To LTA or not to LTA, that is the question

Happy_planner

Hi all. A huge collective thank you for all the knowledge and insight on these boards – it’s been amazingly helpful.

I’d be grateful for your thoughts on which wrapper to invest in. 

I’m 43 and hope to retire at 57. I pay additional rate tax and my wife pays basic rate. We’ll both pay basic rate in retirement.

I have £650k in a workplace pension invested 100% in equities. Even without further contributions, at 2.7% real growth (5% less 2% inflation less 0.3% fees) it would be close to the LTA in 14 years. 

I’m weighing up three options:

(1) Pay into my pension to get 45% tax relief (while it still exists) but potentially breach the LTA

(2) Pay into wife’s SIPP to get 20% relief but potentially pay 20% tax on withdrawal

(3) Pay into ISAs, giving up some tax benefits but adding flexibility on withdrawal

Very grateful for your thoughts! 

Thrugelmir

Wouldn't worry about the LTA until you actually get there.  Markets are a roller coaster not a smooth linear glide path. 

Albermarle

Very similar thread here.
https://forums.moneysavingexpert.com/discussion/6259927/another-lifetime-allowance-question#latest

You might want to think about the 100% equities strategy . You are going for maximum growth , whilst at the same time worrying about breaching LTA . The two things do not match really . Lower growth in the pension , could mean you benefit from more tax relief. 

Happy_planner

Thanks for sharing the link - yes very similar question. These dilemmas often feel more political than financial, as it's harder to predict future tax law than long term financial returns. 

Are there any rules of thumb for how much should be in pensions vs ISAs at retirement? Most planners recommend both, but I haven't seen much guidance on the split.

EdSwippet

Thrugelmir said:

Wouldn't worry about the LTA until you actually get there. 

Not sensible. At that point it is too late to mitigate.

ratechaser

I think (and ISTBC) that as an additional rate taxpayer, it would still be better (by 5%, or 7% if you salsac) for you to pay into your occupational scheme and go above LTA, rather than pay into your wife's SIPP. 

That's however also assuming that your wife's own SIPP is at a level where she would be taking out enough to exceed the 'effective' £16,666 personal allowance annually. If not then hers might be the better place for it.

However that also doesn't take into account any additional matching benefits you might get from your occupational scheme. And does your wife not have one she can use/increase - she's working but paying into a SIPP instead?

Thrugelmir

Happy_planner said:

Thanks for sharing the link - yes very similar question. These dilemmas often feel more political than financial, as it's harder to predict future tax law than long term financial returns. 

Long term financial returns are in themselves influenced by tax laws and are likely to be impacted in the years ahead. 

jamesd

The prime tool for this is venture capital trusts, with a nod to some possible use of EIS and SEIS.

VCTs are a form of collective investment that invests in relatively small businesses. While the VCT investing in many of them reduces the consequence of failure of one the government also gives good tax breaks: a refund of 30% of the purchase price (repayable if you sell within five years) but no more than your income tax due in the year of purchase, tax exempt dividends and tax exempt capital gains.

Depending on the VCT they can invest in companies still trying to prove their product, those who've proved their product but aren't yet profitable, those that are profitable and in fairly early growth to those which are solidly profitable and looking to expand.  The earlier stages are more risky but more potentially profitable than the later ones.

The five year holding rule allows you to recycle the same money every five years, limiting how much of your total investment mixture is in VCTs.


When it comes to taking money out of the pension VCTs can have a role as well. You can pay the 25% income lifetime allowance charge instead of the 55% lump sum one and use the VCT buying to reduce the income tax cost of one the income, something you can't do with the 55% choice.

I'm a satisfied user of VCTs both before and after retiring.

jamesd

You should continue pension contributions that get employer matching because they will still remain beneficial.

For unmatched it's more of a challenge since you can expect to be a higher rate tax payer even if you retire at 55. You can improve the potential benefit of unmatched if you know that you'll use VCT buying to mitigate the tax cost on the way out.

Salary sacrifice can also potentially help a bit, though you won't be able to get much with the 12% employee NI saving even if you concentrate your sacrifice into one month.

Your employer might be willing to negotiate a higher share of employer NI going into a pension via salary sacrifice in exchange for somewhat lower base pay.

If you have other pension payments, perhaps from a flexible benefit plan, you can approach your employer to see whether they will pay into ISAs instead.

Happy_planner

Many thanks for all the advice. I'm fortunate my employer will top-up my salary if I reduce pension contributions. I've decided to keep paying into all three wrappers: 20% my pension, 20% wife's SIPP and 60% ISAs. VCTs are a step too far for me at the moment but will revisit when there's a little more in the ISAs. 

Dansmam

Happy_planner said:

Thanks for sharing the link - yes very similar question. These dilemmas often feel more political than financial, as it's harder to predict future tax law than long term financial returns. 

Are there any rules of thumb for how much should be in pensions vs ISAs at retirement? Most planners recommend both, but I haven't seen much guidance on the split.

It's all political. But not a bad dilemma to have. I'd have voted Corbyn but doubt many on here would have joined me. So if just looking at me not anyone else I'd work on the basis of a rightish political leadership in future. You have time to chuck a lot into savings not pension if you think there'll be a future attack on tax advantages. I'm not the only one who'd vote for that but not many of them read pensions websites 🤣