Reducing window to draw pension income at basic rate

Alexland

Apologies if this has already been covered elsewhere but is anyone else dumbstruck by how the window to draw income at basic rate is being shrunk by both how the SP will grow into the basic rate band and the freezing of the thresholds?

Even if we assume only 2% pa inflation until 2031 then it will only be possible to draw around £31k in today's spending power from a personal pension from SP age before it's taxed at higher rate. It might even be a smaller window if the SP growth is higher due to the triple-lock mechanics.

I've seen commentary in recent days suggesting to make the most of sal-sac before the cap comes in but for me I'm wondering what's the point as my healthy pension valuations mean anything more I put into my pension is likely to be taxed at higher rate in retirement even if I start drawing at the earliest possible date and withdraw the max capped TFLS.

All I would be saving from continuing heavy contributions is the 2% NI (until that's capped) which is a low reward for locking more money away in what seems to be a political football to be kicked around as pension rules are becoming less advantageous over time.

I had hoped it would be worthwhile to make a few more years of heavy pension contributions. It goes against all my MSE instincts but the logical path seems to be to reduce my pensions contributions to only enough to get max employer matching and just pay the tax now?

At least I'm still getting some tax money back via the LISA bonuses and the yield on my new IL gilt holdings will support a higher future drawdown rate so I suppose the government is still doing something for me.

flaneurs_lobster

I'm being deliberately simplistic but why the terror of paying tax at a rate above basic? 

You still get to keep most of the money.

 

Qyburn

You write as if you think an increase in State Pension is a bad thing, making you worse off.

Dazed_and_C0nfused

Alexland said:

Apologies if this has already been covered elsewhere but is anyone else dumbstruck by how the window to draw income at basic rate is being shrunk by both how the SP will grow into the basic rate band and the freezing of the thresholds?

Even if we assume only 2% pa inflation until 2031 then it will only be possible to draw around £31k in today's spending power from a personal pension from SP age before it's taxed at higher rate. It might even be a smaller window if the SP growth is higher due to the triple-lock mechanics.

I've seen commentary in recent days suggesting to make the most of sal-sac before the cap comes in but for me I'm wondering what's the point as my healthy pension valuations mean anything more I put into my pension is likely to be taxed at higher rate in retirement even if I start drawing at the earliest possible date and withdraw the max capped TFLS.

All I would be saving from continuing heavy contributions is the 2% NI (until that's capped) which is a low reward for locking more money away in what seems to be a political football to be kicked around as pension rules are becoming less advantageous over time.

I had hoped it would be worthwhile to make a few more years of heavy pension contributions. It goes against all my MSE instincts but the logical path seems to be to reduce my pensions contributions to only enough to get max employer matching and just pay the tax now?

At least I'm still getting some tax money back via the LISA bonuses and the yield on my new IL gilt holdings will support a higher future drawdown rate so I suppose the government is still doing something for me.

Don't particularly disagree with your logic but it's a bit of a first world problem really.

Nebulous2

I have never paid higher rate tax. My salary has often been just under the threshold, at times the only thing keeping me clear of higher rate tax has been my pension contributions. Standard public sector contributions, not additional ones.

I retired with a moderate public sector pension, took a part-time job and have been putting a fair chunk of my wages from that into a SIPP.  

There is a distinct possibility that I will be at or slightly over the threshold for higher rate tax when my state pension kicks in. 

It's going to be well nigh impossible to get the money out of my SIPP, which has had basic rate tax relief, without paying higher rate tax, unless I stop work and do it now before SPA. 

I'm quite philosophical about it, I'm more fortunate than many people, but it wasn't a situation I expected to be in. 

We often talk here about the advantages of paying higher rate tax in the accrual phase and basic rate tax in drawdown. I appear to have managed to reverse this!  

DRS1

OP You don't mention the 25% tax free cash - perhaps you have already hit the Lump Sum Allowance?  If not then 40% relief on the whole contribution would outweigh 40% tax on 75% on the way out.

flaneurs_lobster

Nebulous2 said:

There is a distinct possibility that I will be at or slightly over the threshold for higher rate tax when my state pension kicks in. 

It's going to be well nigh impossible to get the money out of my SIPP, which has had basic rate tax relief, without paying higher rate tax, unless I stop work and do it now before SPA. 

You are only paying a higher rate of tax on that income over £50k. (I know it's a different number in Scotland).

Again, why is there this loathing of the higher rate? You'll get 60% of the income over the basic limit, it's not like anyone's going to have to sell a kidney here, why this desperate struggle to not pay a bit more?

ali_bear

It's true that more and more people including pensioners will be dragged into the higher band in coming years. 

Clearly taxes have to go up for everyone - I think even the Daily Mail would agree with this (by the way I laughed this morning when I saw their frothing-at-the-mouth headline) 

artyboy

Meh... I'm resigned to paying 40% on a substantial part of my pension drawdown in years to come. I'm still well ahead of the game in terms of relief and extra employer contributions on the way in, but it was only the IHT change that has brought me to wanting to pull it out at a level that would make my total gross income up to £100k/year.

 I'd rather take the tax hit and manage my money outside my pension, rather than wait for the next shake down...

There's also the faintly altruistic motive that I wouldn't want any executor of my estate to have to sift through that mess of working out what the IHT bill would be.

El_Torro

It's always been true that DC pensions are great up to a point. This was especially true when we had a Lifetime Allowance, though is still true (to a lesser extent) today. 

I made a conscious decision a couple of years ago to focus more on my S&S ISAs, thereby making fewer contributions to my pension. While I don't know yet if this was a financially sound decision I don't regret it. The rules can change at a whim so relying too much on one tax wrapper could be a bad gamble. 

Alexland

Thanks, no terror, but you guys have confirmed I'm probably not missing anything.

Agree it's a first world problem. If I reduce my contributions to only enough to get employer matching then with 2% growth above inflation (and half my pensions are now in IL gilts delivering that) then the 25% £268k cap at pension access ages will apply.

So additional contributions are only offering a 2% NI saving, until that's capped in a few years, which is not really enough compensation for the risk of adverse future pension policy changes. The £2k cap is so low even some of my contributions to get matching will be subject to NI.

End of an era of me pension stuffing sadly. I had hoped for a few more years.

Nebulous2 said:

It's going to be well nigh impossible to get the money out of my SIPP, which has had basic rate tax relief, without paying higher rate tax, unless I stop work and do it now before SPA. 

Yes looking back I regret making additional contributions from basic rate income earlier in my career as I would have only saved 32% (inc NI) at the time and if I had known this was going to happen then it would have been better to keep the headroom to continue to avoid 42% (inc NI) for the next couple of years.