Choosing to pay over the annual allowance

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Curious how common this is. Example scenario: 200k earner pays 150k into SIPP. Tax relief is payed back through SA. Without tax relief there is a 40% plus entry penalty as well as the eventual 40% plus on withdrawal. However while inside the SIPP there is no CGT (24%) or DT (36%). 2 CGT events offset the tax entry penalty.

Was this common before the IHT changes but expected to reduce? Is it common for younger HNWI?

Grumpy_chap

https://forums.moneysavingexpert.com/discussion/6662765/choosing-to-pay-over-the-annual-allowance

I don't think earning £200k and putting £150k into pension is common. Most people earning £200k will wish to have more than £50k available in the current year. There is value to enjoying life.

Paying £150k into pension will very soon reach Lifetime Allowance.

Dead_keen

https://forums.moneysavingexpert.com/discussion/6662765/choosing-to-pay-over-the-annual-allowance

You may want to check your maths with a spreadsheet. For example, I you buy something for £100, sell it at £101, buy something else and sell it at £102 the the capital gain will be £2.00 and you will pay 48p CGT (ignore annual exemption bid offer spread and fees). If you got know tax relief on the excess SIPP payments and did the same in the SIPP you would get £40.80 of tax.

There are some circumstances where you get a better answer by overpaying into a SIPP (eg with regard to the tapering of personal allowance) but 2x 24% being better than 40% is not one of them.

DRS1

I have to admit I do wonder what high earners do about pension contributions. Even someone on £360k will have a tapered annual allowance of £10k and £10k for someone earning £360k plus a year is not going to go very far. So what do they do? Use VCTs or EIS or SEIS? Or contribute to a pension and take the tax hit? Now the tax relief on VCTs has been reduced (again) will "excess" pension contributions become more attractive?

Jeremy535897

https://forums.moneysavingexpert.com/discussion/comment/81950494#Comment_81950494

If you earn £200,000 and put £100,000 into a SIPP, assuming £60,000 annual allowance with no scope brought forward, your ANE is reduced to £100,000, because the penalty for overpaying the £40,000 is not included. Consequently, although you will pay 40%/45% on the overpayment, you keep all the personal allowance.

Jeremy535897

The lfetime allowance has gone.

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https://forums.moneysavingexpert.com/discussion/comment/81950494#Comment_81950494

It was an example. Make it 400k earner putting 150k if you are stuck on this point. The point is deliberately going over the 60k annual allowance. If you don't know that's fine don't have to comment. There is no lifetime allowance anymore so this is a non issue.

DRS1

The LTA may have gone but the LSA is there and since the tax free lump sum is a major benefit of a pension scheme going over that is a factor to take into account - especially if you don't get any tax relief on the contributions.

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https://forums.moneysavingexpert.com/discussion/comment/81950711#Comment_81950711

In what world is a 2% gain over a SIPP's lifetime realistic? MMFs have been bringing in guaranteed 4% per year. Long term global/US market average is 8%. Even the FTSE is 5%.

The 40% entry penalty is canceled after 25 years of 4% annual capital gains or 13 years of 8% gains. Even shorter when gain is from dividend distribution over appreciation.

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https://forums.moneysavingexpert.com/discussion/comment/81951085#Comment_81951085

The initial argument against was the LTA limit which was incorrect. LSA is a benefit which only strengthens the scenario. LSA "only" giving 25% tax free withdrawal after tax shielded growth for years would beat the initial 40% penalty.

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https://forums.moneysavingexpert.com/discussion/comment/81950942#Comment_81950942

True the PA remaining will reduce the tax hit but it is relatively small in the big picture so I ignored it to keep figures simple.