Pension Tax Relief for Higher Eaners

StarryNightsWalker

Hello everyone 

This is my first post so please be gentle with me - I am still learning!

I have seen rumours recently that the new PM and Chancellor may remove tax relief for higher earners. I know that this has been on the cards in the past but previous PMs have ultimately decided against it. Given the state of the economy and limited choices available is the time now up for this tax relief? What do you think?

My position is that I am approaching 54 years old and I need to maximise pension contributions prior to hopefully stepping down from full-time employment in 3 or 4 years time - so this tax relief is important to me. My salary is approximately £125k p.a. 

Thanks!

eskbanker

StarryNightsWalker said:

My salary is approximately £125k p.a. 

....in which case Liz and Kwasi may have been minded to offer you generous concessions, but most other politicians will recognise that you're exactly the sort of person who ought to be more able to cope with tax increases than most.

Troxy

It’s all speculation and outside your control; what you can control are your contributions. Given you want to maximise contributions and you can afford to then go ahead.

dunstonh

I have seen rumours recently that the new PM and Chancellor may remove tax relief for higher earners.

Well, that is a new one in the current news cycle.  Not seen that personally.    However, it is the sort of rumour put out by the media every time a budget/statement is due for the last 20 years.   It hasn't been changed yet.

 I know that this has been on the cards in the past but previous PMs have ultimately decided against it.

I don't think it has ever been on the cards.   Just think tanks and media guesswork.

Given the state of the economy and limited choices available is the time now up for this tax relief? What do you think?

This is not a full budget and there is nothing in the manifesto to say it is going to happen.      No point guessing but statistically, it has been going, according to the media for over 20 years and they have been wrong each year.  

ex-pat_scot

There is speculation ahead of every budget on what's going to happen to tax relief for contributions. 
A few years ago it looked like there was more of an effort to consider alternatives, but they were not progressed.
I think it rather doubtful in the medium term, but not impossible.

In your circumstances, I would offer the following guidance.

1. thorough review of your existing situation - legacy DC and DB from current and previous employment.
2. review your current NI credit history and how much more you need to get a full state pension
3. read up on the Lifetime allowance (currently £1.073m) and work out where you are in regards to that, and what your current pension approach will mean for it
4. I hope you realise that with earnings of £125,000 you have a very high marginal tax rate (effectively 63% ish) on the earnings from £100,000 to £125,000. This is anomolous, and there was briefly a suggestion that it might be addressed by Truss/Kwarteng, before their financial plans backfired so spectacularly.
What it does mean is that you get effectively 60% (63% ish if sal sac) tax relief on any contributions you make which reduce your earnings down from £125k to £100k. (if your employer will also match, or donate the ers NI component on top, then even greater tax relief effectively.)
THIS IS AS CLOSE TO A NO-BRAINER AS YOU WILL GET.
5. But... consider also the Annual Allowance. £40k pa for you, given your salary level. This is the max that can be put into your pension each tax year, from all sources (tax relief, sal sac, ers contribution, ees contribution).
6. also But... if you've not contributed the max £40k in the past 3 years AND you earned in excess of £40k for each of those years, then you can also "carry back" 

eg if you had made £10k total pension contribution last tax year, then you could get £40k for this year as max AA, plus an extra £30k from last year (the difference between your contribution and the max).

7. You are 54. You are within touching distance of age 55, at which point you will be able to access these monies and decide any withdrawal strategy or continued investment and contribution plan. 
This gives you 2 challenges - there's not a lot of time left for your contributions to grow, so the magic of compounding of returns can't really take full effect. 
But you're pretty well insulated from political / liquidity risk - that of change to your money that would make it more difficult to access - as it's v unlikely that fundamental pension rule changes will happen within the next 12 months ahead of your 55th birthday.
And the market is relatively low at the moment - although who knows where and when the bottom might be - so you're not looking at potentially throwing a lot of cash suddenly into the market at the top of the cycle.

OK so lots of info.

