Thoughts Appreciated

megacatt

Happy New Year!

I am 55 in April

Broad plan is to retire 58-59ish. 

I have £320k in DC pensions (£165k with employer, £85k with Aviva and £70k HL SIPP).

I also have a DB deferred pension of £40k pa payable from 63 (without actuarial reduction).

I also have £260k in ISA/other savings.

Small mortgage will be paid off by retirement.

Full SP from 67 (assuming I work until 58).

Wife (also 55 next year) has £80k in DC pension, £110k in other savings and £10k pa DB from 62.  Needs another 7 years for full SP at 67.  Not currently in paid employment.

Have an 8-year old cost centre (no other offspring or dependents).

Above figures are in today’s money so inflation and growth excluded.

Currently paying in 5% of salary to employer’s scheme to which they pay an additional 7%.

Given inflation, growth and the frozen LTA I am thinking of the following as an LTA mitigation strategy.

1.       Stop paying into employer’s scheme.  They will pay me 6% salary uplift (in lieu of the 7% contribution).

2.       Put the resulting increased income into other savings.

3.       Crystallize my DC schemes to minimise impact on LTA.  This in April following 55th. birthday.

4.       Take 25% tax free element and feed into mine and wife’s ISAs over the next couple of years. 

5.       Leave balance in DC pots, ensuring all growth is withdrawn by 75.

6.       Maximise (albeit only £3.6k gross) wife’s DC contribution.

7.       Take £30k from HL SIPP as small pots.  I think that this was mentioned previously in the forum as possible.  Put this in the queue for ISAs.

8.       Juggle the date of taking my DB, using the (roughly 5% pa) actuarial reduction to reduce LTA breach.

I think that the strategy then is to retire at 58/59 with a gross income of £60k.  I think this looks reasonably comfortable but still enjoying work and cost-centre will be 13 by then so we’re being conservative.

I would be grateful for your thoughts on this or any other aspect.  Thanks.

Most of my thoughts derive from the great posts on here where I have lurked for a while now.  Thank you to all of you who take the time to try and upskill the rest of us.

NoMore

Just retire now ? If your that worried about breaking the LTA, taking the DB pension now and crystallising the Dc pensions sees you under the LTA.

Or stop letting the tax tail wag the dog, and accept you may have to pay some LTA charge. I think opting out of your current pension just to try and stay under the LTA is crazy, your getting a over 100% return on your contribution (7% match on 5% cont), so what if you pay some tax on that extra contribution, its still more money than not getting it in the first place. 

Marcon

megacatt said:

Happy New Year!

I am 55 in April

Broad plan is to retire 58-59ish. 

I have £320k in DC pensions (£165k with employer, £85k with Aviva and £70k HL SIPP).

I also have a DB deferred pension of £40k pa payable from 63 (without actuarial reduction).

I also have £260k in ISA/other savings.

Small mortgage will be paid off by retirement.

Full SP from 67 (assuming I work until 58).

Wife (also 55 next year) has £80k in DC pension, £110k in other savings and £10k pa DB from 62.  Needs another 7 years for full SP at 67.  Not currently in paid employment.

Have an 8-year old cost centre (no other offspring or dependents).

Above figures are in today’s money so inflation and growth excluded.

Currently paying in 5% of salary to employer’s scheme to which they pay an additional 7%.

Given inflation, growth and the frozen LTA I am thinking of the following as an LTA mitigation strategy.

1.       Stop paying into employer’s scheme.  They will pay me 6% salary uplift (in lieu of the 7% contribution).

2.       Put the resulting increased income into other savings.

3.       Crystallize my DC schemes to minimise impact on LTA.  This in April following 55th. birthday.

4.       Take 25% tax free element and feed into mine and wife’s ISAs over the next couple of years. 

5.       Leave balance in DC pots, ensuring all growth is withdrawn by 75.

6.       Maximise (albeit only £3.6k gross) wife’s DC contribution.

7.       Take £30k from HL SIPP as small pots.  I think that this was mentioned previously in the forum as possible.  Put this in the queue for ISAs.

