Sense check, potential changes to pension tax rules, maximising ISA's

HCIMbtw

I've just been reading the news this morning on potential life time savings allowances or pension contribution taxation changes coming in autumn budget and I am just wanting to sense check my current strategy.

Just turned 34, earning just over £60k following a recent bump (which includes cash allowance for vehicle). Current pension pot only about £48k. 

I am contributing around 23.5% salary to pension, and company contribute 8%, so around £1,500 or so goes into pension each month, my taxable pay is down to about £49k so I am maximizing higher rate tax relief on pension contributions. 

The potential news about fiddling with LTA to make it even lower, or increased taxation on pension contributions, has kinda put the wind up me. And while speculating is pointless I am questioning my rate of pension contributions given it feels within the realms of possibility that I could hit life time allowance or be subject to future punitive taxation on my efforts to make decent contributions to my pension. 

- Is there a way for me to help invest in my wifes pension, given hers will probably lag behind mine?

My wife is currently on maternity leave, isn't a higher rate tax payer and doesn't make pension contributions close to my level. I would be happy if some of my pension contributions could be paid into a pot for her as there is little chance either of us would hit a future LTA if we split my contributions between us. However, I am not aware of any way this would be possible, if we set up a SIPP for her, I made contributions to this (after lowering my contributions to my own pension) , this would not receive 40% relief because the tax benefits for contributions would be based on her salary. 

Anything I am missing here on opportunities to build more equal pots between us and optimise my higher rate relief on contributions for a pension in her name?

- Or, Is there a more tax efficient way to take advantage of maximum ISA allowances?  

Of my take home each month, around 1,800 goes on house, essential living costs, bills. Around £500 goes into a S&S ISA, and then I have a few hundred pounds left for discretionary spend which largely goes on decorating at the moment or other costs associated with a recent house move. My discretionary (ISA contributions) will increase in 3-4 years when my student loan is finally paid off.

Ideally I want my ISA to bridge to retirement, I like the flexibility of having the money in their and would like to contribute much more if I could. £500 monthly contributions only take me to £6k each year of the ISA allowance, but it doesn't feel remotely sensible to take pay at a tax rate of 40% just to put in the ISA. So is there anything I am missing? can I get more money into ISA, less into pension, without incurring higher rate tax? How do other people go about maximising their ISA allowance? feels impossible do this without incurring higher rate tax on take home pay given essential living costs. 

HCIMbtw

Only other thing I am thinking.. is lets say I currently have £1.5m in my pension (£500k over LTA) and my wife has £200k in pension. 

Is 55% tax above LTA considered as couple? So collectively this married couple are within their limits of combined LTA? Or does it just focus on individual, so one person subject to 55% on the value above LTA even though the other person is £800k below the limit. 

Linton

You cant get tax relief on money put into your wife's pension, only your wife can.  However that does not preclude you from giving money to your wife for her pension, assuming she has the earned income in this tax year to cover it.  However it is difficult to justify sacrificing any 40% tax relief in your contributions.

With only £48K in your pension you are a very long time away from needing to worry about the LTA.  Perhaps when you pension pot exceeds £700K you should devote more thought  to it but that must be the best part of 10 years away.  By that time the rules could be quite different.

At £500/month going into your S&S ISA by the time you retire you should have enough to support yourselves for several years.  I dont see much point in increasing the S&S ISA at this stage given your current commitments.

LTA is only on an individual basis.

HCIMbtw

Thanks Linton. totally get your point regarding worrying about it a bit prematurely

Just when I forecast the next 22 years reaching current thresholds seems entirely possible.. 

Just really dislike the idea that I am paying into something under a current set of rules because it is tax efficient but this can be unilaterally changed to pick my pocket and sweet FA I will be able to do about it...

Also get a little bit frustrated with the disparity in rules and benefits across couples... cause essentially all money is shared/equal within the household/family, one half of the couple makes sacrifices for the benefit or another, yet taxation and employment benefits and such don't work that way and honestly, only seem to try screw me. 

