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  • FIRST POST
    • saver_ali
    • By saver_ali 8th Mar 18, 10:29 PM
    • 19Posts
    • 3Thanks
    saver_ali
    In danger of hitting LTA
    • #1
    • 8th Mar 18, 10:29 PM
    In danger of hitting LTA 8th Mar 18 at 10:29 PM
    My husband is currently at 89% of LTA and Iím wondering if we should stop contributing to his SIPP. Iím worried that with reasonable growth he will soon exceed the LTA.

    He is 59, and our current thinking is that he will retire in about a year from now, in around Spring 2019.

    He pays £10k per year into his employerís DC scheme.

    We have also been putting £25k (£20k + £5k top up) into a SIPP for the last few years, to maximise tax relief as he is a higher rate tax payer.

    34% of the LTA is from a DB scheme, forecast to be £17k pa, that he can take in January 2024, aged 65.

    He has about £550k in a SIPP and various DC pensions.

    We havenít made the 2017-18 SIPP contribution yet, but are about to do so. Is this sensible?

    And should we aim to do the same for 2018-19, which will be his last year in work.

    [I am already drawing from a £12k pa DB scheme, and have £70k in a DC scheme. We focussed on paying into my husbandís pension as he was a higher rate tax payer.]

    Thanks for any suggestions.
Page 1
    • TcpnT
    • By TcpnT 8th Mar 18, 11:00 PM
    • 117 Posts
    • 61 Thanks
    TcpnT
    • #2
    • 8th Mar 18, 11:00 PM
    • #2
    • 8th Mar 18, 11:00 PM
    The first two questions that occur to me are:

    What is his employers contribution to the company scheme and is your husband maximising it?

    Are you still working and if so do you have relevant earnings that would allow him to contribute to your SIPP?

    His fund would need to hit 660K to hit the LTA - that's a 20% increase on it's present value. the investment gain in a year is pretty unlikely to be that much so I think you are safe enough to make this years SIPP contribution and probably next years as well. Barring significant market falls in the next year that should fill his SIPP quite neatly. If you do go slightly over the LTA it's not the end of the world as it's only going to be a small tax charge - or you could leave the excess uncrystallised and worry about it in the future. Maybe the rules will change and one day you will be able to access it LTA tax free.
    • saver_ali
    • By saver_ali 8th Mar 18, 11:19 PM
    • 19 Posts
    • 3 Thanks
    saver_ali
    • #3
    • 8th Mar 18, 11:19 PM
    • #3
    • 8th Mar 18, 11:19 PM
    Thanks very much for the reply.

    Yes, he's maximising his employer contributions in his current job. The £10k includes the company contribution.

    I stopped working a couple of years ago, so can only contribute the £2880 pa to my SIPP.

    The LTA has only become a worry since the stock market rises last year.
    • Brynsam
    • By Brynsam 8th Mar 18, 11:43 PM
    • 936 Posts
    • 606 Thanks
    Brynsam
    • #4
    • 8th Mar 18, 11:43 PM
    • #4
    • 8th Mar 18, 11:43 PM
    The LTA has only become a worry since the stock market rises last year.
    Originally posted by saver_ali
    It's a worry a lot of people would like to have.

    If the value of all of your pension benefits, across all schemes, exceeds the lifetime allowance, any excess attracts a tax charge of 25% if it is withdrawn as an income (for instance from an annuity or a drawdown arrangement) or 55% if it is withdrawn as a cash lump sum.

    Given the tax reliefs/employer contributions he will have received along the way, that isn't exactly a disaster if he does exceed the LTA. Only the excess is taxed like this. Keep an eye on the figures, make sure they are up to date and take a view on a regular basis. You have to decide which is 'worse' - not getting tax relief on his contribution to his SIPP, or paying a bit of tax if goes over the LTA. Neither is going to leave you penniless in retirement!
    • saver_ali
    • By saver_ali 9th Mar 18, 12:00 AM
    • 19 Posts
    • 3 Thanks
    saver_ali
    • #5
    • 9th Mar 18, 12:00 AM
    • #5
    • 9th Mar 18, 12:00 AM
    Thanks. That is reassuring. I appreciate we are in a fortunate position, but we have worked very hard to get here, paying in as much as we could afford. We're savers rather than spenders!
    If we don't pay into his SIPP this year he will get a hefty tax bill, as his tax code assumes he will have paid into it.
    • kidmugsy
    • By kidmugsy 9th Mar 18, 12:11 AM
    • 10,539 Posts
    • 7,219 Thanks
    kidmugsy
    • #6
    • 9th Mar 18, 12:11 AM
    • #6
    • 9th Mar 18, 12:11 AM
    My husband is currently at 89% of LTA and Iím wondering if we should stop contributing to his SIPP. ...

