Am I saving too much into my pension?

Albermarle

P1Fanatic said:

Mark_d said:

I'm in a similar situation to you @P1Fanatic.  I'm a couple of years younger than you with a marginally smaller pension pot, paying £30k in to pension each year.  Removal of the lifetime allowance was quite a relief when I first heard about it.

I understand that lifetime allowance applies at the time you crystallise your funds, and then only on the amount of funds you crystallise.  Suppose the LTA was £1m and you have £1m when you retire at 60.  Suppose you take £50k each year as cash but leave the remaining funds invested, the the LTA would only kick in after you've taken out £1m in cash - but the LTA may well have changed by then.

In the above scenario I don't know if I'd be able to increase the amount I could get whilst avoiding the extra tax, however one benefit I could get (vs. someone who paid less pension contributions) is that I could move my investments in to low risk funds (gilts/bonds/cash).

At retirement there is also the option to purchase annuities whilst using part of your fund for drawdown.  There are a lot of options out there.  In my opinion I think you can rest easy for the moment but look to review as and when your fund is approaching £1m

Indeed and hopefully it stays that way. I thought LTA tax was applied at the time of crystallisation ie calculated at the amount the pension pot is when you do they very first draw down or tax free withdrawal?

It is, but it is possible to crystallise in stages, and only as much as you need to do to withdraw the funds you need each year. So if LTA was still around you could have delayed paying it in this way.

Note that although LTA has gone, most likely for good, the amount of tax free cash you can get has been frozen at 25% of the previous LTA, so not quite a win/win situation.

Albermarle

dunstonh said:

FIREDreamer said:

P1Fanatic said:

penners324 said:

There is no LTA. Government got rid of it a year ago

Wowsers how did I miss that. Guess I was worrying about nothing. That makes things a lot simpler. Thanks.

penners324 said:

To be more accurate the LTA was raised to infinity on April 5th 2023. On 5th April 2024 the LTA will be removed completely 

Labour are likely to win the next election and have said they are bringing it back, however they haven’t provided any details of how this would happen.

And they said that before:
a) they realised that the cap on tax free cash is remaining in place and it isn't being indexed.
b) before all the public sector worker unions and groups started moaning saying that they wanted carve outs. 

Are Labour really going to risk going to war with the unions/public sector for such a tiny amount of taxation revenue? - the feeling is no but who knows!

Labour saying they would bring back LTA, was a knee jerk reaction to the surprise announcement from Jeremy Hunt.
In reality how else could a left of centre have been expected to react.

I am surprised that many other posters seem to see this as some kind of manifesto commitment, when they have hardly mentioned it since and no manifesto has been published.

So I agree with you that its reintroduction is unlikely. I would think some review of pension death tax rules, like IHT exemption, was more likely.

P1Fanatic

Albermarle said:

P1Fanatic said:

Mark_d said:

I'm in a similar situation to you @P1Fanatic.  I'm a couple of years younger than you with a marginally smaller pension pot, paying £30k in to pension each year.  Removal of the lifetime allowance was quite a relief when I first heard about it.

I understand that lifetime allowance applies at the time you crystallise your funds, and then only on the amount of funds you crystallise.  Suppose the LTA was £1m and you have £1m when you retire at 60.  Suppose you take £50k each year as cash but leave the remaining funds invested, the the LTA would only kick in after you've taken out £1m in cash - but the LTA may well have changed by then.

In the above scenario I don't know if I'd be able to increase the amount I could get whilst avoiding the extra tax, however one benefit I could get (vs. someone who paid less pension contributions) is that I could move my investments in to low risk funds (gilts/bonds/cash).

At retirement there is also the option to purchase annuities whilst using part of your fund for drawdown.  There are a lot of options out there.  In my opinion I think you can rest easy for the moment but look to review as and when your fund is approaching £1m

Indeed and hopefully it stays that way. I thought LTA tax was applied at the time of crystallisation ie calculated at the amount the pension pot is when you do they very first draw down or tax free withdrawal?

It is, but it is possible to crystallise in stages, and only as much as you need to do to withdraw the funds you need each year. So if LTA was still around you could have delayed paying it in this way.

Note that although LTA has gone, most likely for good, the amount of tax free cash you can get has been frozen at 25% of the previous LTA, so not quite a win/win situation.

Interesting. Do you have any links covering "staged crystallisation" in more detail? Thanks.

Grumpy_chap

P1Fanatic said:

Honestly not something I thought I would ever be asking as have always had the mindset of "put in as much as I can due to tax efficiencies"

I'm 46 (turning 47 in April) and my pension balance is currently £585k. I'm paying in £40k per year via salary sacrifice. I can't access it until age 57 (or will that be 58 as keep reading contradicting info on that?) but I just ran a compound interest calculation assuming 5% average growth over the next 5yrs (5yrs as I plan to retire in 5-6yrs time if things go to plan) and keeping that same level of annual contribution and it shows me getting very close to the LTA limit and there is another 5yrs of potential growth before I can access it.

Anything over the LTA is taxed at 55% if taking a lump sum, so should I be concerned and look at reducing my contributions or is there something I am missing i.e. my calculations of growth are way off? I tried to find some kind of LTA specific calculator but no luck there.

Thanks in advance.

One consideration to the question of whether you are paying in too much might be assessment of likely marginal tax rates.
You would not want to make contributions that gain relief of 20% income tax but then pay 40% on withdrawal.