Albermarle

Getting 40% tax relief is not exactly getting screwed

It is in fact a  very generous benefit /subsidy for higher earners , so don't look a gift horse in the mouth . As you say it may not last that much longer so you should continue to maximise it's benefit now.

I've just been reading the news this morning on potential life time savings allowances or pension contribution taxation changes coming in autumn budget
Same speculation before every budget for the last twenty years . However probably Covid deficit makes it more likely something will happen, although I would guess saving for retirement via a pension will remain the best option .

HCIMbtw

Albermarle said:

Getting 40% tax relief is not exactly getting screwed

It is in fact a  very generous benefit /subsidy for higher earners , so don't look a gift horse in the mouth . As you say it may not last that much longer so you should continue to maximise it's benefit now.

I've just been reading the news this morning on potential life time savings allowances or pension contribution taxation changes coming in autumn budget
Same speculation before every budget for the last twenty years . However probably Covid deficit makes it more likely something will happen, although I would guess saving for retirement via a pension will remain the best option .

I'm projecting some other frustrations when I am saying screwed really, unrelated to tax 

But the point related to tax is more the general frustration that your household income could be £90k with 40k taxed at 40% or 90k with none taxed at 40% and all at standard rate based on how the salaries split between couples.. kind of seems a bit wrong when all you are really doing is trying to provide comfortable quality of life for your family and for future retirement 

But perhaps that comes from me being very comfortable treating mine and my wifes finances as one entity, rather than as individual earners.. maybe that's not normal 

Bimbly

Sorry to disappoint all sun-worshippers, but the autumn is not that far away. Personally, I wouldn't worry about what's in the autumn statement until there has been an autumn statement. Until then, keep putting money into your pension as that 40% tax relief is a good deal.

You could give your wife money up to the total of her earned income to put into her pension. That would include maternity pay. 20% basic rate tax relief is still a good deal.

Different couples are different with the way they treat household income coming from two salaries. Your approach may or not be unusual, but it is certainly not universal. For HMRC to keep track of household income rather than individual income would be very difficult for them, I think.

Albermarle

But the point related to tax is more the general frustration that your household income could be £90k with 40k taxed at 40% or 90k with none taxed at 40% and all at standard rate based on how the salaries split between couples.. kind of seems a bit wrong when all you are really doing is trying to provide comfortable quality of life for your family and for future retirement 

Yes dual income families are much better off tax wise than single income ones, all other things being equal.  . Just the way it is 

kidmugsy

(i) Maximise those pension contributions that let you avoid higher rate tax.  Also be sure to "harvest" maximum employer contributions.
(ii) Open a LISA each before you are 40 (or before a Chancellor abolishes new LISAs).
(iii) Discuss how to spread further investments between (a) wife's pension, and (b) the LISAs.

Note that LISAs would be good for bridging the gap between age 60 and State Pension Age but you would need something else to bridge the gap between drawing from your personal and occupational pensions at 57 (or 58?), and 60.  Money in a LISA will be available for emergencies before age 60 but with a penalty imposed which would be a nuisance but no worse.

MaxiRobriguez

Op:

I'm in a similar boat to you. 33, earning just over £60k, wife just given birth to our first son and looking to use a S+S ISA to bridge retirement.

My pot's a bit higher at £110k and monthly contributions a bit more at £2.1k but I'm not convinced I'll break the LTA for a variety of reasons:

1) Potential for decade+ of low returns given expensive equity markets.
2) Likelihood I'll need to reduce contributions in near future if family demands more of my pay packet than they currently do.
3) May choose to wind down work gradually and if I end up in that scenario later on may choose to forgo pension contributions to push more to a more flexible wrapper like a S+S ISA (which currently has £70k in).

Wouldn't worry about the LTA at the moment. Just use the tax breaks you've got available to you that are worthwhile. A lot can change in a couple of decades.

Worst case scenario is you end up with £1m+ in today's money and you pay a bit more tax on it than you'd like. That's a pretty healthy position to be in.