Pension lifetime allowance , tax relief and tax

[jonny70]

Im in my mid 20's so the lifetime allowance doesn't apply to me yet.


Am I correct in saying that a 40% tax payer gets pension relief on contributions so 6k became 10k .So one can contribute 40k a year to their pension ? (really 24k of taxed income if claiming relief)

Whats the lifetime allowance ? Im a little confused .Does it mean I can get tax relief on contributions to my pension up to 1 million? Then whats does it mean there is a tax charge of 55% once you go over the lifetime allowance?

[Ean218]

There is an annual limit for the amount you pay in, plus there is a lifetime allowance for the amount you actually have in your pension pot which remains tax free.

So if you paid in 40K for 25 years and earned no interest or dividends nor achieved any capital growth you would have reached the lifetime limit.

However private pensions are a favoured target of public sector fat pensioned politicians so none of those figures will be right in 5 years time, never mind 25.

[Mr Pointy]

There are some guide to download here:

http://www.hl.co.uk/tools/free-investment-and-pens...

But you'll have to sign up for relentless further emails.

[Claudia Skies]

jonny70 said:

Then whats does it mean there is a tax charge of 55% once you go over the lifetime allowance?

If your investments grow beyond £1m nothing happens for the time being. When you go to draw your pension the pension company has to check your figures (all of your pensions) against the lifetime allowance. As soon as they see you are over the £1m they are obliged to pay any excess to you net of 55% tax. They send the tax directly to HMRC a bit like PAYE.

In practical terms many people will find themselves at, say, age 50+ and getting close to reaching that £1m figure by the time they retire. This means there's scope to reduce the amount of "investment risk" in the portfolio. Like any sort of insurance, reducing investment risk usually has a cost attached to it in the form of lower returns. If this is juggled carefully it means, if you like, that you can arrange for HMRC to pay 55% of the cost of your "insurance".

Like so many things in investment it's all a question of juggling risks and returns.

[jonny70]

Claudia Skies said:

jonny70 said:

Then whats does it mean there is a tax charge of 55% once you go over the lifetime allowance?

If your investments grow beyond £1m nothing happens for the time being. When you go to draw your pension the pension company has to check your figures (all of your pensions) against the lifetime allowance. As soon as they see you are over the £1m they are obliged to pay any excess to you net of 55% tax. They send the tax directly to HMRC a bit like PAYE.

In practical terms many people will find themselves at, say, age 50+ and getting close to reaching that £1m figure by the time they retire. This means there's scope to reduce the amount of "investment risk" in the portfolio. Like any sort of insurance, reducing investment risk usually has a cost attached to it in the form of lower returns. If this is juggled carefully it means, if you like, that you can arrange for HMRC to pay 55% of the cost of your "insurance".

Like so many things in investment it's all a question of juggling risks and returns.

So one gets relief on contributions to 1 million quid ?

Once your pot is over a million (assuming growth,dividends' etc ) you then pay 55% tax ? so if your pot is 2 million when you go to retire . So on your pot up to 1 million you pay your regular income tax on what you withdrawn (and 25% lump sum can be withdrawn tax free) ,On the 1 million to 2 million you pay 55% tax on lump sum and any income /withdrawals you pay 25% tax + income tax ?

Edited by jonny70 on Wednesday 25th March 15:18

[Welshbeef]

Doesn't £1m pot give c£60k pension a year?



Also why isn't the lifetime allowance INCREASING? We need to ensure its at lease inline with the triple lock for state pension.

[numtumfutunch]

OK have I got this right please?

I will currently pay 55% tax on anything in my pot over a Million when I quit work

My circumstances are that I plan to retire at just over 60
It is projected that my work scheme will be worth just about a Million, but I am also paying into a private scheme which is currently worth 100k but will be nudging 200k if it continues till my retirement

Now if I have things right it is probably pointless continuing with the private scheme as this will be hammered at 55%
Furthermore even if I stop contributing now it will still take a hit

Im aware of new legislation allowing OAPs to buy Lambo's with their pensions but is there any information I can go and read online to give me an idea of how to use my current private pot more effectively, and possibly cash it in early?

Cheers

[Ginge R]

Numtum,

Let's pluck a figure from the air. Let's assume that your pots combined stood at £1,128,426, you exceed that you currently (LTA of £1.25m) exceed the LTA by is £3,426. The LTA charge is 25% of that taken as annual income and 55% if the excess is taken as a lump sum. You will only pay a tax charge on the amount by which you exceed the LTA, the £3,426, and not on your entire 'pot'.

