How many people actually get to the LTA?

Albermarle

biscan25 said:

Right, so if I have this correct, a sound strategy would be: (lets assume LTA is £1m for ease of calcs, and ignore the risk of legislative change)
Pilfer as much tax relief as you are allowed up to AA, even go up to £1.5m saved if you like.
At minimum pension age (57 currently) retire. Designate £1m as drawdown and trigger BCE for 100% of LTA. Take 250k TFC to live on.
In each of the next 10+ years, crystallise 50k and pay the tax charge as income 25%, plus basic rate tax. Thus beating the tax system.
Would this work?

Does not make sense , because £500K will still be charged LTA , so you have not beaten the system at all.

Secret2ndAccount

If you did that, you would be in the same place as if you had put the extra 500k into an ISA, invested in the same funds. Pension gives you tax relief on the way in, and LTA charge on the way out. ISA gives you income tax on the way in, and no tax on the way out. For most people, it comes out even. So it could be a 'win' in a couple of ways:
1. You couldn't necessarily put 500k into ISA's quickly enough, or maybe you already use up your ISA allowance. So, whilst I wouldn't really call it a win, it might still be your best plan.
2. If the pension went in via salary sacrifice, you would probably have saved some NI too, so you would then come out genuinely in front. Some other edge cases, like taking your salary from above to below 100k; these confer the same benefit.

If you view it as getting tax relief on the first million you put into your pension, and no more, then it's hard to justify complaining about it.

biscan25

Albermarle said:

biscan25 said:

Right, so if I have this correct, a sound strategy would be: (lets assume LTA is £1m for ease of calcs, and ignore the risk of legislative change)
Pilfer as much tax relief as you are allowed up to AA, even go up to £1.5m saved if you like.
At minimum pension age (57 currently) retire. Designate £1m as drawdown and trigger BCE for 100% of LTA. Take 250k TFC to live on.
In each of the next 10+ years, crystallise 50k and pay the tax charge as income 25%, plus basic rate tax. Thus beating the tax system.
Would this work?

Does not make sense , because £500K will still be charged LTA , so you have not beaten the system at all.

But you would've received tax relief at 40% or 60%, and only 35% on the way out?
It's entirely hypothetical, I was trying to work to the other extreme compared to where the LTA charge is most penal.

wolvoman

Albermarle said:

Kim1965 said:

I accept that it works against certain proffessions like  doctors in db schemes for example. 
 As a point, I would have thought that tax breaks for pensions  should be for retirement not inheritance.
 I would also think a flat rate incentive would also be fairer a 30 % rate would benefit  lower paid savers.
 Also salary sacrifice, as i understand allows a person to avoid /divert national insurance into pension funds. Many do not have access to ss, seems unfair.
 I have no idea how such changes could be implemented, but it will be interesting to see what happens after a change if government. 

In my opinion the salary sacrifice issue is the most glaringly obvious issue to resolve. It is costing the government more and more every year in lost NI employee and employer payments. Plus it discriminates against employees not in these schemes.
In addition a minority use the salsac to avoid student loan repayments, and it allows high earners to still claim child benefit, if they can afford to salsac a big enough %.

A 30% rate for tax relief is a non starter though. There are a lot more 20% tax payers than 40% , so having a universal 30% relief would cost the Treasury Billions . A figure of 25% has been mooted in the past .

Regarding the laws on inheriting pension pots , they clearly need looking at . Not just about them not being included in IHT calculations, but the preferential tax treatment that beneficiaries get, and that even these advantages can be passed on down multi generations . I think it is clearly a trick legal problem though,  and would be a tricky political problem with some kind of complicated transition to a new regime. 

A few years back I used salary sacrifice, plus a few years of pensions annual allowances to sacrifice 90% of my salary and claim child and working tax credit as well as child benefit, marriage tax allowance and so forth.
Was a fabulous couple of years for boosting the pension and getting some bonus cash to live on.

Albermarle

biscan25 said:

Albermarle said:

biscan25 said:

Right, so if I have this correct, a sound strategy would be: (lets assume LTA is £1m for ease of calcs, and ignore the risk of legislative change)
Pilfer as much tax relief as you are allowed up to AA, even go up to £1.5m saved if you like.
At minimum pension age (57 currently) retire. Designate £1m as drawdown and trigger BCE for 100% of LTA. Take 250k TFC to live on.
In each of the next 10+ years, crystallise 50k and pay the tax charge as income 25%, plus basic rate tax. Thus beating the tax system.
Would this work?

Does not make sense , because £500K will still be charged LTA , so you have not beaten the system at all.

But you would've received tax relief at 40% or 60%, and only 35% on the way out?
It's entirely hypothetical, I was trying to work to the other extreme compared to where the LTA charge is most penal.

Nor sure where the 35% comes from ?
Lets say you gained 40% tax relief on the way in.
A £100 in the pension would only cost you £60 .
Taking the £100 out as income when over 100% LTA , will incur an LTA charge of 25% , so £75 left , Take 20% income tax from that and you have £60 left . So you have basically had to return the tax relief you gained.

