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?