What does that mean in real terms and in the future? Well, let's keep the LTA at £1.25m for now to accentuate this is a hypothetical calc and doesn't apply to anyone in the future. As we know, it's intended to fall imminently to £1m before starting to rise in line with index in a few years. Having said that, it can all change of course. I read a report earlier, that suggested longevity in Australians is set to rocket. If we too, see that..

Anyway, your occupational scheme administrator would currently apply the total charge against your annual pension (that amount being 25% on the excess). That figure is then divided by 20, and your pension reduced by that amount. In other words, if your excess is £3,426 then your total charge is £856.50. That, divided by 20 means that £42.82 would be removed from your annual pension income each year.

There are so many more other aspects to consider too, if you're as border-line as you seem to be, consider taking regulated advice that you trust.

[Ginge R]

Welshbeef said:

Doesn't £1m pot give c£60k pension a year?



Also why isn't the lifetime allowance INCREASING? We need to ensure its at lease inline with the triple lock for state pension.

LTA is a bit of a football now, as are pensions. Let's not regard pensions as income tools solely, let's remember they are vote winners - baby boomers want to pass on wealth somehow and politicians need to play to that segment of the electorate. Read this (below); if longevity continues to rise as sharply here as it seems to be doing in Oz, there are consequences across the board.

Not just in LTA, but state pension age, insurance premiums (what ailments will elderly people have, how much will they cost, what is the health cost profile likely to be?) will go up because people will need or want to be covered for longer, and retirement income will need to last a lot longer too.

http://www.todayonline.com/world/australia/austral...

[Welshbeef]

Ginge R said:

Numtum,

Let's pluck a figure from the air. Let's assume that your pots combined stood at £1,128,426, you exceed that you currently (LTA of £1.25m) exceed the LTA by is £3,426. The LTA charge is 25% of that taken as annual income and 55% if the excess is taken as a lump sum. You will only pay a tax charge on the amount by which you exceed the LTA, the £3,426, and not on your entire 'pot'.

What does that mean in real terms and in the future? Well, let's keep the LTA at £1.25m for now to accentuate this is a hypothetical calc and doesn't apply to anyone in the future. As we know, it's intended to fall imminently to £1m before starting to rise in line with index in a few years. Having said that, it can all change of course. I read a report earlier, that suggested longevity in Australians is set to rocket. If we too, see that..

Anyway, your occupational scheme administrator would currently apply the total charge against your annual pension (that amount being 25% on the excess). That figure is then divided by 20, and your pension reduced by that amount. In other words, if your excess is £3,426 then your total charge is £856.50. That, divided by 20 means that £42.82 would be removed from your annual pension income each year.

There are so many more other aspects to consider too, if you're as border-line as you seem to be, consider taking regulated advice that you trust.

Given you can take 25% of the pot out tax free then given the pot is not greater than £1,333,333.33 you can escape paying any 55% tax so its only above that level based upon today's rules

[LeoSayer]

Welshbeef said:

Also why isn't the lifetime allowance INCREASING? We need to ensure its at lease inline with the triple lock for state pension.

It will increase with CPI from 2018.

[Ginge R]

Welshbeef said:

Given you can take 25% of the pot out tax free then given the pot is not greater than £1,333,333.33 you can escape paying any 55% tax so its only above that level based upon today's rules

Mea culpa.

I was referring to the value of a case that I am working on at the moment (which is where I got the numbers from ) - in this particular instance, an unfunded defined benefit notional pot which has the value of the gratuity built in and valued as twenty times the annual income plus gratuity. The scheme valuation doesn't even consider the amount commuted or taken as cash. For some reason, and in my pre-coffee stupor, I read ''work scheme' and all too hastily assumed it was a DB pot.

DC income in excess of the LTA is still taxed at 25%, the tax rate of 55% applies to lump sums, but you're absolutely right in what you say if the scheme is DC.

[numtumfutunch]

Thanks all

The majority of my pot is DB final salary related, with the extra a DC stand alone

What I'm clear on is that:

A) I need professional advice

B) People currently drawing pensions are seen as a more important electoral target than the rest

C) My kids will be shafted

D) The buy to let market isn't about to die anytime soon

E) Who knows what they'll do to us next?