To make it a bit more tangible: I am in the same situation, pretty much.
I'm the same age (near enough, as far as I can gather!)
I earn pretty much the same.
I am contributing £40k each year, and have done for several years (so I have no unused AA to carry forward).
I am one of the most likely targets for further tax measures, so want to make the best use of my tax allowances as I can as soon as I can, before rules change, restrictions are put in place, or thresholds drop.
I avoid the 60-odd % marginal tax rate completely.

To return to your question- in recent years, pensions tax relief has been oft discussed but never progressed, as it generally leads to second and third order problems (eg NHS doctors retiring early etc).
We are now facing a really difficult economic environment, where more tax levers are going to have to be pulled, and soon. This is going to fall on the shoulders of "those who can bear it", and the high PAYE earners are the simple target who are easiest to farm.

So in conclusion, simplistically from the information you have provided then it sounds like you should be looking to take very prompt action to maximise your available contributions as a serious consideration, if you have the funds available, the capacity (against LTA and AA) and a desire to optimise your tax position. 

Aretnap

This comes around every year. Maybe it will happen this year, maybe it won't. Certainly pension companies enjoy pushing the "contribute as much as you can, now! Last chance to claim 40% tax relief!" line a few weeks before every budget.

That said if you intend to make the contributions anyway and you can spare the cash now (presumably you have some spare cash if you earn £125K) then it makes sense to contribute as much as you can sooner rather than later. Both to avoid any risk of missing out on higher rate relief, and to maximise the opportunity for tax free growth. If you can contribute enough to get your non-pension salary below £100K for this year then you do even better as you get your personal allowance back and get an effective tax relief rate of 60% on (some of) your contributions.

StarryNightsWalker

Thank you so much for this advice.

For a bit of context, I have a disabled son and husband who is unable to work due to ill health. I had to work part-time for many years for these reasons (and for a short time when my children were young had to claim benefits) so historically I was unable to contribute anywhere near as much as currently. This is partly why these years are important to make up for lost ground.

Despite this I have 2 small DB pensions (at 60 = £4.5k pa and 65 = £9k pa unless I take early - not currently planned) and a growing DC work scheme and SIPP (combined past pensions) which are still along way off LTA(less than half). Mortgage (v low interest fixed) will finish in January 2024 and I was always planning to up pension contributions further then - essentially putting this extra money into my employee Salary Sacrifice scheme.

I have an annual meeting with my IFA later in November so will definitely be looking at your suggestions in more detail. Last year we agreed to pay into a SIPP for my husband so that we can use his tax allowance in future. He has v little pension provision. We also agreed for me to build a bigger cash buffer to get through lean years. I also upped my contribution into my work scheme to 10% (employer also pays 10% but won’t pay any more).

All advice welcome! Thank you. 

ex-pat_scot

Thanks for responding.

To add a couple of further thoughts, based on the info you've added:

1. your DB pensions are not small! That's £13.5k for a start. If you get full state pension, then that's another £10k ish.
2. given your patchy history, have you made sure you have full NI years credited? You can check on the gov.uk website.
3. paying for your husband. You can put aside £3600 gross even if he's got no income. Worth it, if you can afford the cash.
4. 10% er contribution is pretty decent. You ought to continue to make the most of that, at the very least. Ideally as much extra now as you possibly can -remember when you get to 55 then the pension (the 25% tax free element at the least) is a great safety net if you have unforeseen cashflow challenges, and you can take 3 "small pots" of £10k each without jeopardising the ability to keep making future contributions.
5. nothing here is advice! It's all anecdotes of enthusiastic amateurs and a few professionals. 

6. you need to have a think about the end goal and clarify that somewhat.
Whilst we are discussing the short term (ie immediate threats to pension tax treatments), I would hope that you have a good picture of what your longer term ambitions are, as a family.
I don't know if you will need to support your child into adulthood, which is a challenge I am possibly facing.
I don't know if you have worked out how much you will need, once you stop working. And therefore how big the pot should be to support that income requirement. And then how the age 60 and age 65 DB pensions factor into that calculation.
I don't know if you have a limited window in which you can work, either because you will anticipate heavy future caring responsibilities (Child and /or husband), or a time limited role in employment, or simply an ambition to stop at a certain age.

