LTA charge versus ISA

iwilson16

I was playing with some figures on a spreadsheet, and have come to the conclusion that if you think you will hit or exceed the LTA by age 75 then you are better off investing in an ISA with post-tax money rather than your pension (with pre-tax money).

Just wanted to check I've not missed something. Calcs are based on being a higher rate taxpayer, and I used the spreadsheet FV function.

I calculated what £40k of salary would be worth in 10 years time, assuming 7% investment return pa.

1. Pension option. £40k goes into pension at year 0. At year 10, the accumulated value is taxed at 55% (the LTA charge, or LAC). Result: £44,212.

2. ISA. Post-tax (and NI) £23,200 (£40k x 0.58) goes into ISA at year 0. Result (year 10): £46,624.

So in this scenario you are 5.45% better off with the ISA option.

Obviously if the company also makes contributions then that makes the pension better, even after a LAC.

In my case, I'm putting in enough to maximise the company contribution, and my spreadsheet is telling me that with the phased drawdown plan I hope to follow then I will be nudging the LTA at age 75 given a 7% investment return and a 2% indexing of the LTA.

What I'm trying to decide is what to do with any extra money I might have for investment over and above my current pension contributions.

The only benefit I see with the pension option is if I were to die early, in which case the pension would not be counted for inheritance tax purposes.

Thanks
Ian

theoldgreychap

Additional rate taxpayer & employer pension contributions - with no corresponding salary uplift if I were to leave the pension scheme makes paying into my conpany pension scheme significantly better - even though I am in excess of protected LTA. My calcs mean I should be more than 10% better off assuming same investment returns, even after LTA charge and higher rate tax on remainder.

zagfles

You don't have to pay 55% on the excess, you can pay 25% and take the remainder as income. This works out to the same 55% if you pay higher rate tax on it but only 40% if you pay basic rate tax.

Assuming a reasonable drawdown rate it's quite possible to be quite a bit over the LTA yet be within the basic rate band in drawdown, depending of course on other income.

iwilson16

Interesting ... I wasnt aware of the income option. If I plug that into my spreadsheet, the value is £48,231after 10 years, assuming 25% deduction and remainder taxed at basic rate. Thats 3.45% better than the ISA.

Thrugelmir

iwilson16 wrote: »

2% indexing of the LTA.

The February BOE inflation report forecast CPI to be over this rate for the next 3 years.

assuming 7% investment return pa.

That's an optimistic rate if net of all costs.