Pension pot could get "too big"?

beeza650

I just want to say from the start that I realise I'm in a fortunate situation so please don't take this ask the wrong way.
Now that LTA has gone and the max contribution level has increased to £60K, based on a 4% p/a increase my pension pot will be £1.3m at 57.
My simplistic view on pensions is that they allow you to defer /lower tax (or avoid it altogether if you die).
With that in mind, does it make sense to save more into a pension than you can withdraw and stay below the 40% threshold?
I've never properly worked out what I spend, or how much that's going to go up as the kids get older, but I'm pretty certain it's less than £50,271 p/a.
Taking 25% lump sum at 57 and then up to the 40% threshold till I'm 85 still leaves well over half £500k (in today's money) in the pot. I'm entitled to full state pension.

It's my understanding anything left passes inheritance (or other) tax-free to my kids so not wasted money at all but I'm wondering if I should be thinking about other options - are there other options???

My original spreadsheet leaves the 25% lump sum invested (I'm not sure what I'd use a big chunk for). If I leave that in and still take up to the 40% then at 85 there be nearly 200K more in the pot then when I'd retired!

I'd really appreciate some ideas/advice. Probably a good start with be to lower the average increase or to put some 10% drops every 5 years or something and see what that does to things?

ColdIron

A friend is close to the LTA and has started investigating how to increase his DC pension with the single intention of leaving it untouched to pass on to his daughter for IHT purposes

If you don't need the cash and want to pass the pension on to your kids you might look at not taking the 25% PCLS

Edit: Note that the PCLS will now be capped at £268,275 (25% of the current LTA)

NedS

ColdIron said:

A friend is close to the LTA and has started investigating how to increase his DC pension with the single intention of leaving it untouched to pass on to his daughter for IHT purposes

If you don't need the cash and want to pass the pension on to your kids you might look at not taking the 25% PCLS

Why would you do that? Surely the children would then pay tax at their marginal rate when they withdraw it (assuming death at age 75 or over). If the intent is to leave it to the kids, would it not be better to withdraw the 25% PCLS tax free and gift that to the kids whilst still alive (and hopefully not within 7 years of death to avoid IHT), passing the remainder within the pension wrapper after death?

ColdIron

My thinking was that the 25% would ultimately be taxable (from the OP), but had overlooked gifting now and I see the OP is 57 so 7 years or 75 isn't a close threat

beeza650

ColdIron said:

Edit: Note that the PCLS will now be capped at £268,275 (25% of the current LTA)

oh, I didn't know that....good (or rather bad) to know. Thanks

Albermarle

You have not said if you are a 40% taxpayer now and if you are that you could up your contributions and still get higher rate relief on all of it.

You do not seem to have taken account of inflation at all. £50K pa today will not buy you so much in 20 years time.

Also be aware, as in the budget, pension law/tax changes all the time.
The LTA change might be reversed/modified at some point, it is pretty controversial.
This may or may not mean the cap on tax free might go up/down.
The abolition of LTA has highlighted/increased the pension/IHT tax loophole, so possibly meaning this will get changed at some point.

beeza650

MAlbermarle said:

You have not said if you are a 40% taxpayer now and if you are that you could up your contributions and still get higher rate relief on all of it.

You do not seem to have taken account of inflation at all. £50K pa today will not buy you so much in 20 years time.

Also be aware, as in the budget, pension law/tax changes all the time.
The LTA change might be reversed/modified at some point, it is pretty controversial.
This may or may not mean the cap on tax free might go up/down.
The abolition of LTA has highlighted/increased the pension/IHT tax loophole, so possibly meaning this will get changed at some point.

My marginal rate of tax is 45% after 60K pension contribution.
I've not directly taken inflation into count but my yearly drawdown is based on a pretty arbitrary increase in state pension of 2.5% YoY and increases in the 40% threshold of 1% YoY. What would you "set" them at? I appreciate this is all a big guessing game though.

I hear what you're saying about IHT laws on pensions. That feels somewhat (highly) likely to be "looked at".
Regarding the LTA, it's a weird one, pensions are tax deferment vehicles (IHT aside), what's the point in saving 40% tax if you just pay it again later. I can't be the only one weighing up the true merits of building up a big pension pot if it means accessing it all you're going to put yourself in the 40% bracket. Yes, the 25% tax-free is pretty cool but as I just learned, that's capped.

MK62

The TFC was already capped for the majority.......and now it's been "detatched" from the LTA, only time will tell if successive governments will tinker with it (which usually means reduce/restrict it)......but the track record of pension tinkering doesn't inspire much confidence that it'll retain it's value over the years.......it seems intergenerational fairness has little bearing on pension policy these days.
As for the tax deferral element of pensions, the usual plan for HR tax payers is to pay lower taxes on withdrawal, than you got on your contributions.......but even if equivalent, employer contributions (especially if it's a salary sacrifice scheme)and/or the TFC and the extra growth on your contributions (from tax relief) still mean pensions will remain the primary choice for retirement savings for the majority.....

beeza650

MK62 said:

As for the tax deferral element of pensions, the usual plan for HR tax payers is to pay lower taxes on withdrawal, than you got on your contributions.......but even if equivalent, employer contributions (especially if it's a salary sacrifice scheme)and/or the TFC and the extra growth on your contributions (from tax relief) still mean pensions will remain the primary choice for retirement savings for the majority.....

Yup that's my intention, but taking up to the 40% threshold, by my calculations, means you're unlikely to run a £1.25M pot down to zero even if you retire at 57 and take the tax-free £268,275. Maybe I need to be way more pessimistic with the pot growth and increases in state pension and more optimistic of how the 40% band will grow in my spreadsheet - i.e. 'allow' me drawdown more.

Today - at 48 - maxing out pensions to £60K p.a. is a no-brainer as my marginal tax rate is 45% and as a contractor inside IR35 I also avoid paying c.14.3% employers NI and apprenticeship levy on the £60k.  So what's that...45+14.3+4.2(employees NI) = 63.5% tax - holy cr#p!!!!

I realise I don't need to think about this in detail now as that massive % above makes any current decision for me but I do like to have a bit of a 'plan' as I'm likely to return to permanent employment at some time.

Albermarle

Yup that's my intention, but taking up to the 40% threshold, by my calculations, means you're unlikely to run a £1.25M pot down to zero even if you retire at 57 and take the tax-free £268,275. Maybe I need to be way more pessimistic with the pot growth and increases in state pension and more optimistic of how the 40% band will grow in my spreadsheet - i.e. 'allow' me drawdown more

Have you heard of Safe Withdrawal rates ( SWR) ? Rather than simply subtracting a sum from your pot each year based on guesswork about inflation, investment growth , there has a been a lot of research ( mainly in the US) based on historical market statistics.

Not everyone agrees with the figures but a widely mentioned figure is 4% as a SWR .

What this means is that your initial annual income is 4% of the pot, and each year you increase that income by inflation.

In this case the projections show that the chance of the pot running out before you are 90/95 is acceptably low. Most likely you will have a lot left, maybe even more than you started.

It assumes that your pot stays invested at around a medium risk level( 40 to 60% equities) .

As we can not see into the future it can only be theory, but useful as a guideline and something to plan around.

beeza650

@Albermarle I'll try that out - what do they suggest to use as the inflation figure though?