LTA - have I got this right please?

pie691

Firstly I appreciate that Im very lucky in being a member of an excellent defined benefit scheme for the last 30+ years.

I am 54 and plan to retire when I am 60.
For the next few years I am flirting with the annual allowance however will definitely stay under the limit until just at the end and can proactively mitigate this.

What is inevitable is that I will breach the LTA from this scheme in the next 2-3y however Im not clear on what to do about this.

If I withdraw from the scheme I will get an extra lump of cash in my pay each month which is then taxed at 40% and I miss out on my employer paying their bit to match it.

On the other hand if I stay in the scheme is an extra 25% tax on the excess above the cap when I retire such a disaster? If I continue to contribute I will breach the LTA by a factor of about 10% when Im 60.

Thanks in advance, I have gone from novice to enthusiast in pension matters in the last month but this one is just going round in circles in my mind. One thing which resonates is that it must be 25% for a specific reason and HMRC always win

Albermarle

Well if you are in danger of breaching the LTA via a defined benefit scheme you must be in a very good position, pensionwise, as DB schemes are treated much more leniently than DC schemes .
So if you have to pay an extra 25% on a small part of it then not a big deal in the great scheme of things . You could always just retire early as another perk of DB schemes is that the LTA is calculated using the reduced pension you get if you retire early.

anselld

Have you allowed for the fact that LTA is increasing annually with CPI?

menziesthefish

On the other hand if I stay in the scheme is an extra 25% tax on the excess above the cap when I retire such a disaster?

No. If your company is contributing then you're essentially being taxed 25% on free money. You're still left with 75%.

One thing which resonates is that it must be 25% for a specific reason and HMRC always win

Excess pension savings above the LTA, when drawn as an income (as your DB scheme will be), are taxed at 25%. If drawn as a cash lump sum the tax is a far more punitive 55%. The assumption is that when the excess is taken as income, the recipient is a higher rate taxpayer and therefore pays a further 40% on the income. So the recipient ends up with 45% (60% of 75%) - in other words HMRC still get their 55% tax.

You could always just retire early as another perk of DB schemes is that the LTA is calculated using the reduced pension you get if you retire early.

Be careful with this. Most DB schemes apply hefty early retirement penalties, often of 5% per year. There are very few times when sacrificing an inflation-linked lifetime income for the sake of saving a bit of tax is the right course of action.

GunJack

Even if you breech the LTA and have to pay a bit more tax, it really means you're a pretty rich (in pension terms) person and for each extra £1 over the limit you only end up with 40p or whatever, you're still rich but also paying your fair share - nowt wrong with that, surely?

lisyloo

GunJack wrote: »

Even if you breech the LTA and have to pay a bit more tax, it really means you're a pretty rich (in pension terms) person and for each extra £1 over the limit you only end up with 40p or whatever, you're still rich but also paying your fair share - nowt wrong with that, surely?

There’s nowt wrong with contirbuting, but the vast majority of people in stressful occupations (like for example GPs) simply don’t think it’s worth working for that return.

aldershot

lisyloo wrote: »

There’s nowt wrong with contirbuting, but the vast majority of people in stressful occupations (like for example GPs) simply don’t think it’s worth working for that return.

The inevitable consequence of cutting the LTA to a level that reduces incentives:

https://www.bbc.co.uk/news/health-48191438

"Meanwhile, the numbers retiring early have been increasing.

Two-thirds of retirements by GPs come early - double the rate seen just five years ago."

lisyloo

Couldn’t agree with you more.
The law of unintended consequences.
The very people who are likely to be dis-incentivized from working are those whose skills we need as they provide a valuable service e.g. gps, consultants, dentists.

Most I know would want to stop if their jobs are stressful and many I know in their 50s are quite jaded either by corporate bull or public sector equivalent.

aldershot

lisyloo wrote: »

Most I know would want to stop if their jobs are stressful and many I know in their 50s are quite jaded either by corporate bull or public sector equivalent.

I packed it in 18 months ago at 54 when I hit the LTA and thought "why bother?" I didn't hate City IT but if you can't shovel any more in to the pension, and you know you are going to be financially secure, the marginal tax rates above £100k are a severe disincentive to carry on.

GunJack

lisyloo wrote: »

many I know in their 50s are quite jaded either by corporate bull or public sector equivalent.

I achieved that by my early 40s !!

shinytop

Rather than GPs being dis-incentivised to work on, the alternative view is that they have such generous pensions that they can afford to retire early. I'm retiring because I have enough pension and savings to do so, not because I can't accrue any more.