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Are we over contributing?

edited 24 November at 1:24PM in Pensions, annuities & retirement planning
34 replies 2.8K views
SpeedSouthSpeedSouth Forumite
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Interested in thoughts on current levels on contributions.
41 Years Old.  2 Pensions 1 @ £250k 1 @ £40k
Missus 38, DC Pension @ 60k, 

ISA's £50K combined (No contributions at present)

Currently I am putting £40k a year in via sal sac, as this has meant tax breaks and tax credit payments.
Missus puts in £12K (full allowance based on wage).

I've always modelled it on above inflation growth so 1.5%, which if I am aiming to retire at 57 it will approach the LTA.  However realistically if it grows by 4.5% (ignoring inflation) then if I continue the same level of investments I will breach LTA significantly by 57. 

Clearly the LTA will go up at some point, so that is a bit of a guess, but if all stays as is currently I could end up with around £1,500,000 in my pensions.

Once the tax credit carrot disappears as it will do when we transitioned to UC, I can look at ISAs and LISAs again.  Given I get Sal Sac though and we get half the NI back the free money is nice.

I earn £70K, so going forward could reduce my contributions and push the ISAs and still not pay any 40% tax, but I'd lose out the NI savings.  So is that 18.2% or whatever it will be offset by the LTA charge.

Obviously its case of making hay whilst the sun shines, but it's just a case of where I make the hay!

Just after some thoughts!
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  • edited 24 November at 3:17PM
    Pat38493Pat38493 Forumite
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    edited 24 November at 3:17PM
    My first thought would be that it's better to keep putting as much into the pensions as you can afford as you are a long way off the LTA right now and whatever you don't put into the pension you are going to pay some tax on even if it's only 20%.

    From what I've seen on other threads, the majority on this forum seem to be pessimistic about LTA increases in future - not sure about long term into the 2030s but most expect it to be frozen for quite a few years to come.

    Also - if you need 30K annual spend, a pot which is at least the level of the current LTA should be sufficient for retiring at 57 based on today's world - however if the LTA is still the same as today in 15 years from now that might not be the case.

    Also I am not sure by what you mean by tax credits disapparing on UC?  What is UC?  (I'm not an IFA or real expert as you can tell).
  • marlotmarlot Forumite
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    Assuming you're a higher rate taxpayer in retirement, the LTA charge simply reverses the favourable tax treatment you received on contributions to your pension.

    If you can afford it, I'd keep contributing substantial amounts - you never know what the future brings.  When I was made redundant in my late 40s, my pension savings hugely softened the blow - I was able to take an easier job at ~60% of my previous pay and still retire at 55.
  • AlbermarleAlbermarle Forumite
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    marlot said:
    Assuming you're a higher rate taxpayer in retirement, the LTA charge simply reverses the favourable tax treatment you received on contributions to your pension.

    If you can afford it, I'd keep contributing substantial amounts - you never know what the future brings.  When I was made redundant in my late 40s, my pension savings hugely softened the blow - I was able to take an easier job at ~60% of my previous pay and still retire at 55.
    I think you mean 'assuming you are a basic rate taxpayer in retirement' Someone paying the higher rate will be paying back more than they gained in tax relief.
  • AlbermarleAlbermarle Forumite
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    OP,
    I think it is sensible to keep making enough pension contributions so that you get the max 40% tax relief.
    The question would be is it worth making more contributions than that, getting only 20% relief ( + NI saving ) 
  • zagfleszagfles Forumite
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    Pat38493 said:
    My first thought would be that it's better to keep putting as much into the pensions as you can afford as you are a long way off the LTA right now and whatever you don't put into the pension you are going to pay some tax on even if it's only 20%.

    From what I've seen on other threads, the majority on this forum seem to be pessimistic about LTA increases in future - not sure about long term into the 2030s but most expect it to be frozen for quite a few years to come.

    Also - if you need 30K annual spend, a pot which is at least the level of the current LTA should be sufficient for retiring at 57 based on today's world - however if the LTA is still the same as today in 15 years from now that might not be the case.

    Also I am not sure by what you mean by tax credits disapparing on UC?  What is UC?  (I'm not an IFA or real expert as you can tell).
    "Tax credits" as in Gordon Brown's payable tax credits which are not "credits" of "tax" at all but more like a welfare benefit, although only partially means tested (tested against income but not capital). Being replaced by Universal Credit which is tested against both income and capital, although there is supposedly transitional protection for those being migrated. Not sure how it works for people with savings. Pension contributions are still 100% deductible for UC as far as the income test goes.

  • zagfleszagfles Forumite
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    I think as long at you're getting at least 40% effective tax relief (ie including NI, employer NI rebate, and tax credits), the limit you should be concerned about isn't the LTA but breaching the higher rate tax threshold in retirement. Make sure to account for the state pension. Currently the LTA combined with basic rate tax is 40%, so if you're getting more than 40% effective relief then you're up on the game. Obviously tax rates and thresholds could change, and pension money is tied up till you're 55/57.
  • Pat38493Pat38493 Forumite
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    zagfles said:
    Pat38493 said:
    My first thought would be that it's better to keep putting as much into the pensions as you can afford as you are a long way off the LTA right now and whatever you don't put into the pension you are going to pay some tax on even if it's only 20%.

    From what I've seen on other threads, the majority on this forum seem to be pessimistic about LTA increases in future - not sure about long term into the 2030s but most expect it to be frozen for quite a few years to come.

    Also - if you need 30K annual spend, a pot which is at least the level of the current LTA should be sufficient for retiring at 57 based on today's world - however if the LTA is still the same as today in 15 years from now that might not be the case.

