowance.

You can reduce your potential lifetime allowance exposure by taking benefits - say just the tax free lump sum - at age 55 and ideally during a big market drop. It's the percentage of the lifetime allowance used that is tracked and used in future calculations so a big drop will reduce the percentage. So does taking benefits as early as possible, before much of the growth has happened. Later growth is starting from a 75% value and is not tested again against the lifetime allowance until age 75, by which time you can have drawn much of it out so the value is not above the 75% starting value.

Say you reach 55 after 18 years. Compound growth at 5% would be to 2.41 times, so £662,750 or at 4.5% to 2.21 times, so £607,250. Those would leave you within the lifetime allowance and able to make more contributions for a while.

You can also consider things like VCT buying, to the extent those are appropriate to you. They get 30% income tax relief that has to be repaid if you sell within five years and tax exempt dividends. You can do buy, sell after five years buy again, subject to a delay between selling and buying of some months. Tax relief is limited to your income tax liability in the year of purchase.

So a broad plan, take benefits as soon as you can, perhaps use VCTs and make some limited additional pension contributions because you still have some room for them. To the extent that you receive employer matching the value of this is also greater than the lifetime allowance charge cost so that much continues to be worth doing even if it means you go over the limit.

Added later: I used "plus inflation" growth so all numbers including lifetime allowance are already corrected to today's money values after inflation and the announced inflation-linked increases in lifetime allowance.

JasonPr

I'm in a similar position and it's extremely hard to plan for 20-30 years out given the number of changes to pensions in the last few years and undoubtedly with many changes yet to come.

I agree with jamesd that taking the lump sum as early as possible will be key, although the 55 figure given by jamesd won't apply (more like 57 or so).

EdSwippet

jamesd wrote: »

That is above the current £1 million lifetime allowance so you are already on track to increase it even with no more personal pension contributions.

The lifetime allowance is supposed to be index linked to inflation from 2018. Assuming that the government actually implement this -- and I'll admit that may be a wild assumption given its track record so far on pension rules stability -- 2% inflation would take it to £1,775,00 by 2027.

somethingcorporate

No-one else has picked up but that is an amazing achievement by the age of just 36, well done.

I chuck 33% of my salary into my pension and will only be at £200k at 36 years age so you have done very well. Good work!

jamesd

EdSwippet wrote: »

The lifetime allowance is supposed to be index linked to inflation from 2018. Assuming that the government actually implement this -- and I'll admit that may be a wild assumption given its track record so far on pension rules stability -- 2% inflation would take it to £1,775,00 by 2027.

The growth numbers I used were "plus inflation" which means that I was already increasing the lifetime allowance by inflation: everything in today's money values.

jamesd

somethingcorporate wrote: »

No-one else has picked up but that is an amazing achievement by the age of just 36, well done. ... I chuck 33% of my salary into my pension and will only be at £200k at 36 years age so you have done very well. Good work!

Both doing impressively well. The challenge isn't so much pension as non-pension to let you retire as early as you could, if you want to. Quite a time to bridge to age 55 or whatever it is when it's relevant to you.

EdSwippet

jamesd wrote: »

The growth numbers I used were "plus inflation" which means that I was already increasing the lifetime allowance by inflation: everything in today's money values.

Thanks. I missed that detail.

So if the government breaks its pension promises as usual, then, the OP is in an even more awkward position. Sigh.

ex-pat_scot

Two real risks to the existing strategy:

1. changing the age at which you can access your pension.

Until recently, this was 50. It was suddenly changed to 55, and there are suggestions that it might be further increased to SPAge minus 10, or minus 5, or even SPAge.

2. Lifetime allowance.

It is due to be indexed, but has regularly been reduced over the last few years from 1.8m to 1.25m to 1m.
Frankly, it serves no purpose that an effective Annual Allowance can't also achieve. The AA also allows certainty (it's over contributions, rather than value).

darren72

Thank you everyone who has taken the time to reply - I really appreciate it.

Looking at those figures then I would say I am best not putting anymore into a pension at the moment.

I've already been investing into VCT's and more recently into a EIS and SEIS - I think this is probably the way to go for the moment in order to get the tax breaks.

Surely it would be easier for all involved if they limited the contributions rather than what it is going to be worth when you retire - Or would that be too much like common sense !?