8.       Juggle the date of taking my DB, using the (roughly 5% pa) actuarial reduction to reduce LTA breach.

I think that the strategy then is to retire at 58/59 with a gross income of £60k.  I think this looks reasonably comfortable but still enjoying work and cost-centre will be 13 by then so we’re being conservative.

I would be grateful for your thoughts on this or any other aspect.  Thanks.

Most of my thoughts derive from the great posts on here where I have lurked for a while now.  Thank you to all of you who take the time to try and upskill the rest of us.

Happy New Year to you too - and many more of them!

Given your very comfortable financial position, it might be worth investing some money in some proper personalised financial advice (i.e. the sort you pay for), possibly on a one-off basis if you don't need ongoing advice, rather than relying on comments based on a helpful but far from complete picture of your finances?

Something which isn't mentioned and might be worth looking at it some term life cover, especially with such a young cost centre to cater for.

Presumably you and your wife have up to date wills providing for guardianship if the worst happens (truly sorry to strike such a misery note, but it's an important one given how young the child is).

Albermarle

Or stop letting the tax tail wag the dog, and accept you may have to pay some LTA charge. I think opting out of your current pension just to try and stay under the LTA is crazy, your getting a over 100% return on your contribution (7% match on 5% cont), so what if you pay some tax on that extra contribution, its still more money than not getting it in the first place. 

I agree with this comment. 

OP - the objective is not to avoid paying tax , but to do what gives you the best overall result.

I think that the strategy then is to retire at 58/59 with a gross income of £60k.  I think this looks reasonably comfortable

Home - PLSA - Retirement Living Standards

Wife (also 55 next year) has £80k in DC pension, £110k in other savings and £10k pa DB from 62.  Needs another 7 years for full SP at 67.  Not currently in paid employment.

You should buy the extra qualifying years to make sure she gets a full state pension. They are very cheap for what you get.

Pat38493

I asked quite a few questions about LTA on this forum and I came to the same conclusions - risk of exceeding the LTA at some long away future date is not really a good reason to stop paying into pension assets.  I expect to pay LTA charges at some point - maybe not till I am 75.  It's a nice problem to have.  Other options seemed worse whilst I am still working.

Also on a specific point, paying you a 6% salary uplift will not compensate you for the employer contributions as it will be much less after it's already less what they were offering you and you will then pay 40% tax on it - you will struggle to offset that in any other way.

Albermarle

If you are a 40% taxpayer when employed and a 20% taxpayer when taking the pension, then if you have to pay an LTA charge on income, you are effectively paying back the 40% tax relief, no more, no less.
So you still get the benefit of the employers contributions ( minus any income tax paid on withdrawal)

megacatt

Thanks for the comments, everyone.

I'm not retiring now because I quite like what I do and have a decent work/life balance. My goal is not to avoid any LTA charge at all costs, just not pay extra tax if I don't need to.

We have decent life cover but I will review this for a post retirement world.

Good point re. wills. We have them but not explicitly covering guardianship. It's obvious in the family what would happen but best to be clear. Not a misery thing at all, this whole forum is about planning for death (sort of!).

Definitely intending to make my wife's years up. Not rushing in case she fancies returning to the world of work at some point.

I need to think through the company pension thing. If I'm paying 40% tax in both retirement and employment then I don't quite see how I'm losing out by stopping my pension payments now. At the moment 12% of my salary goes into my pension. If I stop then 11% goes into savings.

One is taxed on the way out the other on the way in. If I exceed the LTA then I get taxed at 55% coming out rather than 40% going in. Am I missing something?

I do absolutely take the point that this is not a fundamental issue, just trying not to do anything daft.  If I keep paying into the pension then the 25% charge might be about £20k on the extra pot built up between now and then. 

Any thoughts on crystallising the DC pots at 55? Is this daft?  Is crystallising the right term?

Pat38493

megacatt said:

Thanks for the comments, everyone.

I'm not retiring now because I quite like what I do and have a decent work/life balance. My goal is not to avoid any LTA charge at all costs, just not pay extra tax if I don't need to.

We have decent life cover but I will review this for a post retirement world.

