Lifetime Allowance

Korona

My hubbie has been told if he retires at 65 his DB scheme will be very close to the LTA limit. A financial advisor has told us last year not to make any more payments into his AVC because of this.

He is coming up to 50 and is now thinking he might like to retire earlier - maybe 60 - 62. Although our joint pension pot at retirement is very healthy - if hubbies goes first my share drops significantly as his scheme offers 50% spouses (I don't think we can ask for a higher %).

I also have a couple of DB schemes but as the very minor wage earner and basic rate tax payer - would it be efficient to make maximum contributions up to my annual salary - into my AVC? I'm a way off the LTA limit.

Any comments welcome.

bigadaj

Payments into your pension would seem to make sense of your husband is maxing pension options, the first thing to do is to work out what your potential earnings will be in retirement. Assuming state pension then if you would currently be a non taxpayer then making pension payments up to the personal allowance should be very favourable.

Whether this is best paid into an avc depends on a number of factors, does the avc allow,you to take a higher percentage of your benefits from this assumed defined benefit pension, what are their charges?

Assume, you are both maximising is a contributions currently, as these are tax free on the way out.

Also the savings and dividend allowance that has been recently introduced should be considered, particularly the latter as this would allow tax free income from say £150k of investments for each of you going forward, with an opprotunity to use up your capital gains allowance every year to avoid that tax as well.

Triumph13

It may very well make good sense to put your full salary into a pension - especially as you are thinking of retiring early. You can then draw out your full personal allowance plus your 25% lump sum tax free for each year until your DBs come into payment - you won't want to take those early as you are concerned about how much income drops if hubby predeceases you.
Whatever you do though, don't do it via your AVC. AVC contributions would generally only get you relief from the tax you would otherwise have paid. Contributions to a stand alone SIPP or PP get you 'tax relief' on every penny of you income, whether you paid tax on it or not.

jamesd

The DB annual allowance used is calculated as twenty times the ongoing income. If he takes the pension sooner that will reduce it. If he stops working there sooner that will also reduce it.

Given the desire to retire earlier it might make sense for him to continue to make pension contributions, but maybe not into the AVCs. At 55 he can take a tax free lump sum from a personal pension and this would also have the effect of fixing the percentage of the lifetime allowance used for that part, so no increase on it even if it grows. There's another check on just the growth at age 75 but that is usually easy to avoid by taking money out.

Many AVC schemes allow you to combine the AVC and DB values and take up to 25% of the combined value from the AVC, potentially getting all of the AVC money out tax free. It's important to know whether his scheme has this feature.

Many schemes make it possible to buy extra benefits for a spouse.

Whether contributions to your pensions beat his depends in part on the tax rates involved.

40% tax: £80 paid, grossed to £100 in pension, £20 back from HMRC. 25% LTA charge cuts pension to £75, £18.75 tax free lump sum, £56.25 taxable, either £45 at 20% or £33.75 at 40%. Either 20+18.75+33.75=72.50 or 20+18.75+45=83.75

Caution: that calculation is bogus and doesn't correctly handle the lifetime allowance because you're only entitled to any tax free cash if you still have lifetime allowance available! So there is really no 25% tax free lump sum available unless it's taken before the DB scheme. And hence also no LTA charge involved either if there is tax free cash being taken. It's either normal no LTA charge or its LTA charge and no tax free part at all. The DB rules are more fiddly still.

Vs say you at basic rate no sacrifice

£80 net cost, £100 into pension. 25% tax free plus £60 after basic rate pays £85.

All in all, though, pension contributions for you are considerably simpler and more certain and there's no telling just how bad future taxation above the LTA or whatever replaces it might be.

Triumph13

jamesd wrote: »

Even without salary sacrifice 75% of 40% is still 30% and above plain basic rate relief. Then his and your expected income tax rates in retirement come into play. If his is 40% and yours 20% that would move closer to you being better.

Sorry James, having trouble following you there. If he's over LTA he's being hit for a 25% charge on the gross, not just the tax relief. Without salary sacrifice his £60 net contribution is grossed up to £100, but then hit with a £25 LTA charge to leave £75 to extract from the pension. With equal tax rates in retirement that would be worse than a PP for the spouse as the spouse gets a 25% TFLS.

jamesd

Thanks, you're more right and I've added some example calculations that are still bogus as I've described in the revised post.

My guess is that he'll pay higher rate on the way out. That might win if he's making just over £100k a year and regains personal allowance as well as just the 40% relief, since that region has a 60% marginal tax rate.

kidmugsy

Korona wrote: »

I don't think we can ask for a higher %.

You must check that carefully. If the scheme does allow him to surrender some of his own pension so that you eventually get a bigger one that gives a double advantage. Not only are you better looked after but his pension will be reduced in the comparison with LTA because the multiplier of 20 will be applied to his smaller annual pension.

bigadaj

Don't suppose the OP is interested in a divorce?