Hoenir

P1Fanatic said:

but I just ran a compound interest calculation assuming 5% average growth over the next 5yrs (5yrs as I plan to retire in 5-6yrs time if things go to plan) and keeping that same level of annual contribution and it shows me getting very close to the LTA limit and there is another 5yrs of potential growth before I can access it.

Investing in the markets is akin to riding a roller coaster. When you least expect it. There's a sharp sudden drop in front of you. Better to achieve ones goal and possibly exceed it. Than worry about possibly incurring a tax charge now. 

Albermarle

P1Fanatic said:

Albermarle said:

P1Fanatic said:

Mark_d said:

I'm in a similar situation to you @P1Fanatic.  I'm a couple of years younger than you with a marginally smaller pension pot, paying £30k in to pension each year.  Removal of the lifetime allowance was quite a relief when I first heard about it.

I understand that lifetime allowance applies at the time you crystallise your funds, and then only on the amount of funds you crystallise.  Suppose the LTA was £1m and you have £1m when you retire at 60.  Suppose you take £50k each year as cash but leave the remaining funds invested, the the LTA would only kick in after you've taken out £1m in cash - but the LTA may well have changed by then.

In the above scenario I don't know if I'd be able to increase the amount I could get whilst avoiding the extra tax, however one benefit I could get (vs. someone who paid less pension contributions) is that I could move my investments in to low risk funds (gilts/bonds/cash).

At retirement there is also the option to purchase annuities whilst using part of your fund for drawdown.  There are a lot of options out there.  In my opinion I think you can rest easy for the moment but look to review as and when your fund is approaching £1m

Indeed and hopefully it stays that way. I thought LTA tax was applied at the time of crystallisation ie calculated at the amount the pension pot is when you do they very first draw down or tax free withdrawal?

It is, but it is possible to crystallise in stages, and only as much as you need to do to withdraw the funds you need each year. So if LTA was still around you could have delayed paying it in this way.

Note that although LTA has gone, most likely for good, the amount of tax free cash you can get has been frozen at 25% of the previous LTA, so not quite a win/win situation.

Interesting. Do you have any links covering "staged crystallisation" in more detail? Thanks.

There are various ways.

Lets say you have a pot of £200K
You could take £10K in tax free cash . Then you would have £30K crystallised and £160K still uncrystallised.
Or at the same time ( or later ) take some of the crystallised £30K as taxable income .
Then later take some more tax free cash in stages, with or without some taxable income, until it was all crystallised and then only taxable income to be taken.
Or you can take a UFPLS payments, which is exactly 25% tax free, 75% taxable and anything left in the pot is still all uncrystallised.

For access to all options you need to be with a modern pension provider, as with an older pension you will have less flexibility on withdrawal options.

You may find your pension website has some good info and you can look here.
Taking your pension | Help with taking your pension | MoneyHelper

Plus if you read the forum regularly you will get more up to speed, like about LTA for example.

Altior

Albermarle said:

dunstonh said:

FIREDreamer said:

P1Fanatic said:

penners324 said:

There is no LTA. Government got rid of it a year ago

Wowsers how did I miss that. Guess I was worrying about nothing. That makes things a lot simpler. Thanks.

penners324 said:

To be more accurate the LTA was raised to infinity on April 5th 2023. On 5th April 2024 the LTA will be removed completely 

Labour are likely to win the next election and have said they are bringing it back, however they haven’t provided any details of how this would happen.

And they said that before:
a) they realised that the cap on tax free cash is remaining in place and it isn't being indexed.
b) before all the public sector worker unions and groups started moaning saying that they wanted carve outs. 

Are Labour really going to risk going to war with the unions/public sector for such a tiny amount of taxation revenue? - the feeling is no but who knows!

Labour saying they would bring back LTA, was a knee jerk reaction to the surprise announcement from Jeremy Hunt.
In reality how else could a left of centre have been expected to react.

I am surprised that many other posters seem to see this as some kind of manifesto commitment, when they have hardly mentioned it since and no manifesto has been published.

So I agree with you that its reintroduction is unlikely. I would think some review of pension death tax rules, like IHT exemption, was more likely.

It's a long time ago since a manifesto commitment meant anything. Whatever long term fiscal plans Labour have should they win political power, they certainly won't be giving it all away before the election. 

Gary1984

Despite LTA being abolished you may still be contributing too much if you lack the funds outside your pension to bridge the years between when you stop working and when you're able to access the pension.

P1Fanatic

Gary1984 said:

Despite LTA being abolished you may still be contributing too much if you lack the funds outside your pension to bridge the years between when you stop working and when you're able to access the pension.

Indeed. This post has reinforced that for me. Previously I was upping contributions 1-2% each year and sticking bonuses in to get to the £40k annual limit. As soon as I got there they upped to £60k which was another distraction. My primary focus now is increasing my savings outside of my pension to bridge those early years before I hit 57.

Firefly12345

I am in a similar situation age (47 nearing 48) and pot size (640) wise. I decreased my personal contributions from 17 to 12% a few years ago. Very much against the wisdom of this board and tax suicide but the right decision for me.  I generally spend the additional money on an extra holiday. Life is for living and I will be OK in retirement so I want to live it now whilst I know I can. I realise this is a very privileged position but just responding honestly to the OP who is maybe in a similar place.