How many people actually get to the LTA?

hugheskevi

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.

AndrewB22

Anonymous101 said:

I might take a bit of an issue with the detail on the withdrawal rates etc I'd argue that £1m pot gives an income £30k-£40k plus state pension is more likely. However I follow your logic and don't disagree with it. I suppose what I do disagree with is that this is a luxury retirement such that any pot value above this requires a heavy tax penalty (LTA) further to what mechanism already exists in the form of income tax.

Is the LTA alone a tax penalty, or just the clawback of tax relief previously given that is above the total amount of tax relief the rules allow?  That is true, I believe, for DC pensions.  It is not true where someone hits the AA as well as the LTA (that seems punitive) and it is also not  true for some DB schemes, and particularly not true for DB schemes where people have variable pay (like doctors). So it doesn’t work in some cases but I think it is not, in principle, a penalty but instead a clawback of tax relief given.

biscan25

AndrewB22 said:

Anonymous101 said:

I might take a bit of an issue with the detail on the withdrawal rates etc I'd argue that £1m pot gives an income £30k-£40k plus state pension is more likely. However I follow your logic and don't disagree with it. I suppose what I do disagree with is that this is a luxury retirement such that any pot value above this requires a heavy tax penalty (LTA) further to what mechanism already exists in the form of income tax.

Is the LTA alone a tax penalty, or just the clawback of tax relief previously given that is above the total amount of tax relief the rules allow?  That is true, I believe, for DC pensions.  It is not true where someone hits the AA as well as the LTA (that seems punitive) and it is also not  true for some DB schemes, and particularly not true for DB schemes where people have variable pay (like doctors). So it doesn’t work in some cases but I think it is not, in principle, a penalty but instead a clawback of tax relief given.

The tax penalty is 55%. The tax relief would have been given at 20%, 40%, or 45%(was 50%).
So it's clearly been designed as a penalty.

So the only time it would be "fair" is if the marginal relief was 60% (for £100k to c£125k).

EdSwippet

AndrewB22 said:

Is the LTA alone a tax penalty, or just the clawback of tax relief previously given that is above the total amount of tax relief the rules allow?  That is true, I believe, for DC pensions. ... So it doesn’t work in some cases but I think it is not, in principle, a penalty but instead a clawback of tax relief given.

If you work though the combinations, you can see exactly where the LTA is and is not a DC pensions penalty.

It is not a penalty if: your contributions are at higher rate tax, but you pay basic rate or zero tax on withdrawals; or, your contributions are in the 60% bubble bracket and you use the 55% lump sum withdrawal rate if necessary. (For "neutral" cases though -- that is, 40% relief and then 25% + 20% of 75% = 40% on withdrawals, the ones you label as "clawback" -- there remains a non-financial drawback ("penalty") of having your money unnecessarily tied up and inaccessible until age 55 or 57.)

It is a penalty if: your contributions are at or below higher rate tax, but you pay higher rate, additional rate, or 60% bubble bracket tax on withdrawals; your contributions were not in the 60% bubble bracket and you take a 55% taxed lump sum; or, you pass age 75 without having withdrawn sufficient (taxably) to drop below the forced LTA test at age 75.

For DC pensions, some of these could be plannable, which might be okay, but for two things. Firstly, the LTA encompasses not just controllable pension contributions but also uncontrollable and uncertain investment returns. And secondly, the government's repeated freezes and swingeing reductions in the LTA have effectively retroactively changed carefully planned non-penalty circumstances into penalty ones.

AndrewB22

EdSwippet, that is very well summarised and I agree with the majority of what you say. 

To the extent a pension for a higher rate worker who becomes a basic rate taxpayer in retirement but who exceeds the LTA is like an ISA, I’d argue the penalty of not being to access the money until 55/57 is fair recompense for having an additional ISA allowance. 

It may be how you’ve worded it, but the charge at age 75 isn’t unfair of itself, it is just a timing thing. It’s unfair in the same circumstances as it’s unfair before 75 - I think (but am not totally sure).

