Pension question
Discussion
Ok, can someone explain to an idiot (me) what my SIPP Illustration means? It’s one of two pensions and I’ve never understood what it means.
It says “your estimated fund value at retirement, in todays money, is £910,000”. It’s assuming 25 years to run to retirement.
Is that assumption based on no further contributions, or is it based on me making the same average contributions over the next 25 years? I’ve used a compound interest calculator and I can’t get it close to that figure without using unrealistic interest rates - basically 8%. If I use average contributions it ends up significantly more than the 910k.
It says “your estimated fund value at retirement, in todays money, is £910,000”. It’s assuming 25 years to run to retirement.
Is that assumption based on no further contributions, or is it based on me making the same average contributions over the next 25 years? I’ve used a compound interest calculator and I can’t get it close to that figure without using unrealistic interest rates - basically 8%. If I use average contributions it ends up significantly more than the 910k.
Crumpet said:
Ok, can someone explain to an idiot (me) what my SIPP Illustration means? It’s one of two pensions and I’ve never understood what it means.
It says “your estimated fund value at retirement, in todays money, is £910,000”. It’s assuming 25 years to run to retirement.
Is that assumption based on no further contributions, or is it based on me making the same average contributions over the next 25 years? I’ve used a compound interest calculator and I can’t get it close to that figure without using unrealistic interest rates - basically 8%. If I use average contributions it ends up significantly more than the 910k.
I think it assumes your contribution continues as normal.It says “your estimated fund value at retirement, in todays money, is £910,000”. It’s assuming 25 years to run to retirement.
Is that assumption based on no further contributions, or is it based on me making the same average contributions over the next 25 years? I’ve used a compound interest calculator and I can’t get it close to that figure without using unrealistic interest rates - basically 8%. If I use average contributions it ends up significantly more than the 910k.
You say it ends up significantly more than £910k but you also need to apply inflation. Based on 2.5% inflation £910k in today's money needs to be £1,687k in 25 years time
Ah! In which case then it very roughly works. There’s a chart of ‘assumptions’ which show interest roughly around 5% but there’s no mention of inflation.
If I use average contributions of about £2000 per month over 25 years at 5% interest it’s very close to the figure you give.
Bugger! I thought I could get away with reducing my contributions!
If I use average contributions of about £2000 per month over 25 years at 5% interest it’s very close to the figure you give.
Bugger! I thought I could get away with reducing my contributions!
Do you think the lifetime allowance will be anywhere close to £1.7MM in 25 years time?
I very much suspect it won't be, so you need to work through the tax ramifications of breaching the LTA and work out whether or not maintaining your current level of contributions will end up being as tax efficient as you expect it to be.
I very much suspect it won't be, so you need to work through the tax ramifications of breaching the LTA and work out whether or not maintaining your current level of contributions will end up being as tax efficient as you expect it to be.
omniflow said:
Do you think the lifetime allowance will be anywhere close to £1.7MM in 25 years time?
I very much suspect it won't be, so you need to work through the tax ramifications of breaching the LTA and work out whether or not maintaining your current level of contributions will end up being as tax efficient as you expect it to be.
Obviously nobody knows what the future tax laws will be (pensions! An area where you need to plan over 40 years but the rules frequently change! Welcome to Britain). I very much suspect it won't be, so you need to work through the tax ramifications of breaching the LTA and work out whether or not maintaining your current level of contributions will end up being as tax efficient as you expect it to be.
But to my mind it’s not worth worrying about the LTA until you’re pretty damn close to it. And with 25 years to go, the OP isn’t likely to be close now.
Anyone with a £1m DC pot in today’s money might well also value the IHT shielding effect of pensions, even with the extra tax from LTA breach’s g.
omniflow said:
Do you think the lifetime allowance will be anywhere close to £1.7MM in 25 years time?
I very much suspect it won't be, so you need to work through the tax ramifications of breaching the LTA and work out whether or not maintaining your current level of contributions will end up being as tax efficient as you expect it to be.
I’m aware of the LTA but don’t understand the implications of going over it. It’s something I need to research. I very much suspect it won't be, so you need to work through the tax ramifications of breaching the LTA and work out whether or not maintaining your current level of contributions will end up being as tax efficient as you expect it to be.
To be honest I’m hammering the pension while I can as I think it’s almost certain they’ll pull the 40% tax relief. Once they pull that ‘perk’ I suspect I’ll then look elsewhere but even five more years of max contributions isn’t a huge amount and I don’t think will trouble the LTA. And it’s as much about minimising how much tax I give the w
kers (of all colours) in Westminster as it is about planning for the future. I plan to be out of full time employment at 60 and reckoned £1m of todays money at retirement would be more than comfortable. That feels like a really tall order though but £25-30k a year for the next 20 years might do it. It’s just really confusing with the calculators.