    Also I am not sure by what you mean by tax credits disapparing on UC?  What is UC?  (I'm not an IFA or real expert as you can tell).
    "Tax credits" as in Gordon Brown's payable tax credits which are not "credits" of "tax" at all but more like a welfare benefit, although only partially means tested (tested against income but not capital). Being replaced by Universal Credit which is tested against both income and capital, although there is supposedly transitional protection for those being migrated. Not sure how it works for people with savings. Pension contributions are still 100% deductible for UC as far as the income test goes.

    OK - I wasn't aware that you can still be receiving tax credits under that old system when you have a household income of £82K although I admit I don't know much about it.  Is it also based on the number of children you have or suchlike?
  • zagfleszagfles Forumite
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    Pat38493 said:
    zagfles said:
    Pat38493 said:
    My first thought would be that it's better to keep putting as much into the pensions as you can afford as you are a long way off the LTA right now and whatever you don't put into the pension you are going to pay some tax on even if it's only 20%.

    From what I've seen on other threads, the majority on this forum seem to be pessimistic about LTA increases in future - not sure about long term into the 2030s but most expect it to be frozen for quite a few years to come.

    Also - if you need 30K annual spend, a pot which is at least the level of the current LTA should be sufficient for retiring at 57 based on today's world - however if the LTA is still the same as today in 15 years from now that might not be the case.

    Also I am not sure by what you mean by tax credits disapparing on UC?  What is UC?  (I'm not an IFA or real expert as you can tell).
    "Tax credits" as in Gordon Brown's payable tax credits which are not "credits" of "tax" at all but more like a welfare benefit, although only partially means tested (tested against income but not capital). Being replaced by Universal Credit which is tested against both income and capital, although there is supposedly transitional protection for those being migrated. Not sure how it works for people with savings. Pension contributions are still 100% deductible for UC as far as the income test goes.

    OK - I wasn't aware that you can still be receiving tax credits under that old system when you have a household income of £82K although I admit I don't know much about it.  Is it also based on the number of children you have or suchlike?
    Pension conts are fully deductible so it's income after pension conts that count. So if OP on £70k contributes £40k and OP's wife contributes full salary then combined income is £30k, which is enough to get some tax credits with 2 kids, possibly quite a lot if childcare being claimed, or disability elements etc.
    You get elements for adults and children, per child, although IIRC there'ss a limit of 2 for children born after 2017. See https://www.gov.uk/government/publications/rates-and-allowances-tax-credits-child-benefit-and-guardians-allowance/tax-credits-child-benefit-and-guardians-allowance

  • german_keepergerman_keeper Forumite
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    zagfles said:
    Pat38493 said:
    zagfles said:
    Pat38493 said:
    My first thought would be that it's better to keep putting as much into the pensions as you can afford as you are a long way off the LTA right now and whatever you don't put into the pension you are going to pay some tax on even if it's only 20%.

    From what I've seen on other threads, the majority on this forum seem to be pessimistic about LTA increases in future - not sure about long term into the 2030s but most expect it to be frozen for quite a few years to come.

    Also - if you need 30K annual spend, a pot which is at least the level of the current LTA should be sufficient for retiring at 57 based on today's world - however if the LTA is still the same as today in 15 years from now that might not be the case.

    Also I am not sure by what you mean by tax credits disapparing on UC?  What is UC?  (I'm not an IFA or real expert as you can tell).
    "Tax credits" as in Gordon Brown's payable tax credits which are not "credits" of "tax" at all but more like a welfare benefit, although only partially means tested (tested against income but not capital). Being replaced by Universal Credit which is tested against both income and capital, although there is supposedly transitional protection for those being migrated. Not sure how it works for people with savings. Pension contributions are still 100% deductible for UC as far as the income test goes.

    OK - I wasn't aware that you can still be receiving tax credits under that old system when you have a household income of £82K although I admit I don't know much about it.  Is it also based on the number of children you have or suchlike?
    Pension conts are fully deductible so it's income after pension conts that count. So if OP on £70k contributes £40k and OP's wife contributes full salary then combined income is £30k, which is enough to get some tax credits with 2 kids, possibly quite a lot if childcare being claimed, or disability elements etc.
    You get elements for adults and children, per child, although IIRC there'ss a limit of 2 for children born after 2017. See https://www.gov.uk/government/publications/rates-and-allowances-tax-credits-child-benefit-and-guardians-allowance/tax-credits-child-benefit-and-guardians-allowance

    In my opinion the most outrageous loophole in the history of the benefits system. I like to think that if I had been fortunate enough to take advantage I wouldn't have done as a point of principle. But maybe if I had been in that position I wouldn't have been able to resist. I certainly wouldn't criticise anyone who did.

    As I understand it, although I wasn't anything like senior enough to know, TC was rushed in due to political pressures. Maybe this issue was just not considered or maybe it was and it just wasn't practical in the timescale to avoid it.  Fortunately, to my knowledge it wasn't widely known about and utilised. And it wasn't really people in the OP's position that benefited greatly; it was people on lower salaries with quite a lot of kids who did SS down to minimum wage and therefore received large TC payments. And I always assumed that they didn't have mortgage/rent to pay, or maybe benefited from maintenance being disregarded as income. I am a bit sketchy because when it was explained to me many years ago by a colleague who worked on the legislative team I didn't even know what SS was. 
  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    Fortunately, to my knowledge it wasn't widely known about and utilised.
    Pretty sure it has been on every tax credit renewal notice ever issued so every tax credit claimant would have known about it.

    Knowing and understanding can be worlds apart though.
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