I’m also not sure the charge applying to the roll-up of investment gains is unfair, either. Mathematically, it doesn’t matter whether you crystallise the LTA charge at, say, age 55, pay 25%, and then further gains are only subject to income tax when withdrawn, or whether you wait, receive gains, and then pay 25% and income tax later. But I worry I might be missing something.  I don’t think you can pay LTA twice on the same money. 

However, one of your central points was that there are a load of situations where it isn’t fair, and that they’re not fringe cases.  I accept that. Even then, I’d argue that a retiree who is earning over £50k of taxable income, or over £100k, shouldn’t expect too much sympathy from the taxman. I think all the disadvantageous cases only apply to retirees who have >£1m pensions and significant other income. 

The point I agree with unreservedly is the retrospective nature of rules changes and the uncertainty that brings to planning. 

Thank you for taking the time to set out so clearly the different situations. 

The point about the 55% tax on lump sums (in another post) is interesting. If you earned £100, paid 40% tax, and then put £60 into a pension, you’d end up with £100 in the pension after tax. If you then exceeded the LTA and took it out taxable as a large drawdown, you’d pay 25% LTA charge and then 40% income tax, which would leave you with £45.  If instead you took it as a lump sum, the LTA charge would be 55%, and you’d end up with £45. So that’s symmetrical with the 25% LTA charge but as noted, it’s a net penalty if you end up taking money from a pension above LTA and pay higher rate tax. 

Albermarle

The tax penalty is 55%. if you take it as a lump sum  The tax relief would have been given at 20%, 40%, or 45%(was 50%).
So it's clearly been designed as a penalty.

See in bold above .

The typical case is that the person is a 40% taxpayer in employment and a 20% taxpayer in retirement.  Only a small % of people pay 40% tax in retirement, and only a small % of basic rate taxpayers in employment are ever going to be troubled by LTA . Also the pension is usually  taken as income .

So in employment , a £100 in the pension costs £60 .

In retirement the £100 is withdrawn as income and a 25% LTA charge is applied = £75 and then 20% income tax = £60.

So for most people it is simply a clawback of the tax relief once over a certain limit.

EdSwippet

AndrewB22 said:

However, one of your central points was that there are a load of situations where it isn’t fair, and that they’re not fringe cases.  I accept that. Even then, I’d argue that a retiree who is earning over £50k of taxable income, or over £100k, shouldn’t expect too much sympathy from the taxman. I think all the disadvantageous cases only apply to retirees who have >£1m pensions and significant other income. 

But "significant" may need some nuancing. A retiree with an LTA-level pension is motivated by the age 75 LTA test to withdraw all the pension's nominal gains before age 75. That might require drawing £50k/year, if not every year then at least some years. 25% tax free leaves £37.5k. Add £9.5k state pension gives £47k. That leaves just a tad over £3k/year headroom, which doesn't seem to be enough to qualify as significant.

Anyway, since you are good at working through LTA numbers, perhaps this fringe (but not impossible) scenario will amuse you. £100 over the annual allowance into a pension, earnings above £150k so a £45 tax charge on the contribution. Tapered annual allowance or MPAA applies, so 'scheme pays' is not available. Withdrawal of £100 from this pension over the lifetime allowance, in higher rate tax, so a £55 tax charge on the withdrawal. Net result: £100 into a pension, £0 back after all taxes paid, giving a 100% tax rate.

Grumpy_chap

EdSwippet said:

earnings above £150k so a £45 tax charge on the contribution. Tapered annual allowance or MPAA applies, 

I don't understand the taper but I thought you had to be on around £250k not £150k for it to apply... ?

EdSwippet

Grumpy_chap said:

EdSwippet said:

earnings above £150k so a £45 tax charge on the contribution. Tapered annual allowance or MPAA applies, 

I don't understand the taper but I thought you had to be on around £250k not £150k for it to apply... ?

The threshold is actually £240k, but £240k is "above £150k" and (considerably) into additional rate tax. The MPAA applies at any income level.

biscan25

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?