What do MSE'ers do when LTA (nearly) reached

Pat38493

Albermarle said:

but should I really be making decisions in the next couple of years based on an assumption that LTA won't change in the next 11 years?

You can only try and hopefully make some kind of realistic prediction.

Mine would be that it seems unlikely it will be reduced, and that it will start to increase again at some point. Maybe with inflation, once inflation has calmed down. Of course it will be lower in real terms having been frozen through the current period of high inflation.

Well my wife says I'm a pessimist and it did cross my mind that will all the talk of trying to get retired people back to work, or stop them retiring early, the Treasury might try to take the opposite approach - reduce the LTA to such a low level that it's impossible to save enough for a reasonable retirement without paying LTA - this would also arguably remove the LTA driven incentive to stop working!.  Probably I am too pessimistic there.

EdSwippet

Pat38493 said:
Well my wife says I'm a pessimist and it did cross my mind that will all the talk of trying to get retired people back to work, or stop them retiring early, the Treasury might try to take the opposite approach ...

There are already signs that rather than "make work worth your while", the government prefers to focus on making retirement less worthwhile. Exhibits A and B are the upcoming huge cuts to both the capital gains allowance and the dividend allowance.

Expect the beatings to continue until morale improves. A pessimist is just an optimist with experience.

NedS

Of course one of the simplest ways of preventing people from retiring early is to increase the age people can access their pensions. This is rising from 55 to 57, but obviously any increases are likely to take years to filter through the system and aren't going to have an impact right now. Raising again to a minimum age of 60 would probably just push early retirees to save more outside of a pension wrapper and discourage others from saving in pensions at all as they "might be dead by the time they are 60".

leosayer

The 55% tax rate only applies to lump sum withdrawals. Most people will take amounts above the LTA as (taxable) income and pay a 25% charge. 

I can't imagine a scenario where I would de-risk my savings purely to avoid 25% tax on the gains. 75% of something is better than 100% of nothing. The other way of looking at it is that if you're already over the LTA, then the HMRC will take 25% of any market losses you make.

In any case, unless the LTA charge arises from commencing a DB pension then paying the tax is at your discretion depending on how much income you take as drawdown. This may be much later in life.

I'm still making contributions to my work DC scheme via salary sacrifice even though I'm over the LTA based on the current value of my DB pension - should I take it at normal retirement age 60. If I take it early then I'm below but of course who knows will happen with investment performance over the next few years.

There may be situations where your employer's contributions and relief rate makes it worth your while continuing even after the 25% charge. Don't stop contributing until you've done the sums.

EdSwippet

leosayer said:

The 55% tax rate only applies to lump sum withdrawals. Most people will take amounts above the LTA as (taxable) income and pay a 25% charge. 

I can't imagine a scenario where I would de-risk my savings purely to avoid 25% tax on the gains. 75% of something is better than 100% of nothing. ...

For clarity, things are not quite as you describe. You pay the 25% LTA charge first, and then you pay ordinary income tax on the remaining 75% at your top marginal rate.

For a basic rate taxpayer, that comes out to 25% + 20% of 75% = 40%. For a higher rate taxpayer, it's 25% + 40% of 75% = 55%. Virtually nobody will be getting "75% of something". The best case is probably 60%, and 45% is entirely likely.

Also, stating "better than 100% of nothing" presents this as a false dichotomy. I don't think anyone suggested entirely "de-risking" (even moving to all gilts is not zero-risk!).  Lowering risk means accepting the potential for lower return, but it does not create zero return, which is what your wording implies. And lowering risk in a pension but raising it in ISAs is neither "de-risking" nor lowering risk overall.

leosayer said:

There may be situations where your employer's contributions and relief rate makes it worth your while continuing even after the 25% charge. Don't stop contributing until you've done the sums.

There are. A useful employer match that more than offsets the 25% LTA penalty, for one. Although, in this case it is usually better to take that match simply as salary, where at all possible (some negotiation with employer may be required). Except for the egregious 60% band at £100-125k, taking salary now generally beats pension contributions when already over the LTA.

Cus

If you are currently an additional rate tax payer, and intend to be a basic rate tax payer when you begin to access your SIPP, then even if you have a kind employer who would give you their contribution as a salary you still lose out slightly.

Simon11

I would be in the camp that if I was nearing the LTA, I would be looking to retire or reduce hours with a simpler job. 

No point working and saving money that would are unlikely to ever use. I would rather relax and enjoy my life/ savings!

For anyone with nearly 1 million in the pension pot, is it actually possible to spend it during retirement (even with an early retirement?) or will it get 'wasted/ burned' on care in a old people's home while other people without savings pay nothing?

Albermarle

There may be situations where your employer's contributions and relief rate makes it worth your while continuing even after the 25% charge. Don't stop contributing until you've done the sums.

To add to info already given by a previous poster, another way to look at it, is as follows

Someone going over the LTA and getting 40% tax relief on pension contributions when working, and who is a 20 % taxpayer in retirement, then there is no gain or loss on contributions ( tax wise). Someone only getting 20% relief in employment and paying 20% in retirement, will lose out . As will someone getting 40% tax relief but paying 40% in retirement. In the latter two cases, it would only make sense to continue contributing if there was a very generous employer contribution. Or as mentioned some special arrangement with increased salary instead.

Albermarle

Simon11 said:

I would be in the camp that if I was nearing the LTA, I would be looking to retire or reduce hours with a simpler job. 

No point working and saving money that would are unlikely to ever use. I would rather relax and enjoy my life/ savings!

For anyone with nearly 1 million in the pension pot, is it actually possible to spend it during retirement (even with an early retirement?) or will it get 'wasted/ burned' on care in a old people's home while other people without savings pay nothing?

Reaching LTA or getting close is often a trigger to retire.

If a Million Pound DC pot was your only source of income, apart from the State Pension, then it would 'only' generate around £35K pa safely ( and rising with inflation) . For a couple this would not put you in the luxury league ( even with two state pensions) although you would be pretty comfortable.
Alternatively if you had other assets/income, you can use the pension as a very beneficial and tax efficient way  of passing on an inheritance.

ader42

I would crystallise the lot, retire, keep a few years income in savings and take £36k a year as taxable income while staying fully invested but take no income as long as possible if the market took a downwards turn.

I suggest using fiCalc.app or similar to run historical simulations and different withdrawal strategies.