How many people actually get to the LTA?

RickyB2000

hugheskevi said:

RickyB2000 said:

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

A Relief at Source contributor can adjust their tax code to get the tax refund due.

This can be done in advance, eg, could have the higher tax code from April of a tax year, but not make the contribution until March the next year, thus getting the tax refund far in advance of the contribution.

Ah, good point! 

ComicGeek

Secret2ndAccount said:

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.

But if Fred gets extra contributions from the company in addition to his £100, then that could still be an overall benefit if he follows a sensible drawdown strategy. And years of (hopefully) pension growth would make that investment do much better than Ginger who's just spent that £60 on a night out. Unfortunately there are some people who will read the example above and just think 'well I won't bother paying into the pension then!'

All my pension contributions are from my company and don't affect my personal income - so ultimately doesn't bother me if I pay more tax on the amount over the LTA. It's 'free' money to me even at only 45%. 

And it's amazing how many people don't realise that the tax charge is only paid on the excess above the LTA - I have a friend who stopped their company contributions because they thought they would be taxed on the whole pension pot amount.

Grumpy_chap

ComicGeek said:

But if Fred gets extra contributions from the company in addition to his £100, then that could still be an overall benefit if he follows a sensible drawdown strategy. And years of (hopefully) pension growth would make that investment do much better than Ginger who's just spent that £60 on a night out. Unfortunately there are some people who will read the example above and just think 'well I won't bother paying into the pension then!'

All my pension contributions are from my company and don't affect my personal income - so ultimately doesn't bother me if I pay more tax on the amount over the LTA. It's 'free' money to me even at only 45%. 

That makes sense, if near the LTA, stop employee contributions but still take the employer contributions. 
However, with the "Fred" example, employee contributions work out to 100% tax and the employer contributions work out to 55% tax so there is no free money. 
I am thinking of being on auto-enrolment with employer contributions at 3% and employee at 5%.  If I understood correctly, the result would be the employee contributing 100% of 5% to gain 45% of 3%.
Have I understood that correctly?

Obviously, if there are employer contributions that do not require matching employee contributions, then the approach makes sense.

ComicGeek said:

And it's amazing how many people don't realise that the tax charge is only paid on the excess above the LTA - I have a friend who stopped their company contributions because they thought they would be taxed on the whole pension pot amount.

I was not aware.  Thank you.

Albermarle

And it's amazing how many people don't realise that the tax charge is only paid on the excess above the LTA - I have a friend who stopped their company contributions because they thought they would be taxed on the whole pension pot amount.

Some papers run regular scare stories about 'Rishi Sunak robbing pensioners of 55% of their pension' . The Daily Express particularly and the headline often crops up again in the MSN default page when you open a new tab in Microsoft edge browser .

Personally when LTA was looming , I stopped my annual £40K with 40% tax relief and went to minimum employee % , to get max employer %. In any case I retired soon afterwards so probably did not make much difference either way.