Ooh, Time to Start Speculating About LTA Changes Again

michaels

Yes, I agree. I got caught out because, a year ago I could see inflation was going to be high so decided to increase my purchase of added pension in my current DB CARE scheme, knowing it would benefit from the high CPI uplift next April, but didn't fully appreciate PIA's at the time (it takes some time to understand that you can still massively breech the £40k AA limit when you only earn £28k). By the time I did realise, I was able to mitigate the damage by reducing my SIPP contributions but this was undesirable as I am now less able to take advantage of the current lower stock market prices. Now the Sept CPI inflation figure is published, I know exactly where I stand and can plan accordingly.

I did my sums based on an 8% inflation rate giving me a 40k annual gain, I think the only way to fix it now would be to reduce my hours as then the fixed percent of salary going into the pension would be lower.  Not sure if this is a better bet than simply paying the AA charge?  Does anyone know how to calculate the two scenarios?

DoublePolaroid

michaels said:

Yes, I agree. I got caught out because, a year ago I could see inflation was going to be high so decided to increase my purchase of added pension in my current DB CARE scheme, knowing it would benefit from the high CPI uplift next April, but didn't fully appreciate PIA's at the time (it takes some time to understand that you can still massively breech the £40k AA limit when you only earn £28k). By the time I did realise, I was able to mitigate the damage by reducing my SIPP contributions but this was undesirable as I am now less able to take advantage of the current lower stock market prices. Now the Sept CPI inflation figure is published, I know exactly where I stand and can plan accordingly.

I did my sums based on an 8% inflation rate giving me a 40k annual gain, I think the only way to fix it now would be to reduce my hours as then the fixed percent of salary going into the pension would be lower.  Not sure if this is a better bet than simply paying the AA charge?  Does anyone know how to calculate the two scenarios?

Reducing your hours for the scheme year in question, if possible, would reduce your growth for AA purposes, but it's not directly related to your contributions, but rather to your income. You can model it by doing two calculations for growth due to your income then applying the inflation calculations, though where inflation is so high you may find that it has the dominant impact on your growth and certainly a small salary change may make little difference.

Edited to add I may have erroneously assumed you're in the NHS pension. If you are then you can use the case study linked to apply to your own situation...

Rising inflation, a looming problem for NHS pensions - Royal London for advisers

arnoldy

Easiest way to fix this is to move public sector DBs to DC - like everyone else in the country. At a stroke it solves the pensions apartheid, and the need to increase the taper allowance to £250,000pa to cater for the doctors and many other issues. 

If they can't get the backbone, then a half-way house is the best option - e.g. you can earn DB on up to £20,000pa of earnings in public sector but after than that it's the same as everyone else - DC. Similar to the Universities scheme. Still miles better than the grafters in the private sector get. Especially when you consider public sector DBs are fully index linked - almost unheard of now in private sector.

Que the "we can't afford to change from the unfunded public sector system", but the fact is you have to start somewhere in the interests of fairness and the long-term public purse.  

michaels

DoublePolaroid said:

michaels said:

Yes, I agree. I got caught out because, a year ago I could see inflation was going to be high so decided to increase my purchase of added pension in my current DB CARE scheme, knowing it would benefit from the high CPI uplift next April, but didn't fully appreciate PIA's at the time (it takes some time to understand that you can still massively breech the £40k AA limit when you only earn £28k). By the time I did realise, I was able to mitigate the damage by reducing my SIPP contributions but this was undesirable as I am now less able to take advantage of the current lower stock market prices. Now the Sept CPI inflation figure is published, I know exactly where I stand and can plan accordingly.

I did my sums based on an 8% inflation rate giving me a 40k annual gain, I think the only way to fix it now would be to reduce my hours as then the fixed percent of salary going into the pension would be lower.  Not sure if this is a better bet than simply paying the AA charge?  Does anyone know how to calculate the two scenarios?

Reducing your hours for the scheme year in question, if possible, would reduce your growth for AA purposes, but it's not directly related to your contributions, but rather to your income. You can model it by doing two calculations for growth due to your income then applying the inflation calculations, though where inflation is so high you may find that it has the dominant impact on your growth and certainly a small salary change may make little difference.