Clearly the more you invest, the earlier, in a reasonably good investment strategy, the better.  The longer you do this, the more you'll have. 

In my case, I have a number of competing challenges.
I'd like to generate a pot that will deliver something approaching £4,000 per month perhaps. After tax.
I really don't want to be paying tax beyond basic rate.
I need to pay off a fairly decent mortgage (available funds have been prioritised into pension rather than repaying house loan capital).
I have to wait until 55 at the earliest.
I'll have some caring responsibilities for adult child(ren).
I'll likely have a few years of eye-watering tuition fees and living costs to fund for some of my children, as their arts based further education is unlikely to attract student loan eligibility.

So i keep ploughing the £40k max into the DC pot each year, with global equities tracker. That's what I can control.

LHW99

Worth also getting your husband to check his state pension record too. If there are gaps for either of you they could be worth paying for, although the decision for him would unfortunately depend on whether his illness is likely to be life shortening.

StarryNightsWalker

This is really helpful. Thank you.

I have been on the government website and checked our state pension position a couple of times in recent years for both of us. I have also monitored the complex COPE discussions (post 2016 issues and previous member of DB schemes) on this forum and whilst I don’t understand all the detail I can see that we both are already, or will be in the next year or so, entitled to the full new pension when we turn 67 (husband is slightly older than me).

Husband doesn’t have life limiting condition (hopefully) and is currently able to do bits of adhoc work at times so the amount he can contribute to pension varies but we are trying to maximise this as much as possible.

Disabled son is an adult already - but has very complex needs needing full time support and input from us (and always will do).

Good to put DB pensions into perspective- they will certainly help (but still seem some time away!)

Like everyone we are trying to balance living for today, whilst planning for tomorrow and also looking after our family and wellbeing along the way.

I will definitely take all of these points into my imminent  IFA meeting.

 Thanks again

RogerPensionGuy

StarryNightsWalker said:

Thank you so much for this advice.

For a bit of context, I have a disabled son and husband who is unable to work due to ill health. I had to work part-time for many years for these reasons (and for a short time when my children were young had to claim benefits) so historically I was unable to contribute anywhere near as much as currently. This is partly why these years are important to make up for lost ground.

Despite this I have 2 small DB pensions (at 60 = £4.5k pa and 65 = £9k pa unless I take early - not currently planned) and a growing DC work scheme and SIPP (combined past pensions) which are still along way off LTA(less than half). Mortgage (v low interest fixed) will finish in January 2024 and I was always planning to up pension contributions further then - essentially putting this extra money into my employee Salary Sacrifice scheme.

I have an annual meeting with my IFA later in November so will definitely be looking at your suggestions in more detail. Last year we agreed to pay into a SIPP for my husband so that we can use his tax allowance in future. He has v little pension provision. We also agreed for me to build a bigger cash buffer to get through lean years. I also upped my contribution into my work scheme to 10% (employer also pays 10% but won’t pay any more).

All advice welcome! Thank you. 

Hi.

Thanks for posting and posts are clear and simple for me to understand.

Sounds like you are short of LTA by a fair margin and maybe not far away from stopping paid employment and we all have no firm idea of how the LTA will get treated at anytime in the future, currently stuck at 1.073M until April 2026, it may get attacked and reduced to 800/900K as per press outputs last year, just look at how the LTA was invented, was 1.8M, then 1.5M, 1.25M and then 1M and now stopped in its tracks at 1.073M.

Your pay at 125K looks good and maybe you fill up your pension a lot in just a few years, remember 3 years carry forward is available, maybe you could max out the DC scheme you currently in if you like and its possible. Guess you paying 40% and say 2%(3.25%) NI so filling up a DC pot does look cheap.

The AA could be reduced and the 40% tax saving could become less anytime in the future.

Does you employer let you do smart pension contributions and maybe they do or could let you share their contributions of NI, some companies will give 10% extra to the input.

Another thought to consider, when you stop paid employment, maybe clever sequencing of all your pots will be helpful.

Cheers.

https://www.theprivateoffice.com/insights/myths-and-misconceptions-about-lifetime-allowance