Any benefits to contributing to workplace pension past former LTA value?

pb3

Hi Everyone,

As per the title, is it worth continuing to pay into a workplace pension, via salary sacrifice, if the value of one's pensions has reached the former LTA?

I am currently a higher rate tax payer and expect this to continue in retirement. This means that while I would get 40% tax relief on the way in for future contributions, the tax would also be 40% on the way out.

Other than the NIS savings and employer contributions (3% over the mininum in my case) - are there any additonal benefits to continued contributions?

I am toying with either ceasing contributions or reducing them to the minimum required to get the maximum employer contribution.

QrizB

I am toying with either ceasing contributions or reducing them to the minimum required to get the maximum employer contribution.

Personally I would keep paying in at least the minimum needed to get the employer contribution.

I'd also be getting my ducks in a row for early retirement!

gm0

there was not (LTA) and is not (LSA) any tax free cash above the standard threshold. Various protection regimens existed and were handled (variously) by the transition. So the personal "value" may or may not be the standard one.

Indexation of the allowance cap amount seems unlikely to keep pace with inflation given government's past record on keeping promises about that. i.e. say they will. Then don't.

Most people would examine the balance of their investments across tax wrappers. Once the tax relief and free money (employer contrib) has been exhausted. For the ltd self employed - the Corp Tax offset of company payroll and pension costs is also relevant. So it depends on employment type and plans through the decades to retirement.

The "penalty" regimen of the 25% extra rake at age 75 on real and inflationary growth of DC pensions as was most odious about LTA was abolished in the transition.

But we have had the IHT change for 2027 since then making it 40% for DC pensioners with residual pot (and perhaps a house paid up so they fall into IHT across the two). I heard that a tax credit will be applied to avoid double taxation to heirs.

Again that is "today" version. What we can say with any confidence is that it will keep changing and not for the most part in a more generous way. Make of that situation what you will.

Eggs/baskets. And not missing out on employer contribution/sal sac and other efficiencies as may still exist for a while.

Marcon

there was not (LTA) and is not (LSA) any tax free cash above the standard threshold. Various protection regimens existed and were handled (variously) by the transition.

There was and there is! The small pots regime allows you to take 25% tax free cash from each small pot which counts as 0% for LTA/LSA purposes.

gm0

Agree @marcon is correct. 3x small pot rules up front. 3 x 10k. So it's not nothing. Nor does it solve a wider issue on incentives.

Partial transfers to create them if you don't already have them. A tax opportunity caused by historic complexity and endless fiddling. Not big enough to bother with closing down. And used for what it was created for - it has a use. So just ending it doesn't work.

It's entirely legal and falls into appropriate tax management / avoidance not evasion. I am not a fan - but that's a political judgement on what's appropriate rather than the legal line of what is allowed.

Small pots is well supported by some mainstream SIPP platforms who can assist in transfers to reorganise pots to artificially create some small pots for this purpose if required. Other exisitng admin and schemes may not want to be bothered with any of it in situ. And with them your pot isn't small. So that position is not unreasonable in context. Transfer out always being available.

DRS1

The NIC benefit of salary sacrifice is going to get restricted. Perhaps keep it going until then?

Just hope someone doesn't say pensions don't pay NICs so we should increase the income tax rate on that income by an extra 2%.

ali_bear

Small pots are also useful for someone who is semi-retired i.e. can't quite make their mind up and could go back to work.

Back to the original question. The next govt could completely scrap the limit on TFC. It could happen.

cfw1994

https://forums.moneysavingexpert.com/discussion/comment/81976364#Comment_81976364

The correct answer 👍

If you have excess income, then be sure to load ISAs up - easy tax-free fast access during retirement for unexpected items, or luxuries (holidays/cars/etc).

If you have excess income and offspring, maybe consider gifting to them to reduce future IHT.

Nice problems to have 🎉

kinger101

https://forums.moneysavingexpert.com/discussion/comment/81976400#Comment_81976400

technically artificially creating small pots solely for the purpose of avoiding tax would fail due to general anti avoidance rules. I know people do it but it is evasion.

MallyGirl

OH is in this situation. I am hoping he is in his last year of employment so he is maximising the NI gain while it exists as he also gets the employer NI added. As said above, the rules could change again. I'll encourage him to do the 3 small pot wheeze when he does finally let go.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81976657#Comment_81976657

But it isn't solely for the purpose of avoiding tax. The main reason is to avoid triggering the MPAA. Not that many people are troubled by the LSA.