Pension strategy for higher earners

clifford_the_dog · 9 January 2018 at 6:57PM

Hi
I'm curious how other people are approaching their pension saving strategy since the annual tax relief limit on annual contributions tapered down to £10,000 for higher earners making over about £200k.
In doing my tax return it has dawned on me that I have inadvertently created a tax bill for myself in making contributions via salary sacrifice that take me way over the 10k limit and it crosses my mind that perhaps from now I on I should just make the minimum employee contribution into my company scheme (3%) instead of 10% and let the company I work for continue to contribute their 7%.
I am 48 and my pension pot is worth about £650K. I figure that with the right investment strategy this could get up to the £1M limit over the next 12 years anyway (I'd like to have the option to retire when I'm 60).
Used to have an IFA but he decided to be a teacher, I probably need to find a new one........

OldMusicGuy · 9 January 2018 at 7:56PM

My company offers the option stop all contributions when you reach the 10K threshold and they will then pay their contribution just as salary. Obviously that is taxed but it gives us the option to continue getting some money in.

Regarding saving strategy, I was lucky enough to catch the tail end of the high annual pension allowance and was able to save significant amounts into my pension in the last few years of my career (I am retiring in 7 weeks). Sadly that's not much help I am afraid, apart from me sounding smug.

colesy · 9 January 2018 at 8:23PM

Self employed so no negotiation with an employer required. £10k gross into pension, £20k into ISA, £20k into wife’s ISA. Any excess going into taxable account but considering EIS and VCT investments, although a little uncomfortable with the risk factor there.

EdSwippet · 9 January 2018 at 11:42PM

clifford_the_dog wrote: »

I am 48 and my pension pot is worth about £650K. I figure that with the right investment strategy this could get up to the £1M limit ...

The LTA is (currently, at least) indexed for inflation, but even so with 4% of above-inflation growth then by my reckoning your current £650k pot would grow to pretty much exactly reach it in 12 years even without any further contributions. So you will want to watch the angles here carefully.

Taking salary instead is probably the best option for you at this point, if your employer allows. At least you will then have full control over any future pension payments you might make into (say) a SIPP.

Unfortunately not all employers will pay salary in place of pension contributions. As a counterexample to OldMusicGuy, I was painted into a corner by the LTA drop from £1.25mm to £1mm that took effect in April 2016. My employer steadfastly refused outright to offer salary in place of pension contributions. So, effective March 2016 they became my ex-employer. I simply retired four years or so earlier than originally planned.

kidmugsy · 10 January 2018 at 12:03AM

clifford_the_dog wrote: »

I should just make the minimum employee contribution into my company scheme (3%) instead of 10% and let the company I work for continue to contribute their 7%.

But 10% of £200k is £20k, which exceeds the reduced annual allowance. Does that mean you'll be paying tax on the approx £10 excess? At what rate?

clifford_the_dog · 10 January 2018 at 7:29AM

Yes, I’d be paying tax on that part as well which is why some of the posters here are stressing the importance of seeing if my employer will pay salary instead of pension

Thank you to everyone who has replied, very useful and confirms what I suspected

adindas · 10 January 2018 at 7:46AM

colesy wrote: »

Self employed so no negotiation with an employer required. £10k gross into pension, £20k into ISA, £20k into wife’s ISA. Any excess going into taxable account but considering EIS and VCT investments, although a little uncomfortable with the risk factor there.

This is not to argue jst personal though I fail to see the benefit of putting it on ISA, as the money used to subscribe to ISA is already taxed at higher rate at source.

In the meanwhile the OP is already 48yo so within seven years he could get access to some of his pension. Is it not better to put it on SIIP. COuld anyone who know cous shed the light how ISA here will be a better option then SIPP ??

TheTracker · 10 January 2018 at 8:59AM

adindas wrote: »

COuld anyone who know cous shed the light how ISA here will be a better option then SIPP ??

I don’t think anyone has suggested an ISA is better than a SIPP. A side effect of being paid very well is that it’s often unavoidable but to receive more post tax money than you can spend, in which case one is wise to place up to £20k of it in an ISA.

EdSwippet · 10 January 2018 at 2:57PM

adindas wrote: »

In the meanwhile the OP is already 48yo so within seven years he could get access to some of his pension. Is it not better to put it on SIPP?

Once you start breaching pension allowances, the effective tax rates and outcomes can make for unpleasant reading.

Someone exceeding the taper would face 45% tax on contributions, but remember that pensions are also taxable again on the way out. Allowing for the 25% tax free lump sum this pension saver might lose a further 30% to tax on withdrawal, giving an overall 61.5% loss to tax. Clearly just taking the cash as salary here is better.

The numbers for breaching both the taper and the lifetime allowance are truly grim. 45% tax on contributions, and then both a 25% lifetime allowance excess charge and normal marginal tax of say 40% on withdrawal creates a total 75.25% loss to tax. Ouch.

Jaguar_Skills · 10 January 2018 at 3:55PM

clifford_the_dog wrote: »

Hi
I'm curious how other people are approaching their pension saving strategy since the annual tax relief limit on annual contributions tapered down to £10,000 for higher earners making over about £200k.

Does this only apply for people earning over £200k?

I am currently at about £135 - 150 and trying to put as much as possible in my pension - well around 30k a year plus my workplace contributions which may get it to £35k ish.

Could someone clarify. Sorry for hijacking the thread.

TheTracker · 10 January 2018 at 4:04PM

Jaguar_Skills wrote: »

Does this only apply for people earning over £200k?

I am currently at about £135 - 150 and trying to put as much as possible in my pension - well around 30k a year plus my workplace contributions which may get it to £35k ish.

Could someone clarify. Sorry for hijacking the thread.

Basically it starts applying at £150k. For every £2 of income over £150k you lose £1 of allowance, to a maximum reduction of £30k. So for £210k your allowance is only £10k. In your case, £30k contribution is safe while your income (including contribution) is under £170k, and £35k while under £160k.

Pension strategy for higher earners

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