Good point re. wills. We have them but not explicitly covering guardianship. It's obvious in the family what would happen but best to be clear. Not a misery thing at all, this whole forum is about planning for death (sort of!).

Definitely intending to make my wife's years up. Not rushing in case she fancies returning to the world of work at some point.

I need to think through the company pension thing. If I'm paying 40% tax in both retirement and employment then I don't quite see how I'm losing out by stopping my pension payments now. At the moment 12% of my salary goes into my pension. If I stop then 11% goes into savings.

One is taxed on the way out the other on the way in. If I exceed the LTA then I get taxed at 55% coming out rather than 40% going in. Am I missing something?

I do absolutely take the point that this is not a fundamental issue, just trying not to do anything daft.  If I keep paying into the pension then the 25% charge might be about £20k on the extra pot built up between now and then. 

Any thoughts on crystallising the DC pots at 55? Is this daft?  Is crystallising the right term?

This was also similar to the way I was thinking except that I was not planning to pay 40% tax in retirement.

Even if you are though, you still may well be better off putting it into the pension for 2 reasons.  First, the money that you avoid paying in taxes on the way in will be growing as your own money for all the intervening years whereas if you stop putting into the pension all that money will disappear in tax and it won’t be working for you in the meantime.

to put it another way, as. 40% tax payer I only have to use £60 of my potential net income to put £100 in my pension.  If you put the calcs into a salary calculated on the web you will see that you won’t get anything like the full 11% back in your net pay to put in your savings account.  

the other thing is that you most likely  won’t pay 55% LTA charge as this can most times be avoided in favour of the lower 25% charge, and after taking into account the tax free cash portion it comes to the same 40% tax rate that you would have paid anyway, but as mentioned above you get growth on that money in the intervening time.

Also if the money is in a pension it is not part of your estate for IHT purposes if relevant and LTA is only levied at crystallisation events (or at age 75).  

Crystallise pension pots at 55 is normally done to get the tax free cash out.  This could help to reduce future LTA charge but the crystallisation will immediately use a portion of your LTA allowance so your are baking in that % of allowance used.  To take your full 25% tax free cash you need to crystallise the corresponding 100% of the fund. 

 From the figures you posted above this might make sense but with that level of pots it might be worth taking some proper advice at some point as you may also be right that taking your DB early to reduce LTA exposure could also make sense  but it probably requires some complex modelling and a good understanding of the assumptions used.  Personally based on what you described I would carry on paying in to the DC pots and rather look it taking the DB earlier and retiring earlier.

MoneySavingGerbil

It is a tricky juggling act. If you crystalize the full DC pension now then potentially you leave yourself with paying the LTA charge from the DB pension assuming the LTA doesn't get increased in the meantime. I'm assuming the 40K per annum at 63 is in todays money with potentially another 8 annual revaluations to be applied until it comes into payment? It might be worth enquiring with the DB pension administrators what commutation rate they currently use for paying any LTA charge would be. There's no guarantee what it would be in 8 years time (or whenever you take the DB pension), but if it's not on the generous side now you can assume it won't be much better in 8 years time.

My wife crystallised the bulk of her DC pension at 57 thinking she'd left enough remaining LTA for her DB pension to come in under. The DB revalauations after this years and likely next years high inflation mean that she will end up paying an LTA charge on her DB pension. Luckily the commutation rate they use is currently a very generous 33.5 however they did mention they're adjusting it this year so who know what it will be in 2024?

With that figure in your DC pension, your DB pension and then the state pension I don't see how you avoid paying higher rate tax in retirement. In which case your choice is more like 40% tax + NI now vs pay into pension and pay 25% LTA charge on + 40% tax in retirement?

Pat38493

MoneySavingGerbil said:

It is a tricky juggling act. If you crystalize the full DC pension now then potentially you leave yourself with paying the LTA charge from the DB pension assuming the LTA doesn't get increased in the meantime. I'm assuming the 40K per annum at 63 is in todays money with potentially another 8 annual revaluations to be applied until it comes into payment? It might be worth enquiring with the DB pension administrators what commutation rate they currently use for paying any LTA charge would be. There's no guarantee what it would be in 8 years time (or whenever you take the DB pension), but if it's not on the generous side now you can assume it won't be much better in 8 years time.