    34% of the LTA is from a DB scheme, forecast to be £17k pa, that he can take in January 2024, aged 65.
    Originally posted by saver_ali
    If it becomes enough of a problem to vex you, surely he could simply draw his DB pension a little early?
    Free the dunston one next time too.
    • Brynsam
    • By Brynsam 9th Mar 18, 1:01 AM
    • 936 Posts
    • 606 Thanks
    Brynsam
    • #7
    • 9th Mar 18, 1:01 AM
    • #7
    • 9th Mar 18, 1:01 AM
    If we don't pay into his SIPP this year he will get a hefty tax bill, as his tax code assumes he will have paid into it.
    Originally posted by saver_ali
    Yes, but if you don't pay into his SIPP, you will have the money from that 'non-contribution' which will cover the tax bill several times over. He could always put a lower amount into his SIPP, which would both reduce the tax bill and reduce the chances of hitting the LTA.
    • EdSwippet
    • By EdSwippet 9th Mar 18, 9:09 AM
    • 706 Posts
    • 661 Thanks
    EdSwippet
    • #8
    • 9th Mar 18, 9:09 AM
    • #8
    • 9th Mar 18, 9:09 AM
    The LTA has only become a worry since the stock market rises last year.
    by saver_ali
    It's a worry a lot of people would like to have.
    Originally posted by Brynsam
    It's a worry that nobody should have.
    • saver_ali
    • By saver_ali 9th Mar 18, 9:43 AM
    • 19 Posts
    • 3 Thanks
    saver_ali
    • #9
    • 9th Mar 18, 9:43 AM
    • #9
    • 9th Mar 18, 9:43 AM
    Thanks kidmugsy. I did look at illustrations for taking the DB pension early but the annual amount drops at a horrendous rate. If he took it next year, which is 5 years early at 60, it drops from £17k to £10k per annum.
    • Brynsam
    • By Brynsam 9th Mar 18, 9:48 AM
    • 936 Posts
    • 606 Thanks
    Brynsam
    Thanks kidmugsy. I did look at illustrations for taking the DB pension early but the annual amount drops at a horrendous rate. If he took it next year, which is 5 years early at 60, it drops from £17k to £10k per annum.
    Originally posted by saver_ali
    That doesn't sound right - it's a reduction of over 10% a year, which is way out of line with market rates. I'd check again and ask the scheme to confirm the early retirement reduction factor [the % reduction for each year the pension is taken early] and when this factor was last reviewed.
    • Triumph13
    • By Triumph13 9th Mar 18, 10:17 AM
    • 1,180 Posts
    • 1,463 Thanks
    Triumph13
    What's the risk if you put too little in? You miss out on a 41.67% return on investment (£60 net becomes £100 in pension becomes £85 when withdrawn - assuming 20% tax in retirement)


    What's the risk if you put too much in? As long as you don't end up being a higher rate tax payer in retirement (or tax rates go up) then you've tied up money in a pension scheme for no net benefit or loss (£60 => £100 => £75 after LTA charge =>£60 after 20% tax)


    Definitely pay in for this tax year. Next year keep paying into work scheme to get employer's contributions, but maybe hold off paying to SIPP until near the end of the tax year just in case markets have performed incredibly well. Then when they haven't, pay the max in.


    Once retired take the TFLS immediately to get any future above-inflation growth protected from the LTA charge (you'll need to move it into ISAs over several years). Then take the maximum possible without paying higher rate tax every year to run it down a bit to avoid a) higher rate tax once DB and SP on line and b) any LTA charge at age 75.


