Lifetime allowance risk. Should I take more salary and put less in pension

Fatbritabroad

Just wanted to get some views on this. Seems weird asking this at a relatively young age and to be honest I never thought I would need to worry about this but I've realised how quickly a decent sum can grow with the right conditions! I'm also weak on the lifetime allowance to forgive any silly questions

Since my salary fortunately changed rapidly a few years ago (I went from 28k to 85k very quickly) I've utilised my pension to save a decent amount of the tax. My lifestyle had increased but I've used the pension to hedge this.

I currently put in around 15k a year Inc employers Contributions and now have 131000 in my pension. I'm only 37. I'm also getting two large bonuses. The first this month was 19000 and I have taken half as a lump sum and paid the tax and half I salary sacrificed into my pension. So that will take it to 141000. I get another in Jan 2020 of nearly 40, 000 which I would probably look to sacrifice again (given I can utilise unused allowance from previous years). This means without growth I could have 200000 or a fair bit more if this rally continues at 39. In certain scenarios I could stop paying in and growth alone could easily take me over the allowance. Obviously I'm not going to do that but it did get me thinking what do other high earners do? Should I pay more tax and reduce my pension contribution now it's a decent sum? Am I letting the tax tail wag the investment dog.

I have 16k in cash and around 36000 in various investments. A mortgage of 285000 on a house worth 500k. I save 400 a month In to various share save schemes and 200 a month into my s and s isa with additional amounts added as and when I can. I've put in about 8k this year into isas.

I like the idea of having a bit more to be available to invest to allow flexibility for when I retire. Working on an ideal of, 55 to be financially independent. Maybe earlier!

As I say I've always been focused on the tax and reducing this. I've also been weirdly paranoid about making sure I wasn't going to be poor when I retired. And had a goal to have 100k at least in my pension.

It seems daft to worry about the LA allowance when it might not even exist by the time I reach 55 or a bit older but I ALSO don't want to save hard only to see it penalised with the higher tax if I breach this and to my mind although its increasing I can't see them scrapping it. I also fully expect the hrt relief will be scrapped at some point in the future .
I will likely be drawing down when it retire so am I correct then that the tax is only 25% rather than 55%( i read this somewhere but didn't really get it) if you take as cash? In which case as pension should still be the best saving vehicle? Accepting all the rules could be scrapped by then!

I've seen others saying that they sacrifice enough to keep them as lower rate tax payers but I'm over the stage I can do that now. There's some big earners on here I can't imagine they only have 1 million in their pensions so am I focused to much on the lifetime allowance? Should I quit worrying?

Many thanks

kidmugsy

I'd keep using the £40k annual allowance while it's there, and the 40% tax relief/salary sacrifice. Soon enough you might find it's £20k p.a., 25% tax relief, and no salary sacrifice allowed. If your fund ever does get near the Annual Allowance you can swap your investments in a conservative direction and cut your contributions.

Fatbritabroad

That's true I am in an 100 equity tracker fund at the moment so could change to something less aggressive as it grows

andy001

Is OP likely to be hit by tapered annual allowance as threshold income over 110k?

Fatbritabroad wrote: »

Just wanted to get some views on this. Seems weird asking this at a relatively young age and to be honest I never thought I would need to worry about this but I've realised how quickly a decent sum can grow with the right conditions! I'm also weak on the lifetime allowance to forgive any silly questions

Since my salary fortunately changed rapidly a few years ago (I went from 28k to 85k very quickly) I've utilised my pension to save a decent amount of the tax. My lifestyle had increased but I've used the pension to hedge this.

I currently put in around 15k a year Inc employers Contributions and now have 131000 in my pension. I'm only 37. I'm also getting two large bonuses. The first this month was 19000 and I have taken half as a lump sum and paid the tax and half I salary sacrificed into my pension. So that will take it to 141000. I get another in Jan 2020 of nearly 40, 000 which I would probably look to sacrifice again (given I can utilise unused allowance from previous years). This means without growth I could have 200000 or a fair bit more if this rally continues at 39. In certain scenarios I could stop paying in and growth alone could easily take me over the allowance. Obviously I'm not going to do that but it did get me thinking what do other high earners do? Should I pay more tax and reduce my pension contribution now it's a decent sum? Am I letting the tax tail wag the investment dog.

