LTA Basics

cfw1994

Albermarle said:

 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.

This is an issue rarely mentioned in this forum when talking about early retirement . Many jobs ( usually at managerial level but not necessarily just senior managers ) have a number of valuable perks attached that have to be given up at the same time as the salary stops. Life insurance is just one , there is commonly also family private medical insurance, income protection maybe, possibly a fully expensed company car, free mobile and broadband , expensive  laptop supplied etc.

In this case your expenditure goes up when you retire, as you have to buy all/some of these things yourself and the whole package makes it that bit more tempting to do One More Year , or two.....

Very true👍

One reason I got my own car quite a few years back with the allowance was to get used to owning my own car again

I have agonised a little over the health insurance I gave up.  I did come to realise that the time I urgently needed medical help (volleyball in face leading to torn retina and emergency laser surgery 😜), the NHS dealt with it fantastically.  Despite the many problems we have funding the potentially bottomless pit that the NHS is, it remains a brilliant UK benefit 👍

Still haven’t yet decided whether to take any insurance out….have considered going halfway & taking out a Beneden plan, but not sorted out🤔
 
Income protection is less useful once you are into some drawdown, I guess.
& yes, did finally have to buy myself a mobile….went upmarket for decent iPhone 12, mostly for the camera.  Yup, hardly money saving, but one has to live a little 🤣👍

MallyGirl

I suspect I will carry on health insurance for a bit - one cataract was done at 49 and the consultant said the other 'would definitely go' but no idea when. It was very slick getting this sorted by BUPA. Dad has also had 2 ankle and 1 knee replaced by his mid 70s - could blame it on all the standing involved in doing a doctor but who knows how much is genetic 

MallyGirl

jamesd said:

MallyGirl said:

All his Sal sac is in the 2% NI band but he does get 100% of the 13.8% employer NI as well.
No child benefit as our only offspring is at uni.
I woke up to early retirement as a possibility a couple of years ago so we don't have any carry forward from previous years - I suspect that low/high years might fry his brain a bit too much I do flex my contributions over the year but he wouldn't 'mess about' like that.

I don't know or want to know his pay but lets pretend that he can sacrifice so that half of the sacrifice is at 12% and half at 2%. That's 10% or £20,000 or £2,000in NI to be saved.

Is he really so reluctant to avoid having an extra £2,000 in his bank account instead of HMRCs?

Maybe, but putting numbers to it can help to make it more real to him...

Good point - will try and have that conversation, starting slowly. He is an intelligent man but is just not interested in finance.

Albermarle

MallyGirl said:

I suspect I will carry on health insurance for a bit - one cataract was done at 49 and the consultant said the other 'would definitely go' but no idea when. It was very slick getting this sorted by BUPA. Dad has also had 2 ankle and 1 knee replaced by his mid 70s - could blame it on all the standing involved in doing a doctor but who knows how much is genetic 

I think often the medical insurer your employer uses , will offer  a continuation package to you personally when you leave. This could be  beneficial if you have an ongoing problem, as they are maybe more likely to cover it than if you were taking out a new policy .
However the cost of the policy will probably be more than your employer now pays on your behalf.

As usual with insurance you have to compare the known costs of paying for the policy , with the unknown costs of occasionally paying for private consultations/treatment/operations if the NHS has a big waiting list and/or you prefer the nicer surroundings of a private hospital.

zagfles

jamesd said:

zagfles said:

jamesd said:

With lifetime allowance charge salary sacrifice is clearly beneficial in the following regions:

1. for the part getting a 100% employer match.
2. for the part of pay above 100k where there is also recovered income tax personal allowance
3. possibly where child benefit is restored

Beyond that the the best possible non-match case below 100k on £100 of employee sacrifice with basic rate tax on the way out is:

a. if it's within 12% NI band there is immediate saving of £12 in NI, £2 if not.
b. you get 100% of the saved employer NI on the contribution. £113.80 in the pension
c. pay 25% income LTA on the £113.80 leaving £85.35 in drawdown
d. pay 20% income tax on the £85.35 leaving take home £68.28
e. net received is £68.28 + £12 or £2 so £80.28 or £70.28

This compares to 2% NI and 40% income tax leaving take home of £58 in the 2% NI range.

You can do similar calculations for the specifics of how the individual scheme works on employer NI and whether sacrifice is into the 12% NI range or not.

You're double counting in e if you're comparing with the £58 in the next sentence. 

It's correct to add £10 in e for the part of the sal sac below the NI UEL if you take lumpy pay to get 12% employee NI saving, because you're moving income from the 12% band to the 2% band so getting an extra £10 take home pay. But on an income approaching £100k you'd be forced to sal sac a significant amount within the 2% NI band, over half probably, so that would only apply to part, likely less than half even if optimised.

So the comparison should be £68.28 plus maybe £4 or so from NI optimisation (which OP doesn't seem too bothered about), compared with £58.

I was trying to examine the marginal best possible case for an extra £100 of sacrifice. The best possible cases is it going down into 12% NI so that's what I used.

Of course I agree with you that in this practical situation there's going to have to be some NI at 2% even if sacrifice is concentrated into as few months as possible. It appears that he may not be willing even to do quite minor tweaks to get down to the 12% range so in his specific case 2% might be all that's available.

Right. But you're still double counting in line e. You can't add the £2 NI saving in e then take NI off the net in the £58 comparison on the line below. Do you accept this? But you can add £10 by virtue of lumpy sal sac shifting income from below UEL to above, for where it applies. But that would likely only apply to about £10-15k of the sal sac, depending on income, benefits etc. Probably still worth doing if OP and OH can get their head round it, and the scheme is flexible enough.

jamesd

Ah, now I see what you were really trying to get at. Hmm.... 