    You've worked hard and saved hard so enjoy your retirement!
    • saver_ali
    • By saver_ali 9th Mar 18, 1:08 PM
    • 19 Posts
    • 3 Thanks
    saver_ali
    Thanks kidmugsy. I did look at illustrations for taking the DB pension early but the annual amount drops at a horrendous rate. If he took it next year, which is 5 years early at 60, it drops from £17k to £10k per annum.
    Originally posted by saver_ali
    I thought it was strange too, but it's from a newly available online tool provided by Mercers, who manage the pension. I will get in contact with them early next year to get a proper quote for retiring at 60. Thanks for your comments.
    • saver_ali
    • By saver_ali 9th Mar 18, 1:21 PM
    • 19 Posts
    • 3 Thanks
    saver_ali

    Definitely pay in for this tax year. Next year keep paying into work scheme to get employer's contributions, but maybe hold off paying to SIPP until near the end of the tax year just in case markets have performed incredibly well. Then when they haven't, pay the max in.


    Once retired take the TFLS immediately to get any future above-inflation growth protected from the LTA charge (you'll need to move it into ISAs over several years). Then take the maximum possible without paying higher rate tax every year to run it down a bit to avoid a) higher rate tax once DB and SP on line and b) any LTA charge at age 75.


    You've worked hard and saved hard so enjoy your retirement!
    Originally posted by Triumph13
    Thanks. That's very helpful, especially the suggestion about taking the TFLS straight away when he actually retires. I guess that means consolidating all the DCs into the SIPP to make it easier to manage.

    I feel more comfortable with making this year's SIPP contribution now.
    • The_Doc
    • By The_Doc 9th Mar 18, 3:21 PM
    • 80 Posts
    • 58 Thanks
    The_Doc
    If he earns between £100K and £123K, then he is effectively paying 60% income tax on that, so that would be an even bigger reason to continue to contribute to the SIPP.

    Even if you go over the LTA, you don't have to crystallise the whole lot immediately. You could hedge your bets by leaving some of the DC uncrystallised and crystallise it when the market drops (which it will but nobody knows when or by how much).

    You should definitely check the penalties for taking the DB early as that will affect the valuation for LTA purposes. Normal actuarial reduction are in the region of 4-6% per year.
    • 000145
    • By 000145 9th Mar 18, 10:03 PM
    • 8 Posts
    • 1 Thanks
    000145
    Thanks kidmugsy. I did look at illustrations for taking the DB pension early but the annual amount drops at a horrendous rate. If he took it next year, which is 5 years early at 60, it drops from £17k to £10k per annum.
    Originally posted by saver_ali
    Yes but you would have received £50k by the time he reaches 65! You donít lose money by taking it early as your pension just stretches over more years. This is definitely worth thinking about if it stops you hitting the LTA limit. I am also 60 and am taking my pension early. What is the point of working for another 5 years and then paying 55% of my hard earned pension?
    • Brynsam
    • By Brynsam 9th Mar 18, 10:09 PM
    • 936 Posts
    • 606 Thanks
    Brynsam
    Yes but you would have received £50k by the time he reaches 65! You donít lose money by taking it early as your pension just stretches over more years. This is definitely worth thinking about if it stops you hitting the LTA limit. I am also 60 and am taking my pension early. What is the point of working for another 5 years and then paying 55% of my hard earned pension?
    Originally posted by 000145
    But the reduction factor is much higher than the norm. OP, check with Mercer now that the answer you are getting from this super whizzy online new tool is accurate. Either something is wrong with it, or you are entering something incorrectly. Trustees have to use reduction factors which give a reasonable outcome - and more than 10% a year reduction is about twice the norm.
    • Thrugelmir
    • By Thrugelmir 9th Mar 18, 10:22 PM
    • 58,475 Posts
    • 51,848 Thanks
    Thrugelmir
    Iím worried that with reasonable growth he will soon exceed the LTA.
    Originally posted by saver_ali
    Ultimately markets fall back in line with actual company financial performance. Recent growth in the markets isn't mirrored by reality.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • saver_ali
    • By saver_ali 10th Mar 18, 1:35 PM
    • 19 Posts
    • 3 Thanks
    saver_ali
    I've checked the original paperwork and there is supposed to be a 15% reduction by taking the pension 5 years early. Something is wrong somewhere!

    There was another anomaly when Mercers took over management from my husband's ex employer. When I obtained a valuation from the employer 12 months ago, it was £12,400 per annum. The recent one online with Mercers is £17k. This is what has prompted my worry about LTA, because an extra 10% had been used up out of the blue.

    I suspect the Mercer online figures are wrong, so will have to check.

    Thanks everyone for your comments. My question about whether to put more money in the SIPP has been answered, and I will do that next week. He's not going to earn £100k so the 60% tax issue isn't an issue, but we still have scope to maximise tax relief this tax year, and will take advantage of that while we can!
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