100k+ earnings and max TFLS

Mistermeaner

Hi all 

Wanted to check my thinking 

age 46

current DC pot value £1.02mil

Earn 104k basic + (typical) bonus 10-30k 

Company max pay in 10% at employee 5% sacrifice (Sal sac scheme)

As I’m nearly at the max threshold for the 25% TFLS am I right in thinking that there’s no benefit in trying to stay under 100k earnings , and gauling as it is just pay the min 5% sal sac to get company contribution and take the 60% marginal tax hit ?

logic being I want to retire pre pension age so need to build an outside of pension pot, while there are benefits in Sal sac to thresholds to pay lower rate tax on way out than way in once you hit £1mil+ pot and 100k+ earnings there is little benefit in Sal sac any further and would be better served taking the tax hit but investing in isas outside of pension ? 

Thanks 

NoMore

Yes it's still worth it, you're paying a marginal rate of 60% on your earnings between 100k and 125k. Put it in the pension plus an employer match and draw it out at 40% instead. So that's a gain. It's still a gain (but smaller) if you pull it out at the same tax rate because of the employer match.

However you're desire for pre pension savings means you can't always be absolutely tax efficient so may need to pay more tax now to enable that.

QrizB

It really depends if you think the TFLS cap will change in the 12+ years before it becomes relevant to you.

It might be increased, it might be reduced, it might even remain unchanged (but that would be the first time that anyone's left it alone for that long).

DRS1

It is obviously worthwhile staying below the £100k level if you can.

I believe salary sacrifice also saves some NICs. (for a while)

Also don't think that your pension shouldn't grow just because of the LSA.  Think about the level of income it will be able to provide.  If you have got used to an income of £100k pa you will need a pot that is a lot bigger than £1mill to provide it.

Yes some of that can come from ISAs Premium bonds gilts and so on but if your salary keeps on going up you will start to hit the annual allowance and maybe tapered annual allowance which will restrict what you can pay into the pension scheme and your ability to stay under the £100k level.  So 60% tax is coming your way but put that day off for as long as you can.

HedgehogRulez

Don’t forget the tax benefits of dying before 75!

Mistermeaner

Thanks all - previously I have been sacrificing to stay below 100k in reported earnings , however when doing this it doesn’t leave much free cash to invest in pre pension savings

It’s funny the behaviours the tax cliff edges can produce and as DRS1 says it’s actually quite hard to save for a pension consummate with 100k plus earnings as you’re fighting punitive tax at every turn - nice problem to have etc but all of the tax basically acts like a cap that says though shalt not earn more than 100k…. Real disincentive for me to strive beyond this level hence the plan is to spend way less than 100k per annum and retire early 

ali_bear

First of all, the value of investments can go down as well as up. So there is no absolute guarantee that your current DC pot will be that big in future years. Having said that it does seem likely that you will be paying at least some tax at 40% on your pension income (after minimum retirement age). You should definitely aim to be not paying any tax at the rates above that i.e. keep taxable pension income below 100k. 

It depends a lot on what age you intend to retire and how big the gap is to the minimum pension age. But how much do you like working and earning money, compared to not working? Is there a halfway house, like going part-time, or a job that you would love doing but pays little. 

With the pension and other investments some careful modelling and proper paid-for advice would be a good idea, no?

ORC

If you haven’t already, I'd check whether your pension has a protected pension age (mine does, I can access it at 55). You may not need as much cash outside of the pension as you think.

MEL1981

I'm in a similar position but a few years behind you. Pension sitting at 860k and I'm 44 contributing Max 60k per year to just sneak in below the 100k income bracket. Think I'll contribute another few years with the max then tail is down accepting the hit. I need to ramp up my bridging part... As want to FIRE at 50.

Guess it depends when you want to retire and hope much of a war chest you have to bridge at present? 

Mel

Albermarle

QrizB said:

It really depends if you think the TFLS cap will change in the 12+ years before it becomes relevant to you.

It might be increased, it might be reduced, it might even remain unchanged (but that would be the first time that anyone's left it alone for that long).

One issue is that even if it remains unchanged, it reduces in real terms due to inflation. ( one reason maybe why it will probably not get actually reduced) 
So if you had a £1.07 M pot today and even if the next 12 years are not that great investment wise, you would hope/expect the pot to at least to increase with inflation, so would be maybe getting on for £1.5M whilst the LSA could well remain at £268K.

Mistermeaner

Thanks all for input. In order to stay under 100K and avoid the 60% tax i need to sacrifice ~20% (to which the company adds 10%) which is my current level - this see's me adding 30K a year to the pension

At this level of sacrifice i can save maybe 1K a month outside of the pension.... as the goal is to retire well before accessing the pension these ratios just dont add up.... the pension is becoming over stuffed for the sake of tax efficiency

Much while it feels illogical i am going to drop my sacrifice level to the 5% min for a bit (company still put in 10%) so i'll still be adding ~15K per annum to the pension but i should have an extra £700/month or so to put into ISA's - i am aiming to put a min of 20K per annum into an ISA to build up the pre pension war chest

Will see how it goes... my tax efficiency logic may override me at some point