How does the cap on the tax free lump sum impact on pension arithmetic?

michaels

So the 25% tax free lump sum is now capped at £268,250 based on the previous Lifetime Allowance.

It obviously makes no difference to any pots below 1.073m but if your pot is potentially going to be larger than this then it must impact any £s in vs £s out calculations.

Has anyone done any thinking on this?

Subsidiary question, how does this work with a mix of DB and DC pots?

Thanks

zagfles

If you have a pot at or above the current LTA, and you expect it to grow, and you ignore stuff like inhertitance/benefit issues, and you can invest the PCLS such that growth is taxed less than your expected income tax rate in retirement, then it would be best to fully crystallise.

ex-pat_scot

general thoughts -
1. if you reach the £1.073m level, and are 55, then take the full 25% out (if you leave it in, then it's outside IHT, but it will decay in value as inflation erodes its real amount over time)
2. if you still get er contributions, (bonus - plus ers NI) then you'll be better off contributing
3. the main benefit is in tax rate arbitrage. where you are hit with a higher income tax band (+ees NIC) earning than when you are drawing pension.
4. even if you are paying the same tax rate when earning and when retired, if you can sal sac then you still "win" by the amount of NI you save.
5. there are tangential impacts on things based on your deemed income, such as high income child benefit clawback, marginal issues ((60% band etc) and things like student loan eligibility, child care etc.

For the question of DB and DC treatment, I would expect that it will have to have a similar system to how you use up LTA % at the moment, and presumably with the DB valued with a 20x multiplier.

For myself I will need to have a good think about how this has shifted the planning for the next few years.

My plan is (as of yesterday) to be continuing with the max £40,000 contributions.
My salary, after pension, sal sac etc (I get the ers NI refunded and 8% matching up to about £10,000 pa from the company) is somewhere teetering on the £100,000 level. This means that pretty much all of my sal sac pension contributions are at about 70% marginal relief (tax, plus ees NI, plus ers NI refunded, plus loss of PA).

I was going to carry on for another 18m or so, at which point i would have hit the £1.073m level.
I was then going to stop, or switch to contracting (enough to buy a nice EV within the ltdCo with 2% BIK, rather than taking out as salary).
To carry on earning would have meant that I'd either have been stiffed for marginal tax if I'd stopped pension contributions, or would have had pension withdrawal problems getting into the 40% band in retirement plus LTA excess charge.

(NB there's been nothing mentioned about the "small pots" regime - that will add another £30,000 total which can attract the 25% PCLS)

Now that fixed " finish line" has vanished for me in 18m time, I feel I have the flexibility to time my withdrawal / transition to contracting / part time. No longer driven by tax concerns, other than perhaps timing the end of salaried employment to coincide with tax year, NI entitlement etc - possibly to coincide with family milestones of univ and A levels.

michaels

Without Sal sac/employer matching, if you are say saving 20% on the way in and expecting to pay 20% on the way out or 40% on the way in and 40% on the way out (more likely with the LTA being in play) then without the 25% TFLS wouldn't it make more sense to use isa than pension wrapper for the added flexibility?