Edited to add I may have erroneously assumed you're in the NHS pension. If you are then you can use the case study linked to apply to your own situation...

Rising inflation, a looming problem for NHS pensions - Royal London for advisers

Thanks CS Alpha but hopefully the principle is the same.

arnoldy said:

Easiest way to fix this is to move public sector DBs to DC - like everyone else in the country. At a stroke it solves the pensions apartheid, and the need to increase the taper allowance to £250,000pa to cater for the doctors and many other issues. 

If they can't get the backbone, then a half-way house is the best option - e.g. you can earn DB on up to £20,000pa of earnings in public sector but after than that it's the same as everyone else - DC. Similar to the Universities scheme. Still miles better than the grafters in the private sector get. Especially when you consider public sector DBs are fully index linked - almost unheard of now in private sector.

Que the "we can't afford to change from the unfunded public sector system", but the fact is you have to start somewhere in the interests of fairness and the long-term public purse.  

I moved to the CS taking a 35% pay cut as I put that much value on the pension component of the renumeration. If you cut the pension you are effectively cutting my pay at which point the private sector would win again - the (unexpected to me) increase in annuity rates has already actually thrown off my calcs on the benefit or switching jobs - or be it the rates available when I retire are the ones that actually matter.

arnoldy

michaels said:

I moved to the CS taking a 35% pay cut as I put that much value on the pension component of the renumeration. If you cut the pension you are effectively cutting my pay at which point the private sector would win again - the (unexpected to me) increase in annuity rates has already actually thrown off my calcs on the benefit or switching jobs - or be it the rates available when I retire are the ones that actually matter.

That rather proves the point through, doesn't it? The pension is so generous you can work for 2/3rds and still be better off. So that means you need to earn 50% more for the same job in the private sector.  I.e., office admin on £20k in council needs to be on £30k office admin in private sector - good luck with that! etc

Pat38493

EdSwippet said:

Pat38493 said:

... But if you moved that into a drawdown you would end up paying 65% tax?

No, because moving the money into drawdown ("crystallisation") reduces it by the 25% LTA penalty.

Suppose you crystallise £100 with zero LTA remaining. At crystallisation, you pay 25% LTA penalty, and get £75 in your drawdown pot. Draw that at 40% tax gives an effective 55% (25% + 40% of 75%).

Pat38493 said:
... (which makes the same result as if you had got 25% tax free then paid 40% on the rest plus a 25% LTA charge on the full amount)?

Note that there is no 25% tax free above the LTA, only below it; the LTA is a de facto cap on the tax free lump sum. Another way of thinking about the LTA penalty is that below the LTA, you get a quarter of your pension tax free, and above the LTA, the government instead takes that full quarter for itself.

Thanks - well the other part that surprised me was that my previous understanding was that if you take a lump sum from your pension in a normal situation (below LTA), you will get 25% tax free, and the other 75% should be treated as taxable income?  However, if you are above the LTA, none of the lump sum is treated as taxable income - it just takes the straight 55% charge (if I understood correctly)?

Anyway I assume the basic guideance that I saw on earlier threads still applies in that sense
Being a higher rate 40% taxpayer:
- If you are a zero rate taxpayer in retirement it would be beneficial to keep paying into the pension even if above LTA>
- If you are expecting to not be paying 40% tax in retirement but in the 20% zone only, it will probably be a wash whether you continue to pay into pension or not.
- If you are paying 40% tax in retirement you should not bust the LTA.

Exception - if your contributions are doubled by your employer, I guess it's beneficial still in all above situations to pay in at least the matched amount.

Of course the other problem is that it's not possible to really accurately judge for sure whether you will go above the LTA due to investment growth after you already retired.

EdSwippet

Pat38493 said:
Thanks - well the other part that surprised me was that my previous understanding was that if you take a lump sum from your pension in a normal situation (below LTA), you will get 25% tax free, and the other 75% should be treated as taxable income?  However, if you are above the LTA, none of the lump sum is treated as taxable income - it just takes the straight 55% charge (if I understood correctly)?

Right on both points.

