Does it ever make sense to go over LTA?

penryuk

I realise this is a nice problem to have, but my total pension pots are approaching the LTA and if I keep contributing at my current levels I will definitely exceed the LTA, even after the annual increase. My understanding is that if I go over my LTA then at a BCE I will get taxed on the excess and that tax would be 25% if I was going for annuity but 55% if taking a lump sum. So unless you only ever plan to go for an annuity it does not make financial sense to exceed your LTA - is that always the case? Are there any circumstances where it would make any sense to exceed your LTA if you plan to take a lump sum in at any point in the future? I'm approx 7 years away from my planned retirement age (58) - I guess it is highly advisable to talk to a professional but would that be an IFA or a pension expert, or both?

Thrugelmir

And if market returns disappoint for a period of time? 

hugheskevi

My understanding is that if I go over my LTA then at a BCE I will get taxed on the excess and that tax would be 25% if I was going for annuity but 55% if taking a lump sum.

The 25% charge relates to pension in excess of LTA if taken as taxable income (eg pension put into drawdown). So as well as the 25% there is then income tax to pay when received. So for every £100 of pension in excess of LTA there is an initial £25 charge, then for higher rate taxpayers there is 40% tax on the remaining £75 to pay, leaving £45. So the same £55 loss applies as on the one-off 55% LTA charge on lump sum.

So unless you only ever plan to go for an annuity it does not make financial sense to exceed your LTA - is that always the case? Are there any circumstances where it would make any sense to exceed your LTA if you plan to take a lump sum in at any point in the future?

If there is an employer pension contribution, then it is common to exceed LTA and continue contributing to a pension. For example, assume an employer will match your contribution (and also assume Annual Allowance is not an issue and there is no salary sacrifice, for simplicity) - you pay in £100 gross at a net cost of £60 for a higher rate tax-payer, your employer also puts in £100. That £200 is then subject to a 55% charge, reducing it to £90 but that is still comfortably more than the £60 initial cost.

If subject to tapered Personal Allowance you face an effective marginal income tax rate of 60%, so being relieved at 60% and then paying a 55% LTA charge can be worthwhile.

A key challenge can be earlier in life when well below LTA, and evaluating whether making what may appear to be good value personal contributions might in future prove not to have been such good value if you end up exceeding the LTA.

I'm approx 7 years away from my planned retirement age (58) - I guess it is highly advisable to talk to a professional but would that be an IFA or a pension expert, or both?

There can also be inheritance tax considerations which could be relevant depending on circumstances, as pensions are outside inheritance tax. An IFA should be capable of dealing with all that.

cfw1994

Are your contributions assisted by Company matching?
If so, as is usually the case, then part of the reason you go over the limit is the free money invested on your behalf by your company, so not all bad.   As someone once put it to me: the more tax you pay, the more money you have....

penryuk

Thanks @hugheskevi and @cfw1994 - clearly the key is the employer contribution which I currently get at 8%, although I'm pushing in 35% through salary sacrifice to max my annual allowance and avoid some income tax. Still seems worth going over LTA then and just budget for the tax at BCE, taking solace at the ~5% saved.

Albermarle

penryuk said:

Thanks @hugheskevi and @cfw1994 - clearly the key is the employer contribution which I currently get at 8%, although I'm pushing in 35% through salary sacrifice to max my annual allowance and avoid some income tax. Still seems worth going over LTA then and just budget for the tax at BCE, taking solace at the ~5% saved.

AS well as employer contributions , if you are a 40% taxpayer now but will be a 20% taxpayer in retirement then this also helps with the LTA calculation , e.g.
For a 40% taxpayer , a £100 in the pension costs £60 . Take away the 25% LTA charge and 20% income tax = £60.
So then if you get employer contributions and NI savings from salary sacrifice then it looks positive .
If you are only getting basic rate relief on the way in , it looks less attractive/ possibly negative.
Are you aware that you will not normally pay any LTA , until you reach 100% LTA, which can be after several BCE events . So it is unlikely that any LTA tax will be payable at the first BCE, Often nothing is paid until age 75.