Pensions - Lifetime Pension Limit - How close !!??

darren72

I currently hold both a local government final salary pension and a SIPP. I've stopped paying into the final salary scheme as I am no longer employed by the local government.

My SIPP I haven't contributed into now for around 2 years due to my concern over reaching the lifetime pension limit.

Although my SIPP is only currently valued at £290,000 I am concerned that over the next 20 years plus (I'm 37) there is a possibility of this increasing to over the current £1 million limit.

My last local government pension statement shows that from the year 2047 my annual pension from that is currently valued at £13,000 with a lump sump of £7,500.

As it is impossible to know how well my investments (SIPP) are going to do over this time, how can I know when is the right time to stop contributing into the SIPP ?

I'm currently paying 45% income tax at the moment and want to make the most of tax relief whilst I am at this level. I've also invested in VCT's and EIS/SEIS in the current and last few tax years.

Thanks in advance

colesy

As an advanced rate tax payer you're subject to tapered relief so I wouldn't be too concerned about the lifetime limit. Start filling up an ISA - it's the obvious omission from your plan, albeit the tax benefit is in the back end rather than the front end.

darren72

Thanks for your reply. I haven't mentioned all my savings - but I already max out my ISA entitlement.

Sambella

You can estimate the local government pension pot as :-

13000 x 20 + 7500 which gives a pot of £267,500

using the x 20 calculation and adding the lump sum should help you work this out which could help you when working out total pot sizes fro the limits.

darren72

Thanks Sambella - So that makes the total of the local government and SIPP to be £557,500 both are likely to increase in value year on year with no way to guess how well they are going to perform. In theory the value could be worth way more than the £1m limit, or less.

Or am I missing something obvious ?

Sambella

darren72 wrote: »

Thanks Sambella - So that makes the total of the local government and SIPP to be £557,500 both are likely to increase in value year on year with no way to guess how well they are going to perform. In theory the value could be worth way more than the £1m limit, or less.

Or am I missing something obvious ?

You won't reach that local govt pot size until 2047. Many things could happen before then, divorce, redundancy etc
Perhaps better to work the pot out on what it is worth if you retired today and review it often.

bigadaj

darren72 wrote: »

Thanks Sambella - So that makes the total of the local government and SIPP to be £557,500 both are likely to increase in value year on year with no way to guess how well they are going to perform. In theory the value could be worth way more than the £1m limit, or less.

Or am I missing something obvious ?

You'd hope that the lifetime allowance would tart to increase with inflation but it has reduced over the last few years.

I'd try and rebate everything into today's money and ignore inflation, uprate the db pension and then assume say 4% related returns in the sipp. This will give you some idea of where you might be in 30 years, and maybe then make assumptions about lifetime allowance.

You are in a fairly limited cohort worrying about lifetime allowance in your thirties, maybe you need to be spending more!

darren72

OK, thanks - That makes sense.

So the question really is whether my current SIPP is likely to increase in value to £733,000 or not (which would reach the £1m limit).

£290,000 SIPP increase to £733,000 is very possible over the next 20+ years.

I'm trying to work out whether it makes sense to continue contributing into my SIPP, or stick to other tax efficient investments such as the VCT's.

darren72

bigadaj wrote: »

You'd hope that the lifetime allowance would tart to increase with inflation but it has reduced over the last few years.

Thank you. Yes, just taking the SIPP amount with 4% annual returns would be equal to around £940,000 by 2047. As you say though, hopefully the lifetime limit will start to increase.

Triumph13

Two other factors to take into account:
1)The possibility of having access to a company pension with employer's contributions at some point in the future. If that is a possibility then you'd rather fill any remaining LTA that way than doing it 100% yourself.
2)Your likely tax rate in retirement. If you plan to retire early and have an income below the HRT threshold then the LTA charge isn't something to get too worried about as you'd effectively just be paying 40% tax taking out having got 45% relief going in. (assuming rates don't change of course!). If you expect to keep working and end up paying higher rate tax in retirement then the LTA charge would be very painful as you'd be paying 55% tax - so in this case you definitely wouldn't want to be making any further payments to the SIPP.


All in all VCTs look like a much better bet for someone in your position.