Cheers

[Ginge R]

If you cash in early (with your private dc fund), it forms a Benefit Crystalisation Event. So, you won't win out. Licking my finger and sticking it in the wind, I'd suggest we're in for a great deal more flux in the business of pension legislation so stay light on your feet.

If you feel confident enough to be able to subsequently be able to refer to any unused previous annual pension allowance, take an opinion on easing off the personal pension contributions a bit, and investing instead, in normal investments. It isn't what you make, it's what you keep. Think about your exit strategy (you seem to be, which is good) and plan with that in mind, not simply growing to gorge on tax relief.

Consider other tax wrappers too, there's more to life than the pension. And if you're in a public sector DB scheme, there are some truly nasty little clauses within recent Pensions Act legislation which could well affect you, should the state retirement age change. Those changes can me made without the need for Parliamentary authority. Whether they affect you depends on your age and retirement timespan.

[Ginge R]

jonny70 said:

Im in my mid 20's so the lifetime allowance doesn't apply to me yet. Am I correct in saying that a 40% tax payer gets pension relief on contributions so 6k became 10k .So one can contribute 40k a year to their pension ? (really 24k of taxed income if claiming relief)

Whats the lifetime allowance ? Im a little confused .Does it mean I can get tax relief on contributions to my pension up to 1 million? Then whats does it mean there is a tax charge of 55% once you go over the lifetime allowance?

Jonny,

Some people get confused with grossing up contributions or netting down, and in respect if your scenario, a lot will depend on your own income.

You might be a 40% tax rate payer, but you'll only get 40% relief on the amount of your contribution that falls into your 40% bracket. Assuming you're on a salary of £50,000, to make a gross pension contribution of £10,000.00 you only need to pay £8,000.00. If you can claim back a further 20%, via your end of year tax return, on an income of £50,000, you can claim back up to an extra £1,627.00. Therefore, your contribution could cost you £6,373.00.

If though, you were on an income of £60,000, that would certainly be enough to justify a further £2000 back via your self assessment. Remember too, that parents claiming child benefit who are in a household that has lot it, if income rises over £50,000, can use pension contributions to reduce their declared income. So, a 40% uplift can also result in part or all of child benefit being paid again as well.

[oyster]

The interesting point for me about pensions is that because of the lower lifetime limit, there's less reason to start investing at a young age when perhaps only 20% tax savings can be made.

Surely it's now better to wait until one can invest once reaching either 40%, 60% or 45% thresholds, even allowing for the lower amount of compound effect.

Indeed whilst still younger and earning at basic rate, the compound effect can be used for ISA savings.

[Ginge R]

Thats a good point, in principle. In reality, a little and often works well.

It means that you can take a more measured view of investment risk, that you won't lose as much annual allowance as you might and that, if predicted, pension tax relief gets clobbered in the future, you've at least made hay whilst the sun shines.

I agree though; in principle, for many younger savers who want a house, why wouldn't they be focusing on something like a RIght to Buy ISA?

[Welshbeef]

oyster said:

The interesting point for me about pensions is that because of the lower lifetime limit, there's less reason to start investing at a young age when perhaps only 20% tax savings can be made.

Surely it's now better to wait until one can invest once reaching either 40%, 60% or 45% thresholds, even allowing for the lower amount of compound effect.

Indeed whilst still younger and earning at basic rate, the compound effect can be used for ISA savings.

That would be great IF you can 100% be sure the govt doesn't remove higher rate tax relief at some point in the future.

[oyster]

Welshbeef said:

oyster said:

The interesting point for me about pensions is that because of the lower lifetime limit, there's less reason to start investing at a young age when perhaps only 20% tax savings can be made.

Surely it's now better to wait until one can invest once reaching either 40%, 60% or 45% thresholds, even allowing for the lower amount of compound effect.

Indeed whilst still younger and earning at basic rate, the compound effect can be used for ISA savings.

That would be great IF you can 100% be sure the govt doesn't remove higher rate tax relief at some point in the future.

Even if they do, you're still not in a losing position, so long as other savings vehicles have been used whilst a basic rate payer.

[Zigster]

Welshbeef said:

Given you can take 25% of the pot out tax free then given the pot is not greater than £1,333,333.33 you can escape paying any 55% tax so its only above that level based upon today's rules

No. The LTA is applied to the total pot, not the pot after 25% tax-free cash has been taken. GingeR's figures were correct in that respect.