Continue paying into a SIPP when over LTA

Secret2ndAccount

We are rather flitting here between talking about the OP and talking about a generic person. Yes, I was assuming DB because that's how the OP got to LTA. I don't think the 40% taxpayer would invest the 720. If he wanted to do that, he'd put more into the pension. He's going to spend the 720. Don't know how best to view the gain on that. Say CPI, so, in real terms, he only gets back what he put in. As for the main calculation, we are saying the same thing. You're saying growth is tax free because it's taxed the same as the rest of the pension. I'm saying it's taxed because it's taxed the same as the rest of the pension.

zagfles

Secret2ndAccount said:

We are rather flitting here between talking about the OP and talking about a generic person. Yes, I was assuming DB because that's how the OP got to LTA. I don't think the 40% taxpayer would invest the 720. If he wanted to do that, he'd put more into the pension. He's going to spend the 720. Don't know how best to view the gain on that. Say CPI, so, in real terms, he only gets back what he put in.

Then you need to compare with investing £2160 in the GIA, and spending £720. Making a comparison between someone who spends £720 of his £2880 up front and someone who invests the whole lot is clearly ridiculous. Compare like with like. But you've done that and realised your mistake I suspect

As for the main calculation, we are saying the same thing. You're saying growth is tax free because it's taxed the same as the rest of the pension. I'm saying it's taxed because it's taxed the same as the rest of the pension.

No. You seem to be saying you're worse off with the pension because you pay income tax on growth, and think you're better off with a GIA because of that.

I'm saying growth in the pension is effectively tax free because the extra growth from investing the tax relief exactly cancels out the extra tax you pay. It's the mathematical concept of commutative multiplication. Pension gives you the choice to defer paying income tax. If the tax rate is the same and growth is the same, the result is the same.

Or if it makes it easier, consider the pension investment as consisting of two parts, the net amount and the tax relief. In this case £2160 and £1440. The £2160 is yours and the £1440 is the chancellor's. Any gain in the £2160 is yours, any gain in the £1440 is the chancellor's. Exactly the same as if you gave the chancellor his £1440 up front and invested the £2160 in a GIA and paid no CGT or dividend tax.

You'll get it, if you haven't already. Play around with some numbers to convince yourself. We have this conversation here regularly, people often forget their school days maths

RogerPensionGuy

Just to add a few comments. 

People often mention putting pay in to pensions saves maybe 20% or 40% Income tax on the inbound.

I normally include NI savings as well, so currently inbound savings are 33.25% or 43.25% I think. 

If a person is lucky enough that their employer applies smart pension options, the company may plonk much of the employer's NI contributions savings(13.8%) maybe employer will top up employer pension with 11% or 12% and employer still saves cash.

So using 33.25% and 43.25% and an 11% top up, the new inbound savings can be 44.25% and 54.25%

Obviously paying LTA charges of 25% isn't too nice but, if a person is happy with the pension vehicle for all its goods and bads, going over the LTA maybe suitable for some.

Reference the LTA, its treatment since it was introduced is nothing short of bonkers, it's stopping lots of good prudent people filling pensions up, very short sighted by governments. 

The treatment and currently frozen LTA is getting more and more press lately especially with the rates of inflation and causing many people to stop paid employment before they wanted as they see so much negatives and this causing/adding to making the job markets tight and thus winding up pay inflation now and general inflation over these next few years.

Some press reports today are suggesting the LTA will be adjusted way before April2026, I hope so, it needs winding up to at least 1.6M and be essentially connected to a sensible inflation index or a minimum increase  every year.

I have managed to go over the current LTA and am still dripping in as I feel it's the best option for me.

I'm all 👂 👂 awaiting for the LTA to be increased 🙏 

Albermarle

Reference the LTA, its treatment since it was introduced is nothing short of bonkers, it's stopping lots of good prudent people filling pensions up using very generous 40% tax relief , very short sighted by governments. 

See in bold, it is not a one way street. 

Although LTA has its faults, it is basically there to stop relatively well off people taking too much advantage of  the generous tax relief on pension contributions.

BPL

zagfles said:

Secret2ndAccount said:

We are rather flitting here between talking about the OP and talking about a generic person. Yes, I was assuming DB because that's how the OP got to LTA. I don't think the 40% taxpayer would invest the 720. If he wanted to do that, he'd put more into the pension. He's going to spend the 720. Don't know how best to view the gain on that. Say CPI, so, in real terms, he only gets back what he put in.

Then you need to compare with investing £2160 in the GIA, and spending £720. Making a comparison between someone who spends £720 of his £2880 up front and someone who invests the whole lot is clearly ridiculous. Compare like with like. But you've done that and realised your mistake I suspect

As for the main calculation, we are saying the same thing. You're saying growth is tax free because it's taxed the same as the rest of the pension. I'm saying it's taxed because it's taxed the same as the rest of the pension.

No. You seem to be saying you're worse off with the pension because you pay income tax on growth, and think you're better off with a GIA because of that.

