Nearing LTA + salary sacrifice

CRAIGSVILLE1

Hi all,
Currently , I am paying approx £20K p.a  into my DC pension salary sacrifice  to reduce my 40% tax to 20% , and my employer pays in 9% on top. I also pay child maintenance to my ex, and I save approx £2K p.a this way because I am not earning as much in their eyes.
I have transferred my old DB pension into a SIPP , and both combined are knocking on the LTA . I have 6 years left in employment until I am 55.
I have done a rough calculation, and I think I would approx break even tax wise , if I was to still keep paying into my pension to save tax , and pay the 55%  LTA fee on the excess, compared with reducing my pension contributions, and pay 40% tax on my salary, and put some into an ISA.
Does anyone have some sort of calculator for me to double check this complex situation??

Thanks

Craig

cfw1994

CRAIGSVILLE1 said:

Hi all,
Currently , I am paying approx £20K p.a  into my DC pension salary sacrifice  to reduce my 40% tax to 20% , and my employer pays in 9% on top. I also pay child maintenance to my ex, and I save approx £2K p.a this way because I am not earning as much in their eyes.
I have transferred my old DB pension into a SIPP , and both combined are knocking on the LTA . I have 6 years left in employment until I am 55.
I have done a rough calculation, and I think I would approx break even tax wise , if I was to still keep paying into my pension to save tax , and pay the 55%  LTA fee on the excess, compared with reducing my pension contributions, and pay 40% tax on my salary, and put some into an ISA.
Does anyone have some sort of calculator for me to double check this complex situation??

Thanks

Craig

No useful ideas, but in your shoes I’m not sure my concern would be to reduce child maintenance, particularly if you are knocking on the LTA - why not just....er.....help maintain your child a bit more? 

If it is “paying the ex” that is the issue, perhaps open some investment to pay that 2k you save direct to a fund for your child.
Sorry if that doesn’t help, and maybe you already do that.

We had a good friend who left his wife and family, choosing to do so when their kids were 18 specifically to avoid having to pay for their uni education, and it was a really nasty thing to do.  Luckily for her (& their kids), the large friends group we have saw this selfish behaviour for what it was.  Pretty sure he thought everything would carry on as before.  For him, it didn’t.   Bizarre behaviour.

Albermarle

If you take income above the LTA you pay an extra 25% + your normal marginal tax rate . If we assume this will be 20% then:
£1000 income minus 25% and then minus 20% = £600 net 
If you are a higher rate taxpayer paying into a pension now £600 gives you £1000 in your pension . So no gain or loss.
If you are getting employer contributions then you ae still ahead .
Also if you are only knocking on the door of LTA , then presumably you will not be hundreds of thousands of Pounds over and you only pay extra tax on the bit above LTA , so overall not such a big deal and it should not let paying a bit of extra tax dominate your overall strategy.

CRAIGSVILLE1

cfw1994 said:

CRAIGSVILLE1 said:

Hi all,
Currently , I am paying approx £20K p.a  into my DC pension salary sacrifice  to reduce my 40% tax to 20% , and my employer pays in 9% on top. I also pay child maintenance to my ex, and I save approx £2K p.a this way because I am not earning as much in their eyes.
I have transferred my old DB pension into a SIPP , and both combined are knocking on the LTA . I have 6 years left in employment until I am 55.
I have done a rough calculation, and I think I would approx break even tax wise , if I was to still keep paying into my pension to save tax , and pay the 55%  LTA fee on the excess, compared with reducing my pension contributions, and pay 40% tax on my salary, and put some into an ISA.
Does anyone have some sort of calculator for me to double check this complex situation??

Thanks

Craig

No useful ideas, but in your shoes I’m not sure my concern would be to reduce child maintenance, particularly if you are knocking on the LTA - why not just....er.....help maintain your child a bit more? 

If it is “paying the ex” that is the issue, perhaps open some investment to pay that 2k you save direct to a fund for your child.
Sorry if that doesn’t help, and maybe you already do that.

We had a good friend who left his wife and family, choosing to do so when their kids were 18 specifically to avoid having to pay for their uni education, and it was a really nasty thing to do.  Luckily for her (& their kids), the large friends group we have saw this selfish behaviour for what it was.  Pretty sure he thought everything would carry on as before.  For him, it didn’t.   Bizarre behaviour.

Hi, thanks for your info, but I have been paying 10 years of child maintenance, and I am happy to pay a few more years to contribute to the upkeep of my kids.
I also put money into a junior ISA , and a pension for them at moment. 
The ex, and her wealthy parnter have no idea I do this , nor would they think of doing it theirselves.
TBH , if I could afford to not give the ex more, and put more into kids accounts, I would.

