Approaching LTA....

cfw1994

ffacoffipawb wrote: »

Basic rate pre and post retirement.

£1000 in costs you £800

£1000 out costs you 25% LTA tax and 20% income tax.

£1000 x 0.75 x 0.80 = £600 so only £600 out at a cost of £800.

Bad deal.

Of course if the £1000 in gains you tax credits of £410 then the net cost is £390 and not £800 so tax credits can distort the figures.

So if you have hit the LTA whilst “only” paying basic rate tax on the way in.....well, I guess you have done some amazing stuff with the investments :huh:

If paying HRT, that £1000 cost you £600....which as I said, was neutral on the way out
With payments via salary sacrifice, you saved on NI payments against that £600, so you’re winning
....if your company matched contributions, you’ve won :T

Is my maths wrong somewhere there?

lisyloo wrote: »

I don’t see how you can be better off paying an extra 25%.
Only 10% on my contribution is matched, most of it isn’t.

True, and where that last line applies:

cfw1994 wrote: »

In fact, even if you didn’t get matched contribution, tax would be neutral as long as you pay 20% income tax rate.
Going into HRT at that point is the bit that would have cost you, which is a BadThing™

Kind of a reason I have wound my payments down a shade....
Of course doing that frees up money to drop into ISAs (for example), but you’ve already paid tax on that.....

I still maintain that the more tax you pay, the better you have done....

ffacoffipawb

cfw1994 wrote: »

So if you have hit the LTA whilst “only” paying basic rate tax on the way in.....well, I guess you have done some amazing stuff with the investments :huh:

Mine were mostly basic rate, perhaps 70:30 split and paying the maximum allowed in the last few years. Obviously only a small portion was employer matched.

Being mortgage free helped facilitate this.

The Brexit referendum effect on the pound had a very large impact in my favour even though I think leaving the EU is a bad idea.

Albermarle

...

.if your company matched contributions, you’ve won

Is my maths wrong somewhere there?

Your maths is good .:o
If you are a 40% taxpayer in employment and a 20% taxpayer in retirement , it is worth still contributing even if it brings LTA charges - as long as you are benefiting from similar employer contributions at the same time

ffacoffipawb

Albermarle wrote: »

...

Your maths is good .:o
If you are a 40% taxpayer in employment and a 20% taxpayer in retirement , it is worth still contributing even if it brings LTA charges - as long as you are benefiting from similar employer contributions at the same time

Or if it gets you more tax credits or universal credit it is still worthwhile. Oh and child benefit retention too if applicable.

This is how I retired at 55.

EdSwippet

cfw1994 wrote: »

Is my maths wrong somewhere there?

No, your maths is right, but only under the assumptions that a) you would otherwise have paid higher rate tax on the entire pension contribution, b) that the entire withdrawal falls into zero or basic rate tax, and c) that you get an employer contribution match and/or salary sacrifice uplift. These assumptions may hold for you, but they will not for everybody. They do not for me.

cfw1994 wrote: »

I still maintain that the more tax you pay, the better you have done....

To a point, but there is an "opportunity cost" to working where you could be doing something else that you probably would enjoy more. Would you still maintain this if the LTA tax was 75% instead of 55%? How about 85%? 95%? 100%?

In fact, if you contribute to a pension above both the annual allowance and the LTA, an effective tax rate of 100% is entirely possible. No employer match, 45% tax on the way in with no 'scheme pays' facility, and 55% tax on the way out neatly comes to 100%. That is definitely not a case of "the more tax you pay, the better you have done...".

Ciprico

lisyloo wrote: »

I get your point but if you are taking the max drawdown already e.g. £50k then there’s no scope to withdraw further from pension to ISA without paying HRT on the drawdown income.

...maybe deferring state pension is beneficial if you feel you won't be able to draw enough enough 20% pension in time to avoid the second 75 year BCE...?

I suppose the "take away" when approaching LTA is after maxing out ISA, make full use of the capital gains and dividend tax breaks on GIAs being adding non boosted contributions to pension...

cfw1994

EdSwippet wrote: »

No, your maths is right, but only under the assumptions that a) you would otherwise have paid higher rate tax on the entire pension contribution, b) that the entire withdrawal falls into zero or basic rate tax, and c) that you get an employer contribution match and/or salary sacrifice uplift. These assumptions may hold for you, but they will not for everybody. They do not for me.


To a point, but there is an "opportunity cost" to working where you could be doing something else that you probably would enjoy more. Would you still maintain this if the LTA tax was 75% instead of 55%? How about 85%? 95%? 100%?

In fact, if you contribute to a pension above both the annual allowance and the LTA, an effective tax rate of 100% is entirely possible. No employer match, 45% tax on the way in with no 'scheme pays' facility, and 55% tax on the way out neatly comes to 100%. That is definitely not a case of "the more tax you pay, the better you have done...".

Yeah, the maths on precisely what went in from what proportion of wage is never going to be accurate: been paying in for decades!
For me, by far the larger quantity has been in recent years, all at 40%.

That last point....never contributing in on 45% with no employer contribution - can't see why anyone would do that....& hence notwithstanding that curious (& I feel highly unlikely!) edge case, I stand by my statement

I should add for others that I think it was YOU who helped clarify much of this for me many months ago - thanks

I do VERY much appreciate the opportunity cost of doing something other than work. The problem comes when you kind of enjoy aspects of your work - in my case, the work itself is mostly 'yawn', but the people I work with I mostly quite enjoy the company of!

Anyway, that veers a little off the LTA question....

EdSwippet

cfw1994 wrote: »

That last point....never contributing in on 45% with no employer contribution - can't see why anyone would do that....& hence notwithstanding that curious (& I feel highly unlikely!) edge case, I stand by my statement.

It's not so unlikely that it does not happen. The whole current NHS furore around pensions and NHS doctors opting out of overtime is precisely because of issues like this. And the thing with the NHS pension is that your only current options are both unappealing -- either full contributions with a heinous tax (and one that is certain and has to be paid now, even though the pension payments are far into the future,and uncertain), or lose the pension contribution element of salary entirely.

Also, you assume a steady state in pensions regimes here, and that's definitely not been the case for the past. Much of my pension saving was done at basic rate tax in the 80s and 90s and before the LTA was even dreamed up. If I had my life over, I would not save into pensions as hard as I did in the earlier part of my career, so that I could save more later and with higher rate tax relief. As things stand now, I have to apply effort to get past the feeling of betrayal that the LTA penalty engenders.

cfw1994

Yup, all understood. Precisely why I view the LTA as an outrageous tax on thrifty savers!

I feel that the right solution would be no LTA (or one set much, much higher) and probably a less generous HMRC contribution...say 30% for all to encourage and benefit the lower paid rather than be more advantageous to the better paid.
Of course that would almost certainly mean I would probably not be in the “luxurious” position of worrying about tripping over the LTA if that had been the case through my career, but it has always felt a bit wrong to me.....many kids coming out of degrees with what they perceive as huge debt might dream of these problems.

That said, & without wanting to belittle the discussions at all (as someone acutely aware of them!), I am very aware this is very much a “first world problem” on the list of “what is wrong with the Country these days?”

lisyloo

cfw1994 wrote: »

Is my maths wrong somewhere there?

There are assumptions being made.
My HRT is 32.5% (dividends) not 40% and most of my contribution wouldn’t fall under HRT.