I'm saying growth in the pension is effectively tax free because the extra growth from investing the tax relief exactly cancels out the extra tax you pay. It's the mathematical concept of commutative multiplication. Pension gives you the choice to defer paying income tax. If the tax rate is the same and growth is the same, the result is the same.

Or if it makes it easier, consider the pension investment as consisting of two parts, the net amount and the tax relief. In this case £2160 and £1440. The £2160 is yours and the £1440 is the chancellor's. Any gain in the £2160 is yours, any gain in the £1440 is the chancellor's. Exactly the same as if you gave the chancellor his £1440 up front and invested the £2160 in a GIA and paid no CGT or dividend tax.

You'll get it, if you haven't already. Play around with some numbers to convince yourself. We have this conversation here regularly, people often forget their school days maths

So it's not worth paying into a SIPP if over LTA and basic rate retired taxpayer with a DBP? 

zagfles

BPL said:

zagfles said:

Secret2ndAccount said:

We are rather flitting here between talking about the OP and talking about a generic person. Yes, I was assuming DB because that's how the OP got to LTA. I don't think the 40% taxpayer would invest the 720. If he wanted to do that, he'd put more into the pension. He's going to spend the 720. Don't know how best to view the gain on that. Say CPI, so, in real terms, he only gets back what he put in.

Then you need to compare with investing £2160 in the GIA, and spending £720. Making a comparison between someone who spends £720 of his £2880 up front and someone who invests the whole lot is clearly ridiculous. Compare like with like. But you've done that and realised your mistake I suspect

As for the main calculation, we are saying the same thing. You're saying growth is tax free because it's taxed the same as the rest of the pension. I'm saying it's taxed because it's taxed the same as the rest of the pension.

No. You seem to be saying you're worse off with the pension because you pay income tax on growth, and think you're better off with a GIA because of that.

I'm saying growth in the pension is effectively tax free because the extra growth from investing the tax relief exactly cancels out the extra tax you pay. It's the mathematical concept of commutative multiplication. Pension gives you the choice to defer paying income tax. If the tax rate is the same and growth is the same, the result is the same.

Or if it makes it easier, consider the pension investment as consisting of two parts, the net amount and the tax relief. In this case £2160 and £1440. The £2160 is yours and the £1440 is the chancellor's. Any gain in the £2160 is yours, any gain in the £1440 is the chancellor's. Exactly the same as if you gave the chancellor his £1440 up front and invested the £2160 in a GIA and paid no CGT or dividend tax.

You'll get it, if you haven't already. Play around with some numbers to convince yourself. We have this conversation here regularly, people often forget their school days maths

So it's not worth paying into a SIPP if over LTA and basic rate retired taxpayer with a DBP? 

Sorry, your thread got side tracked with discussion not relevant to you...

If you're going to use the money youself, then almost certainly no, because you're only getting 20% tax relief on the way in and will probably pay 40% on the way out (25% LTA charge then 20% income tax which compounds to 40%). But if your only or main focus is on inheritance, eg if you never intend to draw out the extra you're paying in and leave it to your beneficiaries, then it could be worth it.

For instance if you're already over the IHT limit after any spouse/property exemptions, it might be more tax efficient to leave your beneficiaries money via a pension than in your estate. This is most likely to be better if you die under the age of 75, as then your beneficiaries get the choice of either paying the LTA charge and then taking the money tax free, or waiting 2 years, avoid the LTA and instead pay income tax. Depending on their tax situation this could be better than paying IHT.

If you reach 75 the 25% LTA charge will be taken then, and anything you leave will be taxed as income on your beneficaries, so eg if they're basic rate taxpayers they'll pay 20% (maybe 19% due to recent budget). But you'll have had 20% tax relief on the money, so it could be better than paying 40% IHT.

However, if you definitely don't intend to use the money yourself it might be better to dish it out now to your beneficiaries, and hopefully you'll survive 7 years and so it won't be subject to IHT, LTA, or income tax!

BPL

Thank you!

LHW99

Albermarle said:

Reference the LTA, its treatment since it was introduced is nothing short of bonkers, it's stopping lots of good prudent people filling pensions up using very generous 40% tax relief , very short sighted by governments. 

See in bold, it is not a one way street. 

Although LTA has its faults, it is basically there to stop relatively well off people taking too much advantage of  the generous tax relief on pension contributions.

Surely the annual allowance does that, by limiting the maximum amount that can be paid in to £40k (and hence limiting the tax relief that is earned)?

Albermarle

LHW99 said:

Albermarle said:

Reference the LTA, its treatment since it was introduced is nothing short of bonkers, it's stopping lots of good prudent people filling pensions up using very generous 40% tax relief , very short sighted by governments. 

See in bold, it is not a one way street. 

Although LTA has its faults, it is basically there to stop relatively well off people taking too much advantage of  the generous tax relief on pension contributions.

Surely the annual allowance does that, by limiting the maximum amount that can be paid in to £40k (and hence limiting the tax relief that is earned)?

They both do that job. One argument is to abolish the LTA with all its complexities and just reduce the annual allowance instead.