CRAIGSVILLE1

Albermarle said:

If you take income above the LTA you pay an extra 25% + your normal marginal tax rate . If we assume this will be 20% then:
£1000 income minus 25% and then minus 20% = £600 net 
If you are a higher rate taxpayer paying into a pension now £600 gives you £1000 in your pension . So no gain or loss.
If you are getting employer contributions then you ae still ahead .
Also if you are only knocking on the door of LTA , then presumably you will not be hundreds of thousands of Pounds over and you only pay extra tax on the bit above LTA , so overall not such a big deal and it should not let paying a bit of extra tax dominate your overall strategy.

Thanks Albermarle,

That was my rough calculation as well. 
I know I shouldn't let the tax thing dominate my strategy, but it is hard to see some of it taxed so high at the end. 
Also, I still have 6 + years of investing b4 retirement, so probably ( hopefully? Reluctantly?  Lol) would be a few hundred thousand over LTA at the end.

NedS

Tax is a funny thing - none of us want to pay it, but ultimately the more tax we pay, the better of (relatively) we are. I would love to be in a position where I am a high rate tax payer or I have to worry about breaching the LTA.

Another factor you may not have considered is that by continuing to contribute to your pension, you continue to shelter that money from things like inheritance tax so may be able to pass on more to your children from the pot that is left. This may be important to you considering the potential size of your pot.

CRAIGSVILLE1

NedS said:

Tax is a funny thing - none of us want to pay it, but ultimately the more tax we pay, the better of (relatively) we are. I would love to be in a position where I am a high rate tax payer or I have to worry about breaching the LTA.

Another factor you may not have considered is that by continuing to contribute to your pension, you continue to shelter that money from things like inheritance tax so may be able to pass on more to your children from the pot that is left. This may be important to you considering the potential size of your pot.

I do realise I am in a very fortunate position with my pension compared with a lot of people.
I should really just get on , mop up my tears + pay the LTA like a big boy 😭🤣🤣🤣👍👍
Thanks 

unkle

Personally i'd start paying into an ISA, it's broadly cost neutral (aside from your maintenance) and withdrawals will of course be tax free. If you continually pay into your pension, once you start drawing you'll likely to be paying income tax on some anyway regardless of the LTA taxation.

Does your employer pay 9% regardless fo what you pay? if so just let them pay the 9% to keep it increasing.

zagfles

When you transferred the DB pension was the potential for LTA issues properly examined and explained by the IFA? We've seen examples here of DB pension transfers which cause LTA issues seemingly being ignored - there might be a case for mis-selling.

The way the LTA works means it hits DC schemes far harder than DB, so a transfer often causes LTA problems which wouldn't have existed had the pension remained in the DB scheme.

zagfles

CRAIGSVILLE1 said:

Albermarle said:

If you take income above the LTA you pay an extra 25% + your normal marginal tax rate . If we assume this will be 20% then:
£1000 income minus 25% and then minus 20% = £600 net 
If you are a higher rate taxpayer paying into a pension now £600 gives you £1000 in your pension . So no gain or loss.
If you are getting employer contributions then you ae still ahead .
Also if you are only knocking on the door of LTA , then presumably you will not be hundreds of thousands of Pounds over and you only pay extra tax on the bit above LTA , so overall not such a big deal and it should not let paying a bit of extra tax dominate your overall strategy.

Thanks Albermarle,

That was my rough calculation as well. 
I know I shouldn't let the tax thing dominate my strategy, but it is hard to see some of it taxed so high at the end. 
Also, I still have 6 + years of investing b4 retirement, so probably ( hopefully? Reluctantly?  Lol) would be a few hundred thousand over LTA at the end.

Unless you make very optimistic assumptions about growth, or will have other income in retirement, even being a few £100K above the LTA should enable you to draw your pension while remaining in the basic rate band in retirement. In which case sal sac'ing any higher rate income is tax advantagous as you'll get 42% tax/NI relief and will effectively pay 40% when taking it out. On top of any peripheral advantages such as lower income for purposes such as child maintenance.

Obviously rules, tax rates etc can change but that could work either way.

pjread

I'm not sure the 2% NI saving is enough of a kicker on its own given political etc risk, who knows what any colour of government might think is a good idea in 5+ years time.  Maybe if the employer kicks in some or all of the employer NI saving too it would start to look more compelling.