Tapered Pension Allowance

[niceproblemtohavereally]

With a recent change in job, I am in the probably fortunate position that my total income will result in the maximum tapering of my pension allowance. This means that I am only allowed to claim pension tax relief on a maximum of £4K gross per year. Obviously it doesn’t make sense for me to only save this much per year for my retirement.

I am wondering if anybody has any sage advice on things I should be doing with respect to retirement planning. My thoughts so far are as follows:

1) Make use of any carried over allowance from prior years. Unfortunately although I have a little scope here, it is not enough to be material.

2) As there is no tax benefit to adding additional money to a pension, I don’t see much value in tying up additional money in a pension. Have I missed anything with that assumption?

3) I’m planning to make the most of my ISA allowances. Does this make sense?

4) Should I be lobbying my employer to do anything to help me? Is anybody able or willing to share approaches that their employer have implemented to help?

5) Anything else I should be considering here??

Many thanks in advance of your thoughts.

[xeny]

2) I'm vaguely wondering, depending on your other finances, it may make sense simply from a tax shelter viewpoint, as although you pay tax on the way out, you're at least CGT and dividend tax exempt while it is in there?

3)seems like a no brainer.

[Mr Pointy]

Have a look here:
https://www.pistonheads.com/gassing/topic.asp?h=0&...

Consider arranging a call with Nick - it's a free service for PH members.

[CharlesElliott]

For 4), many employers would allow the employer contriubtions to be reduced to 10K with the remainder taken as salary - not that that has any tax advantages either, but it does mean more options. With the reduction now to 4K, I haven't seen the employer contribution follow suit - but I assume they could.

[Carbon Sasquatch]

xeny said:

2) I'm vaguely wondering, depending on your other finances, it may make sense simply from a tax shelter viewpoint, as although you pay tax on the way out, you're at least CGT and dividend tax exempt while it is in there?

Just be careful on the lifetime allowance with that one. Bad enough going over it if you’ve had the tax break on the contributions….

[Twin1]

Agreed with what CharlesElliott has said above - most employers will agree to cap contributions at £4k and pay the rest as an additional, taxable allowance to you. Don't want to second-guess your position but it tends to be that those who are fully tapered are either working somewhere that it affects a lot of people so they have a process in place (banks), or are senior enough to just ask for this....

Otherwise, use your ISA (and LISA if you're in the age bracket for that) allowances. If you have an other half, you could do the same with them, and / or get them to max out their pension to the full extent they can get tax relief.

I'm sure there will be accountants / IFAs who could suggest more 'wizzy' tax-relief solutions...

[aspender]

I have 10% personal contribution which gives me the max available 15% employer contribution all via salary sacrifice. I can then specify an absolute limit each year that is paid into my pension. I’ll specify this each year based on £4K allowance plus any unused allowance from the previous year (how much I end up being tapered depends on bonus/share vesting so is not predictable)

Any of the total contribution not directed into the pension is paid as cash and taxed/NI’d at source. This gets used to max out ISA etc.

All works pretty well.

[niceproblemtohavereally]

Thank you everybody for your input and ideas, I really appreciate them.

I should have mentioned in my original post that we do already make the maximum pension contribution possible for my wife’s self employed income and don’t (currently) have a mortgage.

Some really useful ideas for me to explore further….JISAs, and negotiating with my employer to cap their contributions to pension and pay the balance as current income. Will have to research the impact on that for them in terms of taxes and NI contributions of course so that I can make a well informed argument.

I know this is very ‘1st world problem’ but the tapered allowance does seem to be an odd policy. I can totally understand reducing the tax relief on pension contributions over a certain amount, but to reduce the total annual allowance by such a large amount surely encourages all the wrong behaviours, which would be a drag on govt. resources in the future.

[Twin1]

Completely agree - it's such a blunt instrument. You can't even max out the annual allowance for that long without going through the lifetime allowance. Many of my colleagues are affected by this, and their income rose really quickly, so they've got tiny pensions.

IMO the government should encourage high earners to pack as much into their pension as they want (subject to the standard annual allowance), let them retire in their 50s taking a large income each year and take loads of tax off them at that point. But that would mean looking more than five years ahead.

As Chicken Dinner says, they'd get no sympathy from the general public for taking that kind of approach - 'tax breaks for people on £300k+' doesn't sound great...

[BobToc]

May also consider setting up pensions for the kids. You’ll only be able squirrel away £3,600 / yr for each, but better than nothing.

[supersport]

Whilst I am no raving socialist, I don't buy it that anyone who gets hit by tapering or hitting the life time allowance is going to be so poor in retirement that they are a drag on government funds in their dotage.

I really don't see how anyone who hits the life time allowance can have a "tiny pension".

Personally, I would agree that some of these rules are a little odd. I don't see why they don't put a cap on the point up to which you get tax relief going in. But I can see how that would be more difficult.

Pensions are just a tax wrapper and so just one way saving for retirement, there are others.

[Newc]

niceproblemtohavereally said:

I know this is very ‘1st world problem’ but the tapered allowance does seem to be an odd policy. I can totally understand reducing the tax relief on pension contributions over a certain amount, but to reduce the total annual allowance by such a large amount surely encourages all the wrong behaviours, which would be a drag on govt. resources in the future.

It's a deliberate long term shift in policy, started by Osborne. Treasury wants pension funds to be tax 'exempt', but the contributions to be from taxed income. Structured more like an ISA than the current pension design.

On your actual question, not much flexibility as previous posters have said. One other thing to calculate if your employer makes higher percentage contributions based on your contribution level: are you still net better off with maximum contributions into the pension minus the overpayment charge, than minimising contributions. Have to keep an eye on the lifetime limit too of course.

[niceproblemtohavereally]

Just to follow-up on the thread from last week. I had a very productive discussion with my employer who has agreed to be flexible with my employer pension contributions, and pay all amounts above my tapered allowance as regular pay. I’ll be channelling the surplus into tax free savings where ever possible. Plan is to use these savings to fund retirement as early as possible (prior to being able to access pension savings at 57).

Hadn’t considered asking for this, so huge thanks to those who replied. Anybody else in this situation……might be worth a discussion.