Pension Tax Relief of no value in certain scenarios?

hugheskevi

The scenario of having existing pension savings to use 100% of Lump Sum Allowance and paying higher rate tax on all future withdrawals is uncommon, but will probably occur more in the future as more people are wholly dependent on DC pension, the Lump Sum Allowance is frozen and the higher rate threshold is either frozen or only increasing in line with CPI.

Although the position above makes contributions similar to an ISA, it is not 'no different'

Putting the money into a pension means age-restricted access, uncertainty about the rate of tax that will be applied to withdrawals in the future, and a soft cap on annual withdrawals, as otherwise tapering of Personal Allowance and 45% income tax will be encountered. So that makes it inferior to an ISA in several ways, although in practice these may not be particularly onerous in many cases.

On the other hand, if the individual is a higher rate taxpayer but earns over £100,000 then pension contributions would reduce Personal Allowance tapering and so would be valuable. Possibly also restoring entitlement to free child care. Salary sacrifice - especially if employer shares the employer NI saving - would also improve the deal.

For those still in employment with pension savings well over £1m and income in excess of £50,000 for the rest of their life and who are musing what to do with surplus funds, financial advice is readily available and is likely to be valuable given the size of assets.

Phantom_Investor

.hugheskevi said:

The scenario of having existing pension savings to use 100% of Lump Sum Allowance and paying higher rate tax on all future withdrawals is uncommon, but will probably occur more in the future as more people are wholly dependent on DC pension, the Lump Sum Allowance is frozen and the higher rate threshold is either frozen or only increasing in line with CPI.

Although the position above makes contributions similar to an ISA, it is not 'no different'

Putting the money into a pension means age-restricted access, uncertainty about the rate of tax that will be applied to withdrawals in the future, and a soft cap on annual withdrawals, as otherwise tapering of Personal Allowance and 45% income tax will be encountered. So that makes it inferior to an ISA in several ways, although in practice these may not be particularly onerous in many cases.

On the other hand, if the individual is a higher rate taxpayer but earns over £100,000 then pension contributions would reduce Personal Allowance tapering and so would be valuable. Possibly also restoring entitlement to free child care. Salary sacrifice - especially if employer shares the employer NI saving - would also improve the deal.

For those still in employment with pension savings well over £1m and income in excess of £50,000 for the rest of their life and who are musing what to do with surplus funds, financial advice is readily available and is likely to be valuable given the size of assets.

Many thanks  - this is very very useful.
I won't bore everybody with my personal circumstances, but I won't be anywhere near the level of a £100,000 income, and my only option for pension contributions is via my SIPP.
So in my situation, it seems the SIPP is "inferior in several ways" which is what I suspected.
Again, while it may not be a common scenario, after several hours of searching the web, I could find no confirmation of this.
I think this does rather demonstrate the value of this forum!
 

stueyhants

I’m in a similar situation. I was overpaying into AVCs on top of an existing db scheme to reduce tax, however given the value I’ll get at the end all I’m really doing is to just delay paying the tax. I do get some benefit by avoiding the 55% tax trap but there is no benefit in putting more than to avoid that. So I’ve now backed off the added contributions.

Given I’m paying less in now, I am getting  my wife to put 100% of her salary into her pension, she is only a 20% tax payer but it dos mean she keeps that benefit on the way out as she will likely be under the threshold, at least until State pension age. Felt odd choosing to save 20% rather than 40% but it makes sense overall… I think

kinger101

hugheskevi said:

The scenario of having existing pension savings to use 100% of Lump Sum Allowance and paying higher rate tax on all future withdrawals is uncommon, but will probably occur more in the future as more people are wholly dependent on DC pension, the Lump Sum Allowance is frozen and the higher rate threshold is either frozen or only increasing in line with CPI.

Although the position above makes contributions similar to an ISA, it is not 'no different'

Putting the money into a pension means age-restricted access, uncertainty about the rate of tax that will be applied to withdrawals in the future, and a soft cap on annual withdrawals, as otherwise tapering of Personal Allowance and 45% income tax will be encountered. So that makes it inferior to an ISA in several ways, although in practice these may not be particularly onerous in many cases.

On the other hand, if the individual is a higher rate taxpayer but earns over £100,000 then pension contributions would reduce Personal Allowance tapering and so would be valuable. Possibly also restoring entitlement to free child care. Salary sacrifice - especially if employer shares the employer NI saving - would also improve the deal.

For those still in employment with pension savings well over £1m and income in excess of £50,000 for the rest of their life and who are musing what to do with surplus funds, financial advice is readily available and is likely to be valuable given the size of assets.

The childcare cliff edge is horrendous.  Even the pension tax charge can be efficient compared to the more than 100 percent marginal rate.

Childcare aside, if you've used up ISA, fully loaded premium bonds etc, pensions at least still shelter interest, dividends and capital gains etc, allowing deferral until income drops in retirement.

artyboy

hugheskevi said:

The scenario of having existing pension savings to use 100% of Lump Sum Allowance and paying higher rate tax on all future withdrawals is uncommon, but will probably occur more in the future as more people are wholly dependent on DC pension, the Lump Sum Allowance is frozen and the higher rate threshold is either frozen or only increasing in line with CPI.

Although the position above makes contributions similar to an ISA, it is not 'no different'

Putting the money into a pension means age-restricted access, uncertainty about the rate of tax that will be applied to withdrawals in the future, and a soft cap on annual withdrawals, as otherwise tapering of Personal Allowance and 45% income tax will be encountered. So that makes it inferior to an ISA in several ways, although in practice these may not be particularly onerous in many cases.

On the other hand, if the individual is a higher rate taxpayer but earns over £100,000 then pension contributions would reduce Personal Allowance tapering and so would be valuable. Possibly also restoring entitlement to free child care. Salary sacrifice - especially if employer shares the employer NI saving - would also improve the deal.

For those still in employment with pension savings well over £1m and income in excess of £50,000 for the rest of their life and who are musing what to do with surplus funds, financial advice is readily available and is likely to be valuable given the size of assets.

On that last part, this is fertile hunting ground for SJP and the like - with all their fancy ideas of estate protection trusts or whatever they call them. I had a lucky escape about 15 years ago when I was less financially astute and they came knocking for me via 'colleagues I knew' in the city.

Fair to say with IHT heading the way it is, I can see both me and Mrs Arty drawing down into the 40% bracket, so some suitably targeted independent advice may well come into play.

JayRitchie

"So in this clarified scenario, I put in £10,000 I get £7,500 back, then £2,500 via my tax return, so it's neutral. No different to putting it into an ISA.

Is that now correct?

It may not be a common scenario, and I appreciate I am very fortunate, but I think the various website should point out that the benefits of tax relief do disappear once the lump-sum threshold is reached."

I'm not sure if its common but does get discussed a lot online. In most examples people seem to be making pretty positive assumptions about ongoing returns. Using pensions rather than ISAs does allow a beneficial dampening effect on your available post tax funds if values fall.

I'd be interesting to know how many people this really affects other than as a 'nice problem to have' due to investment returns being greater than expected or the person working a few years longer than they had allowed for.

As a guess the majority of people who end up as higher rate tax payers on retirement get a bit more than the 40% tax relief as they use salary sacrifice (or contract inside IR35) or run their own companies), In any case a lot of those with such substantial pension savings are filling their ISA allowance each year so a fairer comparison would be pensions vs GIA investments.