The nuance is that above the LTA, you have a choice; either a lump sum withdrawal at 55% flat tax (as you wrote); or paying 25% LTA penalty on crystallisation (move to drawdown) and then marginal tax rate on the remaining 75% when withdrawn later on.

For higher rate taxpayers on withdrawal, these come out to be equivalent. If you can engineer to be in a basic rate taxpayer in withdrawals though, the effective tax is 40%, making the lump sum the worse option. (And if in 45% or 60% brackets, the lump sum wins.)

Don't confuse the use of 'lump sum' withdrawal when above-the-LTA with the PCLS 'lump sum'. They refer to different things, and it's unfortunate that the government chose to re-use term in two somewhat different ways. For PCLS, the 'lump sum' is 25% of the amount crystallised. For LTA purposes, a 'lump sum' is just a pension withdrawal made when there is no remaining LTA percentage.

Also, recall that 'crystallising' a pension means moving money into drawdown and then either taking 25% tax free (if below the LTA), or handing that entire 25% to the government (if over the LTA), and designating the remaining 75% for withdrawal. The actual taxable withdrawals on that 75% might happen much later than the crystallisation event. This provides a planning opportunity to jump the LTA hurdles early and so defuse some LTA issues, but without having to immediately draw taxable money from the pension. That can buy breathing space between age 55 (soon 57) and the unavoidable forced LTA test at age 75.

Flugelhorn

Pat38493 said:

Anyway I assume the basic guideance that I saw on earlier threads still applies in that sense
Being a higher rate 40% taxpayer:
- If you are a zero rate taxpayer in retirement it would be beneficial to keep paying into the pension even if above LTA>

How do you manage to be a zero rate tax payer in retirement if you hit the LTA?

michaels

DoublePolaroid said:

michaels said:

Yes, I agree. I got caught out because, a year ago I could see inflation was going to be high so decided to increase my purchase of added pension in my current DB CARE scheme, knowing it would benefit from the high CPI uplift next April, but didn't fully appreciate PIA's at the time (it takes some time to understand that you can still massively breech the £40k AA limit when you only earn £28k). By the time I did realise, I was able to mitigate the damage by reducing my SIPP contributions but this was undesirable as I am now less able to take advantage of the current lower stock market prices. Now the Sept CPI inflation figure is published, I know exactly where I stand and can plan accordingly.

I did my sums based on an 8% inflation rate giving me a 40k annual gain, I think the only way to fix it now would be to reduce my hours as then the fixed percent of salary going into the pension would be lower.  Not sure if this is a better bet than simply paying the AA charge?  Does anyone know how to calculate the two scenarios?

Reducing your hours for the scheme year in question, if possible, would reduce your growth for AA purposes, but it's not directly related to your contributions, but rather to your income. You can model it by doing two calculations for growth due to your income then applying the inflation calculations, though where inflation is so high you may find that it has the dominant impact on your growth and certainly a small salary change may make little difference.

Edited to add I may have erroneously assumed you're in the NHS pension. If you are then you can use the case study linked to apply to your own situation...

Rising inflation, a looming problem for NHS pensions - Royal London for advisers

Mine is CS but I think the rules are similar. 

My calcs are easier as I had zero CS pension at the start of the FY so basically, I have to sum my contributions between when I started with the CS in April 22 and 31st March 23 and increase them by 10.1% plus add contributions for 1-5th April 23 then multiply the whole amount by 16 - is this correct?

Pat38493

Flugelhorn said:

Pat38493 said:

Anyway I assume the basic guideance that I saw on earlier threads still applies in that sense
Being a higher rate 40% taxpayer:
- If you are a zero rate taxpayer in retirement it would be beneficial to keep paying into the pension even if above LTA>

How do you manage to be a zero rate tax payer in retirement if you hit the LTA?

Yes I thought after I posted this that this is an edge case probably not happening much in reality, although I suppose it could happen in some years if you come into a lot of cash  for some other reason.

Also though based on EdSwippet post, there is a 4th option missing from the list which is 60% tax - if you are earning for example £120k, you would pay 60% tax effectively on 20K of that - in that scenario, I'm actually thinking it goes back the other way and you would be better off putting the money in the pension and only paying 55% tax instead of 60%.