Tax on breaching LTA vs tax now

jdl920p

Hello, I have a pension tax question.  I am predicting that the aggregate of my current pension pots will just about breach the LTA when I retire (about 10 years time).  If that happens then I will pay tax on the excess of 50% (if taking a lump sum) or 25% (if taking income)

Also, I am in the lucky position of my salary (plus bonuses) this year going over £100k.  With the reduction in personal allowance this means I will be paying a marginal rate of 60% on everything between £100k and £125k

So would it make sense to put the excess over £100k into my pension?  Tax rebate now but extra tax later

Or just suck up the extra tax now?

Or are there just too many unknowns to be able to really compare the two options (e.g. future pension pot growth, future government policy re LTA, future inflation)

Many thanks

Dazed_and_C0nfused

Maybe one thing to consider is that is highly unlikely that there will be any changes to the rules for the current tax year.  Obviously the new government may see things differently but it would be unusual to announce changes mid year.  I think the recent NI change was announced before the tax year started.

But a lot can happen in the next 10 years.

There is no right answer but maybe a bird in the hand.......

Albermarle

 I am predicting that the aggregate of my current pension pots will just about breach the LTA when I retire (about 10 years time).  If that happens then I will pay tax on the excess of 50% (if taking a lump sum) or 25% (if taking income)

It is 55 % on a lump sum, or 25% on income and then whatever rate of income tax you are paying at the time.

If you are a basic rate taxpayer at the time , you will pay 40% overall ( £100 minus 25% = £75 minus 20% = £60), so if you have gained 40% tax relief on the way in, you are just paying back what you gained.

There are some possible ways to mitigate LTA in a limited way and you do not pay it when you reach the limit, only when you crystallise above the limit , or reach 75.

Also money in a pension pot is not part of your estate, so is not included in Inheritance tax calculations. So in simple terms you may pay some LTA on the excess at 40%, but save 40% IHT on the whole lot ( although you will be dead of course )

QrizB

It's your choice, but personally I'd avoid paying 60% now and hope to pay less later.

EdSwippet

jdl920p said:

I am predicting that the aggregate of my current pension pots will just about breach the LTA when I retire (about 10 years time).  If that happens then I will pay tax on the excess of 50% (if taking a lump sum) or 25% (if taking income)

Actually, 55% on a lump sum (already noted by Albermarle upthread).

You mention retirement in ten years, but you don't give your age. If you would reach age 55/57 before that ten years is up, that gives the opportunity to crystallise some or all of the pension early, even if not taking taxable withdrawals but just the 25% PCLS. Combining this with strategic withdrawals before age 75 (the forced LTA test) can be a way to eliminate, or at minimum reduce, LTA penalties.

jdl920p said:

So would it make sense to put the excess over £100k into my pension?  Tax rebate now but extra tax later

Or just suck up the extra tax now?

Pension tax is a perennial favourite government football, so plenty of unknown unknowns and political risk, of course, even without taking into account market returns, but ... mathematically, 55% (or 40%, if you are lucky) even with LTA penalty is lower than 60%.

Does your employer offer salary sacrifice? If yes, that extends the benefit, since you avoid paying employee NI on the pension contributions; maybe even get an uplift from employer NI if you employer has staff-friendly policies.

Below the 60% tax trap band though, you probably want to be careful about how much you put into your pensions in future. Targeting exactly the LTA at exactly age 55/57/retirement is probably the optimum point, though of course hitting that moving target with a moving baseline is tricky.

jdl920p

Thanks all.  

Of course I meant 55% tax on the lump sum, typo!

I'm leaning towards putting the money in now to get today's tax refund