Secret2ndAccount

Fred works for a private company and earns 65k. He pays £100 into his pension:
Pension pot increase: £100
Fred exceeds the LTA, but his income in retirement is <50k
LTA charge on £100 income: 25%. Leaving £75. 20% tax on £75 = £15, so Fred receives £60 in pension

Ginger works for a private company and earns 65k. She takes the £100 as salary:
Income tax: 40%. Take home pay, £60. Same as Fred. 

Fred would be ill-advised to take the £100 as a lump sum from his pension, as he would then only get £45.
If Fred is a higher rate taxpayer in retirement, even after taking a 250k lump sum, then he is only going to get 45p in the £. Fred could/would/should have considered retiring early, or spending the money.

AndrewB22

In SecretSecondAccount’s example, Fred would be better off saving into an ISA. But if he has used his ISA allowance, is he better off adding to his pension, which exceeds the LTA, or saving outside a pension and ISA?  I am not sure. His income and gains will roll up tax free in his pension, but he’ll pay 40% tax when he accesses them, including the appreciation. If he saves outside his pension or ISA, he’ll pay 40% tax on entry and income tax or capital gains tax on exit. So isn’t a pension better than nothing?

Grumpy_chap

biscan25 said:

Right, so if I have this correct, a sound strategy would be: (lets assume LTA is £1m for ease of calcs, and ignore the risk of legislative change)
Pilfer as much tax relief as you are allowed up to AA, even go up to £1.5m saved if you like.
At minimum pension age (57 currently) retire. Designate £1m as drawdown and trigger BCE for 100% of LTA. Take 250k TFC to live on.
In each of the next 10+ years, crystallise 50k and pay the tax charge as income 25%, plus basic rate tax. Thus beating the tax system.
Would this work?

The sound strategy is probably just to build the most generous retirement fund you can and then worry about the tax if it arises.

I know two people who retired recently with pots of around £3m and they are both living very comfortable retirements.  Interesting how they both used the lump sum differently - one bought a premium sports car and the other a BTL in his wife's name so that she has income to make use of her income tax allowances.

Both were, perhaps, fortunate to have crystallised some funds before the drops seen in recent months so what they suffered in tax is offset by what they did not lose in investment falls.

Secret2ndAccount

AndrewB22 said:

In SecretSecondAccount’s example, Fred would be better off saving into an ISA. But if he has used his ISA allowance, is he better off adding to his pension, which exceeds the LTA, or saving outside a pension and ISA?  I am not sure. His income and gains will roll up tax free in his pension, but he’ll pay 40% tax when he accesses them, including the appreciation. If he saves outside his pension or ISA, he’ll pay 40% tax on entry and income tax or capital gains tax on exit. So isn’t a pension better than nothing?

Legislation regarding CGT, and dividend taxation are quite likely to change, so there are risks in committing to a taxable investment account. Also there's admin to be done - selling a portion of your holdings each April, then buying something different, or trading shares in and out of your ISA. So it's not a walk in the park. However, here is roughly how it works:
The annual CGT allowance is 12,300 If your investments return on average 5%, then you can invest 12300 x 100 /5 = 250k.
Each year, you get some dividends, which would be tax free up to 2k per year unless your other income is very high. Then you get some capital gain. To optimise this, you would shoot for cap gain, and not too much dividend. Assuming you've had a decent year, and have gains of 12k, you sell those stocks, and realise the 12k gain. No tax to pay. You can keep the 12k to spend, or you can use it to buy something different, in order to keep the pot up. But you have to sell every year to use up the CGT allowance, even if you put the 12,300 right back into investments. You can't buy back what you sold within 30 days - has to be something different. You could sell x, and buy it in your ISA, then sell y in the ISA, and buy y in your general account. In other words, it's hassle, but you can do whatever you want.
If your gains are over 12k, you just sell enough to realise the maximum 12,300. Maybe next year the market isn't so good, and you use some of your older gains to get to 12,300.

If part of your entire portfolio is something slow and steady, that returns maybe 3% gain every year, that would be perfect for your taxable account. You could hold 400k of that, and sell 12k of it every year. 

Anyone who has more than 20k to invest outside of a pension can use this method. It's as tax free as an ISA if you get it right.
Remember to drain down the pot at some point unless you plan to pass it on by inheritance. Could be expensive to take it all out in one go if you have accumulated capital gains.

RickyB2000

Flugelhorn said:

RickyB2000 said:

I am pretty sure any high earner can claim child benefit if they have access to a pension. As it is calculated off of adjusted net income not taxable income. So any type of pension contribution counts, as does charity contributions etc. The big difference is the normal pension contributor has to fund 20% out of post tax income and reclaim this at some point in the future while the salsac doesn’t making it much easier

Huh? you can only contribute so much to a pension otherwise other nasty taxes happen, so no you can't all get child benefit - OH used to get it and then 18 months later we had to pay it back, still it sat in the offset account while we were looking after it for the treasury.

Yes of course, 40k plus any carry forward. But the point was that it is not exclusive to people with access to Sal sac, any high earner can do it (I should qualifying that as within the general rules of pension contributions everyone is subject to if not clear)