Why plan to build too large a pension pot? LTA

Adyinvestment

I always thought the Life Time Allowance was how much you paid in with regards to tax relief, I didn't realise it was how much you take out.

What is the point in building up a large pension pot which you plan to spend (hopefully) decades living on?

If my calculations are correct if you reached a pot of £750k and plan on drawing down the expected sustainable (pension making at least this) 4% per year, then in around 7 years you will with your pension pot exceed the LTA? ...perhaps sooner if the pension does well.

Even a pot of £500k and following the 4% rule and with a pension averaging a modest 5% will reach the max in approx 20 years.

What is the point in going above this? It would seem much better to have any extra in ISA's

Prism

Why do you think that £750k will grow to above the LTA so quickly when you are withdrawing 4% per year? I mean there is a chance but its not likely. The pot is supposed to go down not up.
Also, your withdrawal rate (4%) does not need to be the same as your actual drawdown amounts. If you are in risk of approaching the LTA you could withdraw extra and then put it aside into a GIA or ISA for later years. 

Mickey666

Well, even if you exceed the LTA it only means you’ll have some tax to pay.  Is that really such an awful thing?  I imagine there are many pensioners who would be happy to have to pay more tax if it meant their income and standard of living increased.
Tax efficiency is one thing but in my book pension planning is all about securing a desired standard of living, not trying to minimise tax as a priority.

Albermarle

If you are getting 40% tax relief on your contributions then the LTA basically just takes that back again. If you are getting employer contributions as well then you are still ahead.
All capital and dividend growth remains sheltered in a pension . It does in an ISA as well but you can only add £20K pa max to it.
Pension pots are not subject to 40% inheritance tax ,, whilst ISA would be if you left enough for your estate to pay IHT.
Basically pension vs ISA depends on your personal circumstances and fear of paying LTA should not be the only issue to think about .
As mentioned paying tax also helps make the world go round. 

Adyinvestment

I was working on the pension making gains of approx 5% a year - should have been more clear

To put a more simpler way if the pension makes 5% (£37500) each year (assuming you withdraw less than this each year) you will reach the LTA in around 8 years? 

shinytop

I'm trying to prevent an LTA tax bill by withdrawing as much as I can below the HR threshold and feeding into ISAs.  But I'd much rather the investments do so well that I can't keep up and have to pay a bit of tax one way or another.  That would be a win for me and HM Treasury. 

Prism

Adyinvestment said:

I was working on the pension making gains of approx 5% a year - should have been more clear

To put a more simpler way if the pension makes 5% (£37500) each year (assuming you withdraw less than this each year) you will reach the LTA in around 8 years? 

Well if you gain 5% each year and withdraw 4% each year then you are only growing 1%. Sure, the gains will vary and the withdrawal will be fixed but it would mean that you wouldn't hit LTA.

Malthusian

Mickey666 said:

Well, even if you exceed the LTA it only means you’ll have some tax to pay.  Is that really such an awful thing?  I imagine there are many pensioners who would be happy to have to pay more tax if it meant their income and standard of living increased.

It means the complete opposite as you would have a higher income and standard of living if you'd saved via an ISA or unwrapped investments instead.

garmeg

Malthusian said:

Mickey666 said:

Well, even if you exceed the LTA it only means you’ll have some tax to pay.  Is that really such an awful thing?  I imagine there are many pensioners who would be happy to have to pay more tax if it meant their income and standard of living increased.

It means the complete opposite as you would have a higher income and standard of living if you'd saved via an ISA or unwrapped investments instead.

Not necessarily as some / most of the excess contributions (in excess of those required to theoretically hit the LTA) could have been paid by that person's employer.

Adyinvestment

Prism said:

Well if you gain 5% each year and withdraw 4% each year then you are only growing 1%. Sure, the gains will vary and the withdrawal will be fixed but it would mean that you wouldn't hit LTA.

How would you not be hitting the LTA? - are you assuming you will be leaving the pot as inheritance?

Prism

Adyinvestment said:

Prism said:

Well if you gain 5% each year and withdraw 4% each year then you are only growing 1%. Sure, the gains will vary and the withdrawal will be fixed but it would mean that you wouldn't hit LTA.

How would you not be hitting the LTA? - are you assuming you will be leaving the pot as inheritance?

Because with an overall growth of 1% on your example of 750k then you won't. Are you assuming that you can withdraw 4% and then also grow another 5%?