It probably assumes contributions will increase over time, should have low/medium/high projections and will be shown in today's terms after inflation.
To be honest you may as well use your own assumptions that you pick and understand. There's nothing special about those illustrations.
To be honest you may as well use your own assumptions that you pick and understand. There's nothing special about those illustrations.
Jawls said:
Obviously nobody knows what the future tax laws will be (pensions! An area where you need to plan over 40 years but the rules frequently change! Welcome to Britain).
But to my mind it’s not worth worrying about the LTA until you’re pretty damn close to it. And with 25 years to go, the OP isn’t likely to be close now.
Anyone with a £1m DC pot in today’s money might well also value the IHT shielding effect of pensions, even with the extra tax from LTA breach’s g.
Slightly off topic question But to my mind it’s not worth worrying about the LTA until you’re pretty damn close to it. And with 25 years to go, the OP isn’t likely to be close now.
Anyone with a £1m DC pot in today’s money might well also value the IHT shielding effect of pensions, even with the extra tax from LTA breach’s g.
Pensions are shielded from IHT so can be passed to whoever you wish in your will. But once you as an individual receive this Pension pot what does that mean?
Does it add to your pot meaning you may have LTA issues or it’s just a pot of cash you could draw on tax free or if you draw any of the cash then it’s at your marginal rate
Does it still keep the 25% tax free take away?
I ask as it’s a potential for me but if it simply bolts onto my own pension then we’re in breach of the LTA & I’d then have to stop paying into a pension losing the matched company payments and also the tax rebate instead suffering the tax burden.
Crumpet said:
I’m aware of the LTA but don’t understand the implications of going over it. It’s something I need to research.
To be honest I’m hammering the pension while I can as I think it’s almost certain they’ll pull the 40% tax relief. Once they pull that ‘perk’ I suspect I’ll then look elsewhere but even five more years of max contributions isn’t a huge amount and I don’t think will trouble the LTA. And it’s as much about minimising how much tax I give the wkers (of all colours) in Westminster as it is about planning for the future.
I plan to be out of full time employment at 60 and reckoned £1m of todays money at retirement would be more than comfortable. That feels like a really tall order though but £25-30k a year for the next 20 years might do it. It’s just really confusing with the calculators.
Are you maxing out your ISA allowances as well? Personally I'd rather have a millon in an ISA than a pension but that's just me & my situation. The LTA is a major factor & you might want to look more closely at it & not just pile everything into a pension because of the 40% tax allowance & then find you're paying a massive chunk of tax for breaching the LTA. You might find that splitting your investments betwen pension & ISA means you don't go massively over the LTA & have a healthy chunk in the ISA. To be honest I’m hammering the pension while I can as I think it’s almost certain they’ll pull the 40% tax relief. Once they pull that ‘perk’ I suspect I’ll then look elsewhere but even five more years of max contributions isn’t a huge amount and I don’t think will trouble the LTA. And it’s as much about minimising how much tax I give the w
kers (of all colours) in Westminster as it is about planning for the future. I plan to be out of full time employment at 60 and reckoned £1m of todays money at retirement would be more than comfortable. That feels like a really tall order though but £25-30k a year for the next 20 years might do it. It’s just really confusing with the calculators.
Welshbeef said:
Does it add to your pot meaning you may have LTA issues or it’s just a pot of cash you could draw on tax free or if you draw any of the cash then it’s at your marginal rate
According to this it doesn't impact LTA if you receive a "dependent's pension"https://www.gov.uk/hmrc-internal-manuals/pensions-...
HMRC said:
Nor does it use up any of either the deceased member’s or the dependant’s lifetime allowance.
And further down, it confirms the amount is taxed not tax-free. As I understand it's added to your taxable income so will be taxed at your highest taxrate.HMRC said:
The person receiving the dependants’ scheme pension is liable for income tax on the amount they receive
Welshbeef said:
Slightly off topic question
Pensions are shielded from IHT so can be passed to whoever you wish in your will. But once you as an individual receive this Pension pot what does that mean?
Does it add to your pot meaning you may have LTA issues or it’s just a pot of cash you could draw on tax free or if you draw any of the cash then it’s at your marginal rate
Does it still keep the 25% tax free take away?
I ask as it’s a potential for me but if it simply bolts onto my own pension then we’re in breach of the LTA & I’d then have to stop paying into a pension losing the matched company payments and also the tax rebate instead suffering the tax burden.