I was trying to look at after tax and NI in both cases and I'm not yet able to convince myself that I double counted so I'll ponder a bit more.

e seems to be correct at net received in the sacrifice case, since the NI saving is received.

And line below the NI is really deducted so that seems right.

What's the net bank account effect of the two cases? Actual after tax and NI cash flows.

zagfles

jamesd said:

MallyGirl said:

All his Sal sac is in the 2% NI band but he does get 100% of the 13.8% employer NI as well.
No child benefit as our only offspring is at uni.
I woke up to early retirement as a possibility a couple of years ago so we don't have any carry forward from previous years - I suspect that low/high years might fry his brain a bit too much I do flex my contributions over the year but he wouldn't 'mess about' like that.

I don't know or want to know his pay but lets pretend that he can sacrifice so that half of the sacrifice is at 12% and half at 2%. That's 10% or £20,000 or £2,000in NI to be saved.

Is he really so reluctant to avoid having an extra £2,000 in his bank account instead of HMRCs?

Maybe, but putting numbers to it can help to make it more real to him...

Unlikely to be anywhere near £20k.

OP mentioned he may go over £100k in the next few years, would imply he's on at least £80k. She mentioned 10% employer conts.

So, assuming £80k, max sal sac with no carry forwards as looks like none available, would be £28119 (£40k minus £8k employer cont divided by 1.138 to account for employer NI saving paid into pension)

Min wage approx £18500 (depending on hours actually worked - assuming 40h week), or £1542 a month.

Monthly pay £6667, NI UEL is £4189

So each month where max sal sac used would be £6667-£4189 = £2478 above UEL (saving 2% NI) and £4189-£1542 = £2647 below UEL (saving 12%).

That could only be done for 5 months. That would leave £2494 left to sal sac, which would be all at 2% apart from £16.

So a total of £13252 has been sal sac'ed below the NI UEL and so got the 12% NI saving.

But it could be worse than this. It's likely that a minimum employee cont is necessary each month in order to get max employer conts, so that needs accounting for. If it's say 5% that might be accomodated in this particular case within the extra £2494 which would nearly all be at 2% anyway, spread across the 7 months not doing sal sac down to min wage. But will be dependant on exact figures.

Also, another complication is that if the OP's OH gets taxable benefits (car, medical insurance etc) which is highly likely at that salary level, then those would add to his taxable pay, but they wouldn't count towards NMW, so would effectively reduce the max monthly sal sac available. However, assuming the benefits aren't NI'able on the employee (most aren't) I don't think it would affect the amount of 12% NI savings since NI'able pay would be lower than taxable pay and so less NI'able pay above the UEL, and the max monthly sal sac would still be the same amount below UEL (the amount above UEL would reduce).

Basically, it's quite complicated to attempt to max out NI savings! There's also the issue of budgetting with lumpy pay, and understanding how PAYE will deal with it.

If OP can get her head around all this, and the scheme has the flexibility necessary, it may be worth it to save a bit over £1000 NI!

zagfles

jamesd said:

Ah, now I see what you were really trying to get at. Hmm.... 

I was trying to look at after tax and NI in both cases and I'm not yet able to convince myself that I double counted so I'll ponder a bit more.

e seems to be correct at net received in the sacrifice case, since the NI saving is received.

And line below the NI is really deducted so that seems right.

What's the net bank account effect of the two cases? Actual after tax and NI cash flows.

Without lumpy sal sac:

It's as you quoted but without the +£12/2

So e. net received is £68.28

That compares with £58 if you don't sal sac the £100.

The extra £2 NI you pay if you don't sal sac is already accounted for in the £58.

(Of course investment growth will apply, but that will apply to both equally so assumes they are invested in the same things with the same charges and the £58 outside the pension grows tax free eg in an ISA or using CGT/dividend allowances)

But with lumpy sal sac, if the £100 you are sal sac'ing is below the monthly UEL:

You get the same net in the pension, so £68.28

However, because you have moved £100 of income from the 12% NI band to the 2% NI band, you also have increased your take home pay by £10. So you get the same as non lumpy, which accounts for the amount you sal sac, but an extra £10 on top from shifting income from one band to another. Think about it - you'd get the same £10 saving if you persuaded your employer to pay you lumpy salary - ie the same annual salary but spread unevenly over the year.

RoadToRiches

All this LTA stuff gives me a saw head trying to figure it out but I run risk of exceeding this myself at some point, if all goes to plan.

Am I right in thinking that as long as I do not take anymore than £1,073,100 from tax free pot and drawdown pots combined that there is no lifetime charges? That the pension can continue to grow beyond the limit and it will make no difference. until I have taken £1,073,101 from the pension wrapper?

What is the significance of being 75?

zagfles

RoadToRiches said:

All this LTA stuff gives me a saw head trying to figure it out but I run risk of exceeding this myself at some point, if all goes to plan.

Am I right in thinking that as long as I do not take anymore than £1,073,100 from tax free pot and drawdown pots combined that there is no lifetime charges? That the pension can continue to grow beyond the limit and it will make no difference. until I have taken £1,073,101 from the pension wrapper?

What is the significance of being 75?

No. It's what you "crystallise", not what you take. For instance if your pot was £1m and you wanted to take the £250k TFLS but nothing else, you would have to crystallise the whole £1m, even if you wanted to leave the £750k in the pot untouched.

Various things happen at 75. Any uncrystallised funds are assessed against the LTA. So you can't avoid it then by leaving it in. Any growth in drawdown pots are tested then too, ie if the drawdown pot has increased - you can avoid this by making sure you take enough drawdown so that the pot isn't bigger at 75 than when you crystallised.