Choosing to pay over the annual allowance

Grumpy_chap

Earns £200k, pays £150k into pension

Earns £200k, pays £100k into pension

Earns £400k, pays £150k into pension

Is this thread just discussing scenarios or is there an actual case that the OP has?

expansion

https://forums.moneysavingexpert.com/discussion/comment/81951141#Comment_81951141

The title and opening question are clear enough. Your contribution so far has been:

1) a personal opinion about quality of life unrelated to the broader tax strategy question

2) talking about LTA which ended 3 years ago

If you have any valuable information please go ahead and provide it

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81951115#Comment_81951115

First point - it wasn't me that mentioned the LTA.

Second point - the LSA stops that 25% tax free withdrawal at just over £268k currently. So if you are contributing to a pension scheme valued at more than the old LTA then you are going to pay tax at your marginal rate on all your withdrawals (not just 75% of them as would be the case where you can use the 25% TFLS) which makes those additional pension contributions less attractive. Zero tax relief on the way in versus 20% (or more) tax on the way out is not attractive no matter the tax sheltered growth in the interim.

Dead_keen

https://forums.moneysavingexpert.com/discussion/comment/81951100#Comment_81951100

Fair enough. You don't want a trivial example that shows when it can be a bad idea. Let's make it a bit more real. So assume:

• your 8% pa return for 25 years, split 3% as dividend income taxed at the highest rate and the rest taxed at the highest CGT rate each year (so a pretty bad example as typically you'd not pay CGT each year if you owned it personally)
• no ISA allowance, annual exemption or other allowances, no spouse who pays a lower tax rate
• no difference between cash you invest personally or cash you invest via the SIPP as you use scheme pay (it's not a fair comparison if you don't use scheme pay as you need to pay the annual allowance tax charge out of taxed pay) - it's not a 40% entry penalty its whatever your marginal rate is (so could be 45%), but I'm ignoring the benefit of not having tapering of PA
• taxed at a marginal rate on the way out (SIPP would clearly be better if you died before age 75, but I'm an optimist)
• tax law does not change

If your marginal rate on retirement is 45% then having the investments personally makes arithmetical sense (SIPP drawdown gives 94.77%). If it is 40% on retirement then, on these random assumptions, SIPP drawdown gives 103.38%.

What's the past history of doing this? People would have been foolish do this from an income tax perspective because of the penal LTA. Ignoring an IHT play (which does not work from April 2027) the only time it made sense was to save tapering of the PA when the LTA was not in point.

Would I do this? Not a chance (100% vs the possibility of 94% or 103%). I've no idea of your age but with a SIPP you are locked in until 55 or 57 or whatever a future government says. Tax rules can change (e.g. marginal rate of 50%, LTA reinstated, etc) and it's a lot less flexible with things like IHT. And the more years that you do this, or the more likely you are to need extra cash to consume, gift or fill up ISAs, the more likely you will be of being a 45% taxpayer on retirement.

phlebas192

I doubt if many people here have earned anything like that much so cannot offer any practical experience. I certainly have not! That said, under current & proposed rules there is limited benefit in ending up with a SIPP worth more than £1m or so at the time you plan to retire since accessing the extra will likely end up being taxed at 40% through either IT or IHT. Tax breaks are designed to assist those with up to moderate wealth, not the very wealthy and whilst the latter can benefit from some the likelihood is that they are going to be reduced rather than enhanced over time.

Probably a scenario where you should be asking the opinion of an IFA used to dealing with very wealthy individuals rather than an internet forum.

newlease

This was mostly an IHT play but that loophole is being closed.

It's not uncommon for higher earners to contribute past the annual allowance to drop a tax bracket. Several times above the AA will not be common because very few people in the UK earn that sort of money.

Grumpy_chap

https://forums.moneysavingexpert.com/discussion/comment/81951150#Comment_81951150

No need to be rude!

The title and opening question:

Choosing to pay over the annual allowance. Curious how common this is. Example scenario: 200k earner pays 150k into SIPP

Was answered in my first response:

I don't think earning £200k and putting £150k into pension is common

The supplement about life choices was a secondary comment in that answer.

It is unfortunate you did not like my answer, but that is my answer. The forum is not just an echo chamber.

My comments about whether this was purely a hypothetical discussion or a real scenario was also pertinent, especially given the changes in the scenario base-line as the thread developed. In fact, none of the scenarios offered have enough information for a meaningful answer to really be given without a significant number of assumptions being made:

• What other pension provision does the individual have already?
• Other income now?
• Where in the UK does the individual reside?

Between the different scenarios, the individual might be making the "above AA contributions" from higher rate tax band, or might be making all the "above AA contributions" from additional rate tax band. Makes an even bigger change to the calculation if the "above AA contributions" lie in the band where personal allowance is withdrawn.

The reference to the LTA (now LSA) is also relevant as it makes a difference to the tax treatment on withdrawal.

FWIW, I might well be one of the contributors with the closest practical experience of aggressive pension contributions and able to comment appropriately, but you seem disinclined to know. I have had several years where my pension contributions have exceeded earned income including one where pension contributions totalled £113k while other income below PA.

I repeat my query as to whether there is a real question and specific circumstance here. If so, then fuller details will be required to allow the forum to provide a more accurate and appropriate response.

If there is no specific circumstance to be considered and there are just comments around hypothetical scenarios, then this is just discussion and I refer you to:

https://forums.moneysavingexpert.com/discussion/6160122/money-savers-arms-including-discussion-time-statement