Paying into pension when over LTA

ManMadeWays

Hi, I have a pension pot >LTA and am a Higher Rate tax payer, and 56.


I continue to pay into a defined Contribution scheme 6 % (salary sacrifice) and my employer 11% maxing at 12 %.


I know I will lose 25% in LTA charge leaving 8.25% to 9% employer contibution effectively going in


I could drop to 3% and employer drops to 8 %, or just exit completely. I get 7 times life cover at the moment and 'only' 4 times if I exit this scheme. Should I carry on, or exit and keep the 6% now (net of tax/NI) ? I think it makes sense to stay in long term but could do with the extra cash now

I'm likely to carry on working until 60



Any opinion/advice ? Thanks :beer:

kidmugsy

ManMadeWays wrote: »

and my employer 11% maxing at 12 %.

What does that mean?

EdSwippet

ManMadeWays wrote: »

Hi, I have a pension pot >LTA and am a Higher Rate tax payer, and 56.

Have you considered crystallising your pension up to the LTA limit? New contributions will still fall into the LTA penalty zone, but at least by doing this you will avoid LTA penalties on the growth from your existing pension funds ...

... until the age-related LTA test at age 75. Here you want to draw down enough between now and then to ensure you duck under that. Even drawing down at a 45% rate beats the 55% created by the 25% LTA penalty plus 40% tax.

ManMadeWays wrote: »

I continue to pay into a defined Contribution scheme 6 % (salary sacrifice) and my employer 11% maxing at 12 %.

It is rather unclear what this means, but from the sound of things you have a good employer match that more than makes up for the LTA penalty. Salary sacrifice, or other?

ManMadeWays wrote: »

Should I carry on, or exit and keep the 6% now (net of tax/NI) ? I think it makes sense to stay in long term but could do with the extra cash now.

What will your tax rate be in retirement? If 20%, then the LTA penalty plus 20% tax comes out to 40%, so equivalent to your current tax rate. On the other hand, if 40% then you will end up paying 55% on money above the LTA when you draw it.

So projecting your future circumstances will help you decide. If your employer's contributions match overcomes the LTA penalty -- and from the above it sounds like it does -- then you are ahead and it is worth carrying on. You would not want to contribute beyond the employer match, though.

Have you asked your employer whether they will offer plain salary in place of pension matching? Some do, others do not. If they will, that would mean you could take the money now, and it could also (depending on your tax rate in retirement) be more tax efficient for you than pension contributions.

ManMadeWays wrote: »

I'm likely to carry on working until 60

Any particular reason? Breaching the LTA is a strong incentive to consider retiring earlier than planned. This is what I did.

mark55man

EdSwippet wrote: »

<snip>

Any particular reason? Breaching the LTA is a strong incentive to consider retiring earlier than planned. This is what I did.

Indeed,whilst an amount of mental preparation for retirement is good, by far the greater propotion of posters on here speking as retirees wish they had gone earlier than later
Good luck with your problem - a nice problem to have

Albermarle

but could do with the extra cash now

Although the exact financial calculation will depend on the points made above , if you already have excellent pension provision but need extra cash now , then this should be a big factor in your decision as the future is unknown .

EdSwippet

Albermarle wrote: »

Although the exact financial calculation will depend on the points made above , if you already have excellent pension provision but need extra cash now , then this should be a big factor in your decision as the future is unknown .

Rather than losing a generous employer match, it is probably more efficient to crystallise some or all of the pension now (at most perhaps, up to the LTA), use the 25% PCLS from that for 'extra cash', and carry on capturing the employer match on future salary.

Assuming early retirement isn't on the cards, of course. Also, worth noting that pensions are currently an IHT bypass, so if there is an intention to pass on this money rather than spend it then this needs to be factored in to any decision to crystallise and draw down the pension.

kidmugsy

How much tax is levied if a pensioner who has breached the LTA dies before 75? Presumably there is some sort of penalty rather than the widow simply receiving tax-free income?

EdSwippet

kidmugsy wrote: »

How much tax is levied if a pensioner who has breached the LTA dies before 75? Presumably there is some sort of penalty rather than the widow simply receiving tax-free income?

BCE5C/D or BCE7. AJ Bell explains here: https://www.investcentre.co.uk/sites/default/files/AJBIC_Death_Benefit_Rules.pdf

mark55man

EdSwippet wrote: »

BCE5C/D or BCE7. AJ Bell explains here: https://www.investcentre.co.uk/sites/default/files/AJBIC_Death_Benefit_Rules.pdf

Very complicated, as so much depends onthe circumstances of the pensioner and his beneficiaries. but a good exposition of it all

ManMadeWays

they pay in 11% but after another year service they pay in 12%

ManMadeWays

Thanks for all the replies.


1. Employer contibution is currently 11%, and will increase to 12% in a year or so


2. I enjoy the work and am well paid, plus a company car, so carry on



3. I also want to continue to earn to help my children get on the property ladder indeed the Tax Free lump sum will become property deposits


4. My wife is likely to continue to work albeit part time until I am about 60, so I will whilst she is still working


5. Not desperate for the cash but it's a couple of hundred a month net, just checking it makes financial sense, in the future I will only take out a pension below the HRT threshold


6. I can't swap this pension for cash as I have already done that once coming out of a DB scheme



7. My intention is to leave as much in the pension for my kids to inherit



8. Yes its a nice problem to have, I'm extremely lucky and grateful






Thanks