It will sit outside your own lta.Pensions are shielded from IHT so can be passed to whoever you wish in your will. But once you as an individual receive this Pension pot what does that mean?
Does it add to your pot meaning you may have LTA issues or it’s just a pot of cash you could draw on tax free or if you draw any of the cash then it’s at your marginal rate
Does it still keep the 25% tax free take away?
I ask as it’s a potential for me but if it simply bolts onto my own pension then we’re in breach of the LTA & I’d then have to stop paying into a pension losing the matched company payments and also the tax rebate instead suffering the tax burden.
Depending on if the person dies before they are 75. Before 75 and you can withdraw tax free. After 75 it is taxed at your own marginal rate.
Abdul Abulbul Amir said:
Welshbeef said:
Slightly off topic question
Pensions are shielded from IHT so can be passed to whoever you wish in your will. But once you as an individual receive this Pension pot what does that mean?
Does it add to your pot meaning you may have LTA issues or it’s just a pot of cash you could draw on tax free or if you draw any of the cash then it’s at your marginal rate
Does it still keep the 25% tax free take away?
I ask as it’s a potential for me but if it simply bolts onto my own pension then we’re in breach of the LTA & I’d then have to stop paying into a pension losing the matched company payments and also the tax rebate instead suffering the tax burden.
It will sit outside your own lta.Pensions are shielded from IHT so can be passed to whoever you wish in your will. But once you as an individual receive this Pension pot what does that mean?
Does it add to your pot meaning you may have LTA issues or it’s just a pot of cash you could draw on tax free or if you draw any of the cash then it’s at your marginal rate
Does it still keep the 25% tax free take away?
I ask as it’s a potential for me but if it simply bolts onto my own pension then we’re in breach of the LTA & I’d then have to stop paying into a pension losing the matched company payments and also the tax rebate instead suffering the tax burden.
Depending on if the person dies before they are 75. Before 75 and you can withdraw tax free. After 75 it is taxed at your own marginal rate.
Sadly that’s not the news I was hoping for - firstly above 75 and secondly if I took any of this pot (assuming there was a pot ) then it would be 40-45% so it could actually be better for it to be taxed within the estate.
Unless of course I retire much earlier and draw down that way.
Hmm this isn’t what we’d expected - or really thought about.
Welshbeef said:
Pensions are shielded from IHT so can be passed to whoever you wish in your will.
Does it still keep the 25% tax free take away?
Your will doesn't cover pension because the pension doesn't directly belong to you, it's in trust and that's how it can be outside your estate. Instead, you make a beneficiary nomination with each pension provider.Does it still keep the 25% tax free take away?
Income tax free if the previous owner died before 75, or subject to income tax at your marginal rate if after 75. Can flip back the other way if you die before age 75.
No tax free lump sum, regardless of whether the deceased member had taken it or not.
Doesn't use any of your LTA.
Welshbeef said:
Thank you.
Sadly that’s not the news I was hoping for - firstly above 75 and secondly if I took any of this pot (assuming there was a pot ) then it would be 40-45% so it could actually be better for it to be taxed within the estate.
Unless of course I retire much earlier and draw down that way.
Hmm this isn’t what we’d expected - or really thought about.
If you inherit a SIPP, then you can request the scheme administrators to change the beneficiary from you to someone else - you have to do this before 'accepting it'. In my case, they were OK with making my wife the beneficiary of my share of my late fathers SIPP. As she only had a very small pension of her own, its much more tax efficient than if I had inherited it.Sadly that’s not the news I was hoping for - firstly above 75 and secondly if I took any of this pot (assuming there was a pot ) then it would be 40-45% so it could actually be better for it to be taxed within the estate.
Unless of course I retire much earlier and draw down that way.
Hmm this isn’t what we’d expected - or really thought about.
PistonHead007 said:
Welshbeef said:
Pensions are shielded from IHT so can be passed to whoever you wish in your will.
Does it still keep the 25% tax free take away?
Your will doesn't cover pension because the pension doesn't directly belong to you, it's in trust and that's how it can be outside your estate. Instead, you make a beneficiary nomination with each pension provider.Does it still keep the 25% tax free take away?
Income tax free if the previous owner died before 75, or subject to income tax at your marginal rate if after 75. Can flip back the other way if you die before age 75.
No tax free lump sum, regardless of whether the deceased member had taken it or not.
Doesn't use any of your LTA.
