Lifetime allowance

alfabet · 1 December 2019 at 9:21PM

I am 39 with a current DC pension pot of £190k.

I am currently contributing approx. £23k pa, making hay with higher-rate tax relief. I am lucky that my employer offers salary sacrifice, generous contributions of their own, and a 6% NI uplift on additional voluntary contributions.

I would like to retire at 60.

I am concerned about the lifetime allowance. Should I be?

anselld · 1 December 2019 at 10:16PM

You are right to keep an eye on it but you are a long way from needing to be "concerned" for the time being.

gm0 · 1 December 2019 at 10:24PM

A few fellow consumer grade thoughts around this.

Nobody really *knows* 15 years out - the variables are too many. When I was you most of this iffy legislation full of retrospective and unintended consequences had yet to be dreamed up in the treasury.

Political risk (further changes to the loads made already since A-day) - inevitable.
Actual inflation vs "promised" - CPI indexation of the allowance
GBP currency devaluation scenarios and impact on cash values in a depreciated currency
Your career arc and contributions shape within AA (and what happens to AA)
Investment returns until retirement and sequence of return if you are saving hard into a 50% correction and recovery
Inflation and returns from 55 - 75 so another 20 years

Now - that doesn't mean you shouldn't make some assumptions based on current rules and model it out to 55/60 and then on to 75. A blended historic return figure for your mix of equities and any bonds, and an inflation number + your contribution profile. Simplistic but if it shows a problem then you have one. Ideally you would model an S curve around the long term trend line to model buying (more) cheap units as part of the journey.

For what its worth - make sure you have understood the ugly backstop 2nd test at age 75 (*cash* growth of crystallised (so inflation/devaluation impact and investment return)

So in essence if you do end up saving so much that a good returns scenario takes you towards the limit before retirement then you will likely end up needing to crystalise promptly and then to draw the growth reliably to 75 to stop it tipping over into the penalty zone (making good use of annual tax allowances). If your other income sources and desired retirement timing make this difficult (income tax marginal rate) then you will have to play with the profile. ISA recycling of tax free cash is also used to mitigate the LTA trap - if the cash is not used for mortgage debt and consumption. But understand the IHT implications of the various choices. (SIPP outside estate exemption).

IFAs often don't like crystallising or TFLS + recycling if not needed for current day consumption primarily for the IHT reason. But "at LTA" is (currently) an edge case and it will make more or less sense to do so or not based on your circumstances, goals, inheritance, charitable gifting, health, other income etc. etc.

The only real certainty is that it will all have changed more than once before you get there.

cfw1994 · 1 December 2019 at 10:35PM

anselld wrote: »

You are right to keep an eye on it but you are a long way from needing to be "concerned" for the time being.

I would very much agree with this. Good to be aware of it, but 20+ years is a long time in pensions legislation, as well as fund growth!

Perhaps revisit it in 10-15 years when you are that bit closer.

Meanwhile, if I had told my 39-year old younger self anything on this, I would have told him to invest in ISAs as well as the pension, to give me more 'tax-free' money access to help allow me to retire before my pension is accessible. NOT at the expense of not funding the pension, but in addition.
At 39, I would urge him to take out a S&S LISA before he turns 40, and get 4k each year in it if possible: the Government would add 1k, he could add for the next 11 years (to the age of 50) and access it from the age of 60. A low-cost S&S LISA in a reasonably adventurous tracker fund.

(actually, I couldn't have, of course, because LISAs didn't exist when I was 39....but you get the idea:rotfl:)

Thrugelmir · 1 December 2019 at 10:56PM

alfabet wrote: »

I am concerned about the lifetime allowance. Should I be?

You are someway short of the LTA at the moment. Why do you believe that it might be a problem in the future? Your choice of investments and the return there on is likely to be a major factor over the next 20 years.

jaybeetoo · 2 December 2019 at 8:28AM

Don’t worry about it (yet). There’s plenty of time for future governments to completely change the pension system. The system has been changed many times during my working life.

alfabet · 3 December 2019 at 2:53PM

Thank you all for your replies.

gm0:

Now - that doesn't mean you shouldn't make some assumptions based on current rules and model it out to 55/60 and then on to 75. A blended historic return figure for your mix of equities and any bonds, and an inflation number + your contribution profile. Simplistic but if it shows a problem then you have one.

Thanks for the prod, I ran some basic numbers in a spreadsheet. Assuming LTA grows by 2% CPI, I achieve 6% pa fund growth, and my contributions also grow by CPI, I would exceed the LTA at age 58.

Given there is the potential for my contributions to grow by more than CPI this is a slight alarm bell for me?

Thank you for the points about IHT and the 2nd test at age 75 - I was unaware of this.

cfw1994:

At 39, I would urge him to take out a S&S LISA before he turns 40, and get 4k each year in it if possible: the Government would add 1k, he could add for the next 11 years (to the age of 50) and access it from the age of 60. A low-cost S&S LISA in a reasonably adventurous tracker fund.

Interesting, I had dismissed LISAs because the tax relief isn't as good (in comparison to pension contributions) and access from 60 doesn't help with the "bridge to pension" years. Why do you think it's worth having one?

Thrugelmir · 3 December 2019 at 3:36PM

alfabet wrote: »

Thanks for the prod, I ran some basic numbers in a spreadsheet. Assuming LTA grows by 2% CPI, I achieve 6% pa fund growth, and my contributions also grow by CPI, I would exceed the LTA at age 58.

Is your portfolio invested in such a manner to achieve a 6% PA compound growth rate. Investment returns are rarely linear.

alfabet · 3 December 2019 at 4:00PM

Is your portfolio invested in such a manner to achieve a 6% PA compound growth rate. Investment returns are rarely linear.

It's achieved 9% pa over the last five years (100% all-world equities in a bull market). 9% is obviously not sustainable long term. I am lucky that fund fees are 0.1% and my employer provides a trustee so I do not have any platform costs.

If I change the modelling to 5% pa growth then I hit the LTA at age 60; 4% pa at age 64.

One thing that occurs to me is that when changes are inevitably made, they are likely to make higher-rate tax relief less attractive (it could even be abolished). So I'm probably right to make large contributions now, because they can compound later.

Triumph13 · 3 December 2019 at 4:26PM

I'm very familiar with your position as my employer also adds 6% to salary sacrifice contributions. I have ended up a little over the LTA, but it's worth noting that, with the big assumption that tax rates don't change, any contributions you make that end up over the LTA still net you a better return than that available to a basic rate taxpayer without sal sac once they have used up their PA.
£58 net cost to you gives £106 in the pension. Taxed at 40% (LTA charge + basic rate) gives you £63.60 after tax for a 9.7% net profit vs 6.3% for a basic rate person (£80 =>£100 =>£85). In other words, don't worry too much about going over as long as you won't pay HRT in retirement.

Mick70 · 3 December 2019 at 5:12PM

I doubt it will be an issue for you and by that age it will have raised a fair amount also or political changes could mean it is even scrapped, who knows

Lifetime allowance

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