Pension taper - what next?

I'm a long time lurker on this thread and hoping for some advice! Three years ago I moved into a very lucrative job which automatically put me into the additional rate tax band. My earnings also mean that the full taper applies so I am limited to £10,000 of pension contributions per annum. I probably didn't twig on to the effects of this early enough, but have now also used my full pension allowances from the previous three years. My pension is worth approx £190,000 and I am 34 (my spouse pays higher rate tax so I understand that no transfer of allowances is possible). I will continue to pay in £10,000 per year and I also contribute to a LISA (for retirement, I already own property). My questions are as follows (i) my contributions + employer contributions will exceed £10,000 (it seems silly not to get free money from my employer but the combined amounts will exceed £10k) - is there any reason not to do this?; and (ii) will my pension and the future tapered contributions be enough to have a comfortable retirement (if I retire at 60 I could only add a further 260k to the pot plus 80k LISA savings until 50). Apologies if this seems a bit of a "first world problem"!
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  • kidmugsy
    kidmugsy Posts: 12,709
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    You'll have to pay tax on the amount by which the total contributions exceed your reduced annual allowance. OR, there's a thing called "scheme pays" by which it's your pension scheme that pays the tax.

    The rules on the scheme being obliged to pay the tax sound unhelpful to me, but it's conceivable that the scheme can opt to pay the tax. Experts will doubtless drop by soon.
    Free the dunston one next time too.
  • Brynsam
    Brynsam Posts: 3,643
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    I think this really is a case where getting expert advice (the sort you pay for!) is well worth it, not least because there are many considerations including your wife's financial position.
  • EdSwippet
    EdSwippet Posts: 1,584
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    kidmugsy wrote: »
    The rules on the scheme being obliged to pay the tax sound unhelpful to me, but it's conceivable that the scheme can opt to pay the tax.
    They are indeed unhelpful. A scheme is obliged to pay the tax out of the pension if the £40k allowance is exceeded, but it is optional if the taper is exceeded. Some schemes do, some don't.

    Where the scheme does not pay, and you pay the tax on the contributions yourself out of other (post-tax) income, you will have to pay tax again on the pension withdrawals, leading to pure double-tax. So, put in £100, pay perhaps £40 in tax. Later, withdraw £100, pay between £15 and £55 in tax (depending on marginal bracket, and either PCLS tax free or LTA tax penalty). At the lower end of things, a "mere" 55% tax rate; at the higher end, 95%. (The absolute worst case is 60% tax on the way in and 55% on the way out, for a total 115% tax.)

    Where the scheme pays, the results are marginally less horrific. Put in £100, scheme pays £40, withdraw the remaining £60 and pay between £9 and £33 for a tax range of 51% to 73% (and a worst possible case of 82% tax).

    Given those numbers, and knowing whether a scheme will or will not pay tax if you contribute above the taper, it should be possible to work out whether to continue contributing. The answer will revolve around how much the employer contributes, how much the employee has to contribute, and whether or not the employer will pay salary in place of pension contributions.
  • kidmugsy
    kidmugsy Posts: 12,709
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    Brynsam wrote: »
    getting expert advice (the sort you pay for!) is well worth it

    Would I be right to guess that it's a rather specialist field, not necessarily one for your nearest convenient IFA?
    Free the dunston one next time too.
  • mark55man
    mark55man Posts: 7,905
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    I would also seek advice on the savings board as there are a small number of threads there on managing tax outside of pensions eg VCT / Maximising tax free interest - gilts / gold ....


    but expert specialist advice seems worthwhile
    I think I saw you in an ice cream parlour
    Drinking milk shakes, cold and long
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  • dunstonh
    dunstonh Posts: 116,040
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    kidmugsy wrote: »
    Would I be right to guess that it's a rather specialist field, not necessarily one for your nearest convenient IFA?

    It requires no specialist knowledge or understanding and most IFAs will have people in this situation on their books.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • grey_gym_sock
    grey_gym_sock Posts: 4,508 Forumite
    edited 22 June 2018 at 6:35PM
    mark88man wrote: »
    I would also seek advice on the savings board as there are a small number of threads there on managing tax outside of pensions eg VCT / Maximising tax free interest - gilts / gold ....

    well, after the OP's limited pension contributions and LISA, the next port of call would usually be the remaining £16k of ISA allowance (to go into a S&S ISA).

    then, assuming OP and spouse are looking at their finances jointly, is the spouse making the maximum pension contributions they can that will attract 40% relief? and also using their full £20k ISA allowance (perhaps including £4k into LISA)?

    only after exhausting all the above (which may in fact be the position, but i don't think we know this from info provided so far) would it be usual to go on to more obscure tax wrappers (e.g. VCT) or just to hold investments in a taxable account.
  • Nimbot
    Nimbot Posts: 2 Newbie
    Thanks everyone! I do fill my ISA every year (with 4K now being allocated towards a LISA). I am mortgage neutral (signed up to a five year fix in 2014 thinking rates couldn't get any lower.... will most likely pay it all off next year). I have the max amount in premium bonds (I don't get any personal savings allowance so 1.4 percent tax free isn't too terrible), have all the usual regular savers (despite the interest rate being effectively halved for me) and some general investment accounts. My husband (lol) puts nearly half his salary into his pension so definitely avoids higher rate tax!

    It looks like the general consensus is to get an IFA so I will look into that but thanks so much for all of the suggestions. Everyone is so nice and helpful!

    Nim.
  • LHW99
    LHW99 Posts: 4,137
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    Premium bond prizes are tax-free!
  • OJ32
    OJ32 Posts: 9
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    Hi Nimbot,

    I am in a very similar position. Aged 33 and my pension has £230k in it but I am limited to only adding £10k pa. My wife doesn't work at the moment so she is limited to a very minimal pension contribution (£2,880). It is hard to see pension savings forming a particularly relevant chunk of our overall wealth in say 20 or 30 years time assuming all goes well.

    My employer pension contribution is £6k pa and I AVC £4K. At the age of 35 my employer contributions step up and there is a matching facility that kicks in so I will also be faced with the same choice of turning down free money or paying the tax.

    As you say it is a very first world problem, but the taper allowance effectively makes it impossible for people that earn high incomes from early in their career to build up the type of pension pot historically available. You could contribute £255k per year as recently as 8 years ago.

    My position does diverge from yours at this point though as instead of filing my ISA allowance and finding places to park extra savings, I have a £1m mortgage to contend with!
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