LTA and Upper Earnings Limit breached - continue to contribute?

Newnoel

Hello all

I work for an American company that has a reasonably generous pension scheme: I contribute 5% of earnings, and they put in another 10% giving 15% in total

My concern is this: I am in my mid-40s and have had a couple of promotions recently, so my annual income is now in excess of £210k, and I am just about to breach the LTA

Should I stop contributing to the pension?

Aegis

Have you asked whether your employer would be happy to give you the 10% contribution as additional pay? That may well be the best option available.

Newnoel

That would be ideal, as I could chuck that £25k contribution straight into a VCT.


Unfortunately, they are not open to this suggestion

Aegis

Basically it depends on the end point.


If you die before age 75, your heirs will get £41.25 for every £33 gross you pay into the scheme. Your effective cost at that point (assuming you elect for the scheme to pay your annual allowance tax bill) is £17.66.


If you draw the fund out at 45% tax, you keep £22.69 of each £33 gross paid in, which still costs £17.66.



In either option you remain in profit, but marginally.


If you take the cash, you get £17.66 and could make a VCT contribution with it, getting you 30% income tax relief, taking your total to £22.96. This is not a significant increase over the pension benefits, but it would tie you in to a very high risk investment portfolio which could generate large returns or go more or less entirely bust.


Overall the high employer contributions make the pension seem more attractive than the cash unless the employer increases your pay.

EdSwippet

Newnoel wrote: »

My concern is this: I am in my mid-40s and have had a couple of promotions recently, so my annual income is now in excess of £210k, and I am just about to breach the LTA.

At this income level it looks like you will also be hit by the full pension annual allowance 'taper', dragging your allowance down from £40k to just £10k. You may have some past years' unused allowance to carry forwards, but limited.

Newnoel wrote: »

Should I stop contributing to the pension?

At a two-for-one match it's still mathematically worthwhile contributing up to your annual allowance. Say you contribute £33 so that £100 hits your pension. You will very probably pay 55% tax on withdrawals (assuming you are in the 40% bracket in retirement), so you get £45 back. This compares well with the £17.67 you would retain from £33 of earnings at 45% tax.

The trickier question is whether it is also worth breaking the annual allowance if there is more employer match to capture. Here the numbers look less rosy. Above the annual allowance you would face 45% tax on £100 hitting your pension, and then 55% tax (say) again on withdrawal due to passing the LTA. If you can use 'scheme-pays' to cover your income tax here, this would net you £24.75, still above the £17.67 from earning £33. If you cannot use 'scheme-pays' though, you end up with pure double-tax on your pension, and at 45% on the way in and 55% on the way out your tax rate here is 100%, leaving you with precisely £0. Definitely avoid the latter then, I guess.