I have 16k in cash and around 36000 in various investments. A mortgage of 285000 on a house worth 500k. I save 400 a month In to various share save schemes and 200 a month into my s and s isa with additional amounts added as and when I can. I've put in about 8k this year into isas.

I like the idea of having a bit more to be available to invest to allow flexibility for when I retire. Working on an ideal of, 55 to be financially independent. Maybe earlier!

As I say I've always been focused on the tax and reducing this. I've also been weirdly paranoid about making sure I wasn't going to be poor when I retired. And had a goal to have 100k at least in my pension.

It seems daft to worry about the LA allowance when it might not even exist by the time I reach 55 or a bit older but I ALSO don't want to save hard only to see it penalised with the higher tax if I breach this and to my mind although its increasing I can't see them scrapping it. I also fully expect the hrt relief will be scrapped at some point in the future .
I will likely be drawing down when it retire so am I correct then that the tax is only 25% rather than 55%( i read this somewhere but didn't really get it) if you take as cash? In which case as pension should still be the best saving vehicle? Accepting all the rules could be scrapped by then!

I've seen others saying that they sacrifice enough to keep them as lower rate tax payers but I'm over the stage I can do that now. There's some big earners on here I can't imagine they only have 1 million in their pensions so am I focused to much on the lifetime allowance? Should I quit worrying?

Many thanks

Alexland

I am in a similar position having used up 1/4 of the LTA still in my 30s. I am leaning towards holding more shares in ISA/LISAs and more bonds and cash in balanced pensions. So the pensions are more of a safety net.

AnotherJoe

I agree with kidmugsy, take the £40k and HR tax relief whilst its there. If its still there when the LTA starts to look close thats the time to make alternative investments.
It seems at least logical that at some time the LTA will be abolished, but the quid pro quo being lowering or removal of HR relief.
Plus, if your salary rises much more, for you removal of HR relief is imminent under current rules, so again that speaks to taking it now.

milton1970

Would flag that you can also use the available balance vs the allowance going back 3 years to pay in > £40k in any year. Also possible to pay in yourself (not through payroll) and claim tax credit plus tax back. You cannot claim NI back.

As others say - grab the tax benefit whilst you can!

Fatbritabroad

AnotherJoe wrote: »

I agree with kidmugsy, take the £40k and HR tax relief whilst its there. If its still there when the LTA starts to look close thats the time to make alternative investments.
It seems at least logical that at some time the LTA will be abolished, but the quid pro quo being lowering or removal of HR relief.
Plus, if your salary rises much more, for you removal of HR relief is imminent under current rules, so again that speaks to taking it now.

Thanks guy quick question about the tapered tax relief. I'm obviously going to be above it for the years when I get these one off retention bonuses particularly the 40k ones, but I'll still have unused allowances from the preceding years. Am I still OK to salary sacrifice in those cases? Will they take into account that I have unused allowance from the previous years and that my salary will reduce again the year after? I wonder if I can defer some for another year or whether that's not allowed....

milton1970

Your allowance for the particular year will be reduced but you can use any available balance from prior 3 tax years

Milton

Fatbritabroad

Sorry crossed with Milton so looks like I'll be OK in 2020 assuming salary not too much more I'm likely to get a 4% pay rise for the coming year from July. Unsure after that as they are looking to potentially change our contracts as part of an alignment of benefits with our new owners. Another tough decision as the new owners have far more generous pension contributions (8% employers contribution vs our 4%) but I suspect they will want to take those of us on this current contract off it as a condition) we get paid as a % of our account size. Thing its cost then quite a lot of money although technically you are supposed to have a potential downside I don't think they have applied it in most cases. And people like me who were vastly under paid saw their salaries rocket. Who knew actually rewarding people for hard work actually makes them want to do more! :j

milton1970

No problem - I have had similar issue on redundancy payments

Devil is in the detail

Go back over the last 3 years and cal contributions vs allowance ( watch out it wasn’t always £40k pa) there is an online calc on Gov.co.uk

Then use payslips to total contributions per annum

You may need to declare on self assessment for tax year so register for that too.

In reality it’s a few rules that seem complicated but if you understand sequence it is fine

But will need ongoing monitoring as you will get drug for tax if get it wrong 😁