LTA Basics

MallyGirl

I have read what I can on here and tried Mr Google but am struggling with the basics on LTA. It is not something that has featured in my reading as I won't reach it but it has become clear that my husband will and we are in this together. He has no interest in finance and leaves it all to me but I am not comfortable with my level of knowledge here. I suspect we will probably find a local IFA but I just want to get the basics clear first so that we can get the most out of the IFA.

OH has no DB pensions, it is all DC. We will both get full SP at 67 - we are 54 now and he wants to work till our daughter finishes uni in 5 years time. I would happily stop sooner. He might start to earn more than £100k in that time period so he would definitely sal sac below that threshold as a minimum if it happened.

Current value of 2 SLoC pensions plus SIPP is £621k and nothing is being added to these.
Workplace pension is £233k and he is adding £40k per year via sal sac (10% employer contribution plus the employer NI)
That makes £850k today plus 5 years contributions and 5 years growth to come. If growth is low then he might not go over LTA by much.

I can't get my head round the 20% vs 55% tax on the excess - why would anyone ever do the lump sum and take a 55% hit. I am definitely missing something there.

I think that every time he 'crystallises' a chunk it will chip away a percentage of the LTA - whether he moves a big chunk into drawdown to get a tax free lump sum or whether he takes it in smaller amounts with 25% of each withdrawal being tax free doesn't seem to make a difference. Eventually he might have used 100% and then the LTA charge kicks in - or he hits 75 (or dies) and the same happens. Is that right? Nothing to do till that happens?

Since it is only a tax on the excess is it always best to keep contributing or does the tax cancel out the gains from sal sac. I can't work out the maths. Should he cut back on pension contributions and put more in his ISA which currently gets £1k per month.

Any info much appreciated.

Thrugelmir

Maintain pension contributions until the LTA actually becomes an issue. There's then the luxury of derisking the portfolio. 5 years is a lifetime when it comes to investing. A 17 year bull market is somewhat unlikely. 

ukdw

Re the question about why pay 55% rather than 20% -

If you take a lump sum at 55% then there is no more tax to pay.

If you instead crystallise and pay LTA charge of 25% (not 20%), then you will have either 0%, 20%, 40% or 45% further tax to pay when you drawdown from the crystallised pot.   (or slightly different rates in Scotland).

0% is unlikely - (unless someone dies before age 75) as this tax free allowance is most likely to be used up drawing from the below LTA part of the pension pot.

20% tax works out as a total of 40% (not 45% - as you only pay 20% on the 75% left after the 25% charge is taken) - so is better than paying 55%,  however it may well be that there isn't much 20% tax band left from drawdowns from the below LTA part of the pension.

40% tax works out as a total of 55% - which is the same as the Lump Sum rate - this is the most likely tax rate that you would pay on above LTA drawdowns - which is I guess why the lump sum withdrawal rate is set at the same level

45% tax works out at more than 55% (58.75%) - so if there is a risk of needing to drawdown money at a 45% tax rate then doing a lump sum withdrawal and paying 55% works out cheaper.

Albermarle

Since it is only a tax on the excess is it always best to keep contributing or does the tax cancel out the gains from sal sac. I can't work out the maths.

If you get 40% tax relief on the way in and pay 20% income tax when taking the pension , then any above the LTA will be neutral tax wise . If you only get 20% tax relief and/or pay 40% tax on the way out you lose.

So in the case of a 40% taxpayer now and 20% in retirement , it is worth continuing to contribute enough to at least get maximum employer contributions . If you contribute more and you go over the LTA , you do not lose or gain from a tax point of view

I think that every time he 'crystallises' a chunk it will chip away a percentage of the LTA - whether he moves a big chunk into drawdown to get a tax free lump sum or whether he takes it in smaller amounts with 25% of each withdrawal being tax free doesn't seem to make a difference. 

Correct . 

Some ways to reduce LTA are mentioned in several threads on the forum but there is no magic solution .

It is often said if you have to pay some LTA, then you have won the game anyway .

pip895

Might at least be worth getting the maximum 40k/annum out of the pension and into both your ISAs.  I am not that far ahead of him in SIPP value and the LTA is looming large for me - I’m not adding more to the pension.

I think the LTA shouldn’t stop you accumulating enough to achieve the max employer contribution but after that it’s less clear cut.  

I think I might also be trying to persuade him to retire earlier- but if he loves his job then there is no sense in that..

MallyGirl

pip895 said:

I think I might also be trying to persuade him to retire earlier- but if he loves his job then there is no sense in that..

I haven't given up on this but it has taken quite a lot of talking to bring him round to early retirement at all. He does not love his job - he just wants to make sure that we can do what we want to in retirement (travel mainly) and not be financially constrained. I'd go as soon as I thought we had enough - he will always be the 'one more year' type. He does also have pessimistic days when he focuses on the 10x salary life insurance he gets while still working - worth more dead than alive sort of thing.

zagfles

Albermarle said:

Since it is only a tax on the excess is it always best to keep contributing or does the tax cancel out the gains from sal sac. I can't work out the maths.

If you get 40% tax relief on the way in and pay 20% income tax when taking the pension , then any above the LTA will be neutral tax wise . If you only get 20% tax relief and/or pay 40% tax on the way out you lose.

So in the case of a 40% taxpayer now and 20% in retirement , it is worth continuing to contribute enough to at least get maximum employer contributions . If you contribute more and you go over the LTA , you do not lose or gain from a tax point of view

Yes, except that you gain in a similar way to an ISA, ie growth is effectively tax free. Also if you sal sac, the effective tax relief will likely be 42% (inc NI) or 62% if over £100k (avoiding PA loss) so you gain. 

MoJoeGo

You mention he 'might' end up earning over 100k in future so I'm wondering if he is currently salsac'ing entirely within the 40% tax band, or if he's dropping into basic rate? If that's the case then could you rebalance your pension contributions between you so that anything below the 40% band he's currently sacrificing could instead be added into your pension (or a new SIPP in your name)?

I'm of course assuming you are not a 40% taxpayer yourself - if you are then even more opportunity for a rebalance of contribution s between you?

zagfles

There's loads of good articles, often from pension providers and aimed mainly at advisers but usually quite understandable if you have a basic understanding of pensions, if you google "LTA BCE".

Also could be worth a chat with pensionwise, or your SIPP provider for guidance, they will be able to explain the rules but they won't advise what you should do, but it sounds like that's what you need as you seem to want a better understanding so you can make your own decisions rather than someone to tell you what you should do.

If you do need paid advice on the subject I don't see any need to be obsessive about "independant" advice - that's only an issue for recommending investments etc so they use whole of market. For tax advice you just need someone who understands the rules, your SIPP provider may be able to provide that. As seen here some IFAs don't understand the LTA!

Albermarle

 For tax advice you just need someone who understands the rules, your SIPP provider may be able to provide that.

As an example , Fidelity offer standalone advice on LTA for £4K.

zagfles

Albermarle said:

 For tax advice you just need someone who understands the rules, your SIPP provider may be able to provide that.

As an example , Fidelity offer standalone advice on LTA for £4K.

Ridiculous! I suppose with a big pot there's always someone after a slice. The LTA really isn't that hard to understand for someone with a basic understanding of pensions and maths. It just takes some time to get your head around. I would suggest OP just reads as much as possible about it, maybe use free guidance services eg pensionwise, or the SIPP provider may offer guidance free, and asks questions here, then maybe consider paying for advice if she's still not confident in her understanding.