FIRE Girls Pension Diary - Aim High & Dream Big

GenX0212

Firegirl said:

I thought the Life Time Allowance (LTA) was abolished so there’s no longer a cap on what you can accumulate in your pension, with out getting extra tax charge?

Lump Sum Allowance (LSA) currently £268, 275. This is the max tax free amount you could take out across all pensions.  My current thinking is not to take the Lump Sum.

Another consideration is Lump Sum and Death Benefit Allowance (LSDBA) - usually £1,073,100

So now that the LTA is abolished it is more about how you take your pensions and the tax you’ll be charged at that point. It’s sort of annoying the rules can change at any point. 

My current total pensions are £379, 500.  What this chat has taught me is that I really need to think about how I’ll take my pension before it gets to high.  I feel a spreadsheet coming on, or maybe go modern and see what chat GPT has to say😆

Correct, there is no cap as such as to what you can pay in to a pension. The LSA caps what you can take out tax free, whether it is as a one-off lump sum or, drawdown, or UFPLS, or put towards an annuity.

There's no single right answer as it depends how much is in your pot, how much you are paying in, how and when you plan to withdraw it and how well it ends up performing, but the closer you get to the LSA the more likely that when 'taking out' of your pension might end up being more than the tax relief when it was 1st paid in.

If you have £500k now and it stays invested for 10 years and achieves an annual return of 10% then you would end up with £1.3m (higher than the LSA). If you had £800k then it would only take 5 years. £1m then it's less than 3 years.

jimi_man

michaels said:

Saving using ISA rather than sipp offers some protection as you pay the tax now rather than later on the inflated values.

Can you explain this please? As far as I can see it doesn't make any difference but my maths may be totally way off!

If you save £80 a month at 5% into an ISA for 20 years it gives £32,883. If you pay that into a pension the Govt add £20 so it's a £100 a month, which gives £41,103. Take off 20% at the end and it brings it down to £32,883. 

Obviously leaving aside any TFLS.

SouthCoastBoy

The argument is you dont pay tax on the growth, however it still may not be cost effective, say you invest £32k in an isa and it trebles in value, so worth £96k. You would have paid 8k tax. If that went into a sipp you would have got an initial 40k investment triples to 120k. Tax to pay, assuming 20% tax payer liable for 18k tax after taking 30k lump sum. 

In instance of isa you get back 96k. In sipp you get 72k + 30k, so get 102k back

If 40% tax payer on 100% of sipp would be 54k + 18k so only get 72k back. In reality I imagine in the majority of cases an individual will not be in the 40% tax bracket the full withdrawal amount from the sipp

Pat38493

MallyGirl said:

Firegirl said:

Thanks @michaels very good points. 

Very interesting to think about ISA. I’d never really thought about the tax being paid upfront on the smaller amount, before the investment grows. 

Emmmmm I need to give this some thought because I’ve been putting money into my pension to bring me below the higher tax bracket. I had been thinking of putting more to my ISA to give me some flexibility on retirement/financial freedom age.

I have higher risk investments in the ISA where the growth is tax free and lower risk (and likely lower growth) in the SIPP where there will be tax to pay on getting it out.

I guess htis makes sense as long as you have enough in ISA that you won't risk running out of money outside of your pension earlier than expected (in the event of a big downturn) and then being forced to pay 40% tax on SIPP withdrawals.  This is the balance I will be trying to strike in the next 10 years or so.

jimi_man

SouthCoastBoy said:

The argument is you dont pay tax on the growth, however it still may not be cost effective, say you invest £32k in an isa and it trebles in value, so worth £96k. You would have paid 8k tax. If that went into a sipp you would have got an initial 40k investment triples to 120k. Tax to pay, assuming 20% tax payer liable for 18k tax after taking 30k lump sum. 

In instance of isa you get back 96k. In sipp you get 72k + 30k, so get 102k back

If 40% tax payer on 100% of sipp would be 54k + 18k so only get 72k back. In reality I imagine in the majority of cases an individual will not be in the 40% tax bracket the full withdrawal amount from the sipp

Yes I get that. The same as my example really. Both return exactly the same figure - £96k (ignoring the lump sum for the moment). But Michaels seem to suggest that ISAs (rather than SIPPs) offers protection as you pay the tax now rather than later on inflated values when to me there is no difference apart from the TFLS. 

Just wondered if I was missing anything but it seems not.

michaels

jimi_man said:

michaels said:

Saving using ISA rather than sipp offers some protection as you pay the tax now rather than later on the inflated values.

Can you explain this please? As far as I can see it doesn't make any difference but my maths may be totally way off!

If you save £80 a month at 5% into an ISA for 20 years it gives £32,883. If you pay that into a pension the Govt add £20 so it's a £100 a month, which gives £41,103. Take off 20% at the end and it brings it down to £32,883. 

Obviously leaving aside any TFLS.

What you are missing is that the frozen tax thresholds mean that money taken pre growth at 20% may instead, post growth/inflation within the sipp, end up in the 40% (or even higher) rate bands.

See my thread re the impact of fiscal drag, Jane Bloggs who intends to draw 50k in real terms forever starting in 2021 is drawing over 100k in 2040, not just half in the 40% band but now into the personal allowance withdrawal effective 60% rate band.

Firegirl

@michaels I just read your thread ‘fiscal drag: when is the number not the number’. A stark reminder how the value of money changes over time, especially if tax thresholds stay frozen.  I can see how ISAs really come into play in a big way.

A reminder…how lucky I am to have this problem ito work all this out!

Alexland

michaels said:

What you are missing is that the frozen tax thresholds mean that money taken pre growth at 20% may instead, post growth/inflation within the sipp, end up in the 40% (or even higher) rate bands.

Yup I've grown pensions already worth the majority of the LTA in my mid 40s (even after a pension sharing order withdrawal) and if I only contribute enough to get employer matching for the rest of my career and take the £268k lump sum it now seems likely that I will pay higher rate on drawing the 75% even with my protected access age to start drawing from 55. Earlier in my career I'll have saved some 20%+12% NI (at the time) to later pay some 40%.

I was thinking my LISA was my last retirement account worth contributing into but it now seems like they might stop adding bonuses on that soon too. While it might be a nice problem to have it's also a disappointment as my plans expected it would have been worth heavy contributing for longer into pensions and LISAs..

So I will be putting more into my S&S ISAs despite the announced changes making them worse too.

michaels

Alexland said:

michaels said:

What you are missing is that the frozen tax thresholds mean that money taken pre growth at 20% may instead, post growth/inflation within the sipp, end up in the 40% (or even higher) rate bands.

Yup I've grown pensions already worth the majority of the LTA in my mid 40s (even after a pension sharing order withdrawal) and if I only contribute enough to get employer matching for the rest of my career and take the £268k lump sum it now seems likely that I will pay higher rate on drawing the 75% even with my protected access age to start drawing from 55. Earlier in my career I'll have saved some 20%+12% NI (at the time) to later pay some 40%.

I was thinking my LISA was my last retirement account worth contributing into but it now seems like they might stop adding bonuses on that soon too. While it might be a nice problem to have it's also a disappointment as my plans expected it would have been worth heavy contributing for longer into pensions and LISAs..

So I will be putting more into my S&S ISAs despite the announced changes making them worse too.

FireGirl, sorry for hijacking your thread. 
I am looking at unwrapped low nominal yield govt bonds (normal and index linked) where most of the return comes as tax free capital gains on maturity as being the receptacle for the fixed interest portion of my pots.

kempiejon

Alexland said

So I will be putting more into my S&S ISAs despite the announced changes making them worse too.

Catch me up on that please, I didn't see they've been changed for the worse.