My wife crystallised the bulk of her DC pension at 57 thinking she'd left enough remaining LTA for her DB pension to come in under. The DB revalauations after this years and likely next years high inflation mean that she will end up paying an LTA charge on her DB pension. Luckily the commutation rate they use is currently a very generous 33.5 however they did mention they're adjusting it this year so who know what it will be in 2024?

With that figure in your DC pension, your DB pension and then the state pension I don't see how you avoid paying higher rate tax in retirement. In which case your choice is more like 40% tax + NI now vs pay into pension and pay 25% LTA charge on + 40% tax in retirement?

Yes but OP needs to consider when he needs to actually crystallise the theoretical future pension contributions and at what tax rate.

Ostensibly, if OP is on a salary of £80K for example, and we assume he is 40% taxpayer in both now and in retirement and is fully subject to LTA charges, he has a choice of putting £8400 in his pension or receiving £4620 net.  Paying LTA charge and 40% tax on £8400 leaves him worse off.

Case closed - OP is correct he should stop paying into employer pension (as long as employer honours the 6% salary uplift).

Not so fast though.

If OP doesn't require access to this money for 10 years and we apply 5% estimated growth in both scenarios, OP ends up slightly better off by putting the money in the pension.  

Therefore it partly depends on when and how OP will make pension withdrawals.

And there we are assuming continuous worst case - 40% marginal tax rates and full LTA all the way through.  

In reality, OP has an opportunity to stay within 20% tax rates (or even better) for some years prior to when his state pension kicks in given the level of ISA savings already in place.  If you have a few years of 20% tax in retirement it becomes much more clear that continuing to put money into the pension is better.

Also - OP should confirm that  his £40K DB pension is indeed fully deferred and only subject to statutory revaluations, and has no dependency on his current salary or benefits (to make sure there is no possible additional LTA liability possible there).

Additionally is £40K DB pension at NRA really the real terms figure today?  I ask because when I asked my DB pension for an estimate of my real terms pension at NRA, what they sent me wasn't in real terms - they had actually added 2.5% compounded inflation forecast to NRA on top.  

Of course all this assumes the goalposts aren't moved in one way or another.

megacatt

Thanks Pat and Money Saving Gerbil.  

It's getting a bit theoretical but if we're considering the growth on continuing contributions then we should also consider growth on the non-crystallized DC pot.  This potentially (hopefully!) increases the liability if the LTA remains frozen, making more of a case for freezing through crystallization now and allowing the residual pot to grow having locked-in the LTA %.

Pat38493 said:

In reality, OP has an opportunity to stay within 20% tax rates (or even better) for some years prior to when his state pension kicks in given the level of ISA savings already in place.  If you have a few years of 20% tax in retirement it becomes much more clear that continuing to put money into the pension is better.

Also - OP should confirm that  his £40K DB pension is indeed fully deferred and only subject to statutory revaluations, and has no dependency on his current salary or benefits (to make sure there is no possible additional LTA liability possible there).

Additionally is £40K DB pension at NRA really the real terms figure today?  I ask because when I asked my DB pension for an estimate of my real terms pension at NRA, what they sent me wasn't in real terms - they had actually added 2.5% compounded inflation forecast to NRA on top.  

Good point re. sources of income for some years to reduce marginal tax rate.

The DB is fully deferred and only subject to statutory revaluations.  It is in today's money and will have potentially 8 more revaluations.

The point about taking the LTA charge as a commuted lump sum from the DB pension is not one I'd considered.  I guess I'd assumed that it would be taken as an additional tax charge from income paid from the DB (I can see that this doesn't work now that I think about it).  Or a lump sum tax bill that I'd pay from wherever I chose.  I will investigate options.

I don't have any personal recommendations for pension specialist IFAs and am not sure how to find one.  Unbiased isn't attractive and a Google search doesn't feel a great way to find a technical specialist for some one-off advice.  

As an aside just typing this stuff (and using words like crystallization) is very useful so thank you.