Person in question is 75 +
My marginal rate is above the IHT rate
I guess mitigation options
1. Draw hard in the pension (assuming it’s coming to me) rather than cash or shares as they would be taxed at 5% less than what I would have comp + this pension draw down
2. Me to instantly pass it to my kids (can you do that with a pension pot like you can with shares. Then as they are primary school age let all of them draw out tax free allowance each year give or take £40k drawdown each year tax free
3. Me to stop working more than a decade earlier as taking a lower income could save me a huge amount of tax/pointless working.
4. Cannot top up pension as I’m at the max already per annum.
5. Request / suggest large scale gifting of savings etc to get under the IHT thresholds.
Hmm
PistonHead007 said:
It probably assumes contributions will increase over time, should have low/medium/high projections and will be shown in today's terms after inflation.
To be honest you may as well use your own assumptions that you pick and understand. There's nothing special about those illustrations.
Yes I think that’s a fair point. I’d calculated and made my own assumptions based on about 5% and what I planned to contribute over the period remaining. It’s just that their assumption was so wildly different. To be honest you may as well use your own assumptions that you pick and understand. There's nothing special about those illustrations.
Mr Pointy said:
Are you maxing out your ISA allowances as well? Personally I'd rather have a millon in an ISA than a pension but that's just me & my situation. The LTA is a major factor & you might want to look more closely at it & not just pile everything into a pension because of the 40% tax allowance & then find you're paying a massive chunk of tax for breaching the LTA. You might find that splitting your investments betwen pension & ISA means you don't go massively over the LTA & have a healthy chunk in the ISA.
I did last year but I doubt I will this year. I would contribute more but obviously it’s post tax so I’m losing a lot that way. The way I’ve set things up at the moment - and I planned to do it for four years and then reassess - is that I’ve done 30% salary sacrifice into my pension and put the mortgage on interest only (at 1.7%). I then planned to use the 25% lump sum to pay the mortgage off at age 58/60. The extra that was paying down the capital on the mortgage I’m splitting between putting into my S&S ISA and maxing out the pension.
Whether this is optimal or not is debatable, but I feel at least I’m taking some decent steps towards planning ahead! I also want to live well and enjoy the now!
Not intending to hijack OP's thread but related question, how do PH folks strike a balance between Pension and ISA contributions or alternatively how do you balance between Pension contributions that avoid higher rate tax and take-home pay of which some will go into the S&SISA and cash savings?
I sal-sac'd the equiv of 1/3 of my gross salary last tax yr (Inc employer contributions) into my work pension and il aim for similar this tax year but with a young sprog who's expenses will only go up with age I suspect il have to reduce contributions soon. As others including the OP alluded too, we don't know how long current rules and tax benefits of pensions will remain so I am also in the camp of 'filling my boots' whilst it's still available.
Op - slightly OTT but when I use the online compound interest calculators I use a 3% interest/compound rate till my expected retirement age ..it's a bit extreme but prefer to use conservative estimates rather than the more bullish assumptions.
I sal-sac'd the equiv of 1/3 of my gross salary last tax yr (Inc employer contributions) into my work pension and il aim for similar this tax year but with a young sprog who's expenses will only go up with age I suspect il have to reduce contributions soon. As others including the OP alluded too, we don't know how long current rules and tax benefits of pensions will remain so I am also in the camp of 'filling my boots' whilst it's still available.
Op - slightly OTT but when I use the online compound interest calculators I use a 3% interest/compound rate till my expected retirement age ..it's a bit extreme but prefer to use conservative estimates rather than the more bullish assumptions.
Edited by VR99 on Monday 6th June 10:19
Edited by VR99 on Monday 6th June 10:24
I wonder how many people actually look into or fully understand that pension is inheritance tax free and simply think that’s it (as I had ) but then…. Marginal rates could be 63.25% or 46.25% or 41.25% basically MORE than the 40% the estate would pay so smarter in some instances to draw pension over drawing savings.
Or course you can pass on the pension or retire sooner but that forces a lifestyle change
Thanks all for this given lots to think about
Or course you can pass on the pension or retire sooner but that forces a lifestyle change
Thanks all for this given lots to think about
Crumpet said:
Ooh, one more question on the LTA…..
My planned retirement is 60. If I get close to the LTA at 57 can I simply retire (assuming 57 is still the retirement age) and start drawing down my pension to avoid busting the LTA?
There would still be various LTA assessment events. But yes, paying less in and allowing less time to compound (which is what early retirement equates to) would mean that your pension is less likely to bust through the LTA. My planned retirement is 60. If I get close to the LTA at 57 can I simply retire (assuming 57 is still the retirement age) and start drawing down my pension to avoid busting the LTA?
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