Life time allowance - what do you do when you approach this?

Cus

The only 'strategy' I can identify is to cross my fingers and hope that when it's time to access the pension the government has scrapped the LTA or had put in place some more favourable rules..

jamesd

garmeg said:

I dont think they do advise HMRC in general.

All pensions make annual reports to HMRC which include date of first flexible drawing, contributions and amounts drawn. It's not optional though the flexible drawing items are needed only after the MPAA has been triggered.

shinytop

sausage_time said:

Interesting thread!  I'm in a similar position to @Scrudgy .

Can I ask @shinytop - what does BR stand for (as in BR threshold, BR limit)

Yup too many acronyms here, @MallyGirl has already answered.  I would have had to ask a couple of years ago.

garmeg

jamesd said:

garmeg said:

I dont think they do advise HMRC in general.

All pensions make annual reports to HMRC which include date of first flexible drawing, contributions and amounts drawn. It's not optional though the flexible drawing items are needed only after the MPAA has been triggered.

Not something I have seen but it makes sense for some sort of bulk submission to be made to HMRC every year.

jamesd

You describe it as both DC and AVC. Is it really AVC which is always linked to a DB pension and how much will the DB pay? The DB element may mean that you're way above the lifetime allowance already. For the rest of this post I'll assume that it's not AVCs and there is no associated DB income.

What are your thoughts on when  you'd like to retire and on what household income? You might already be able to achieve the financial target. What is the state pension situation for each of you?

For salary sacrifice you get the maximum 12% employee NI saving by concentrating it into as few months as possible, just above minimum wage. This is because NI is calculated by pay period, not year. The potential benefit is several thousand Pounds less NI on your pay.

Above LTA and assuming basic rate income tax on the way out here are two possible effects:

1. 40% income tax relief, 2% NI saved is £100 in the pension for net cost of £58. Out the 25% LTA charge leaves £75 and 20% income tax leaves £60.
2. 40% income tax relief, 12% NI saved is £100 in the pension for net cost of £48. Out the 25% LTA charge leaves £75 and 20% income tax leaves £60.

In both cases you're still ahead even after the charge. If you get hal of the saved employer NI added:

2b. 40% income tax relief, 12% NI saved is £106.90 in the pension for net cost of £48. Out the 25% LTA charge leaves £80.17 and 20% income tax leaves £64.13.

The lifetime allowance use is calculated when you take benefits, including taking 25% tax free lump sum and leaving the other 75% in flexi-access drawdown untouched. This doesn't trigger the MPAA cut to 4k/year of DC pension contributions. What you could do at 55 is take 25% of half of the pot immediately and do the rest whenever there's a big  market drop or 20k/year tax free fallback.

At age 75 there's an extra lifetime allowance check on growth in value of money in drawdown. You avoid that by taking enough money out so there's no growth.

It's also worth learning about VCTs - funds of small and relatively new companies - because their 30% of the purchase price tax relief plus investment performance can be useful.

Alexland

jamesd said:

You describe it as both DC and AVC. Is it really AVC which is always linked to a DB pension and how much will the DB pay? 

It's not correct that AVC terminology only ever relates to DB pensions. I have had a DC pension with AVCs. The scheme had a basic minimum 3% contribution level to be a member and anything above that was described in the scheme rules as an AVC.

Scrudgy

jamesd said:

You describe it as both DC and AVC. Is it really AVC which is always linked to a DB pension and how much will the DB pay? The DB element may mean that you're way above the lifetime allowance already. For the rest of this post I'll assume that it's not AVCs and there is no associated DB income.

Hi, thanks for the reply. I can confirm that it is a defined contribution money purchase scheme with my employer. I pay in 6%, employer pays in 6%. I then pay in AVC’s to max out the annual £40k allowance through a combination of monthly and annual AVC. All of my regular contributions and the AVC are paid via salary sacrifice.

Albermarle

The scheme had a basic minimum 3% contribution level to be a member and anything above that was described in the scheme rules as an AVC.

Was there any actual difference to the pension between the part where the regular contributions went and where the AVC's went ? If not then using the terminology AVC was probably unnecessarily confusing ?

zagfles

Albermarle said:

The scheme had a basic minimum 3% contribution level to be a member and anything above that was described in the scheme rules as an AVC.

Was there any actual difference to the pension between the part where the regular contributions went and where the AVC's went ? If not then using the terminology AVC was probably unnecessarily confusing ?

Some workplace pensions split the contributions into various types like employer, "employee" basic, AVCs etc. I think it's overcomplicated but it gives the option to invest different contribution types differently. Some people might find that useful (probably not many though).

sausage_time

So let me make sure I understand.  I'm older than 55 (but less than 60), still working, and my DC pot is worth a little over £900k.  I could move £900k to drawdown to crystallise that amount.  I don't need any lump sum now, so I'll probably just do flexible drawdown (to minimize income tax liability, like @Scrudgy suggests) once I stop work until the state pension cuts in.  So the crystallised pot can grow (tax free, and outside of the Lifetime Allowance limit), and what's left of my pot can grow too (up to LTA-£900k).  My employer can continue to pay into this, and I can top up (both through salary sacrifice) and because I won't have taken any drawdown yet, there is no £4k limit.  There can be no argument about recycling - because I have not taken any lump sum or drawdown.