Exceeding lifetime pension allowance

Exceeding lifetime pension allowance

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JapanRed

Original Poster:

1,559 posts

110 months

Tuesday 11th February 2020
quotequote all
I’ve read that someone earning £40k for 40 years will likely gain a pension of around £1M.

I’m in a fortunate position that I currently pay 12.5% into my pension plus my employer pays 14.3%. I’m 35 and in that there’s a reasonable chance I’ll exceed my lifetime personal pension allowance (£1,055,000).

What happens if and when I reach/exceed my personal allowance? Should I be looking to reduce my pension contributions? Or increasing them?

I’ve got about £150k sitting in a ltd co and have read that the 40% pension contributions relief may end soon. I’m toying with the idea of using the funds in the ltd co to maximise mine and my wife’s contributions for the past 3 years. But this would mean we will almost certainly go over the £1M allowance.

Any advice? (Please don’t tell me to go to a tax advisor, I’ve got an appt booked with one in a few weeks I just want to get the basics in my head before then).

Thank you.
Rob

LeoSayer

7,299 posts

243 months

Tuesday 11th February 2020
quotequote all
The LTA increases with inflation every year.

If you exceed the LTA then you pay additional tax when you take your pension eg drawdown. The tax is 25% on taxable drawdowns and 55% on tax free cash.

You'll need a crystal ball to see what will happen with regard to investment growth, tax relief, your actual earnings and the LTA itself.

My understanding is that you can only use previous year's (carry forward) annual allowances if you were a member of a pension scheme during those years.





JapanRed

Original Poster:

1,559 posts

110 months

Tuesday 11th February 2020
quotequote all
Thanks Leo, can you expand on your second paragraph?
25% on taxable drawdowns?
55% on tax free cash?

gangzoom

6,251 posts

214 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
I’m in a fortunate position that I currently pay 12.5% into my pension plus my employer pays 14.3%. I’m 35 and in that there’s a reasonable chance I’ll exceed my lifetime personal pension allowance (£1,055,000).
If its the NHS pension just sit tight and wait for the budget. Am few years older than you and I already exceeded my £40k annual growth limit last year. Pretty much every singles senior clinician is currently facing a major tax bill which NHS England have said they will pay. There is suppose to be somekind of announcement made on the subject in the coming budget.

craig1912

3,273 posts

111 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
Thanks Leo, can you expand on your second paragraph?
25% on taxable drawdowns?
55% on tax free cash?
It’s 25% if taken as an income and 55% if taken as a lump sum. You only pay the charge once you cristallise in excess of the LTA and there is also a test at age 75. It gets a little complicated

https://adviser.royallondon.com/technical-central/...

depending on circumstances it may well be worth still paying into your pension if the employer contribution is significant. I did because even with the extra (Potential) charge it worked out beneficial

JapanRed

Original Poster:

1,559 posts

110 months

Tuesday 11th February 2020
quotequote all
gangzoom said:
JapanRed said:
I’m in a fortunate position that I currently pay 12.5% into my pension plus my employer pays 14.3%. I’m 35 and in that there’s a reasonable chance I’ll exceed my lifetime personal pension allowance (£1,055,000).
If its the NHS pension just sit tight and wait for the budget. Am few years older than you and I already exceeded my £40k annual growth limit last year. Pretty much every singles senior clinician is currently facing a major tax bill which NHS England have said they will pay. There is suppose to be somekind of announcement made on the subject in the coming budget.
Thanks gangzoom. It is indeed NHS but I don’t think I will be covered by the budget announcement. I don’t earn over £100k from my NHS PAYE as I’m part time. I do rest of my work through ltd co and take dividends to top myself up to £99k per year. Hence having a surplus in ltd co.

JapanRed

Original Poster:

1,559 posts

110 months

Tuesday 11th February 2020
quotequote all
craig1912 said:
It’s 25% if taken as an income and 55% if taken as a lump sum. You only pay the charge once you cristallise in excess of the LTA and there is also a test at age 75. It gets a little complicated

https://adviser.royallondon.com/technical-central/...

depending on circumstances it may well be worth still paying into your pension if the employer contribution is significant. I did because even with the extra (Potential) charge it worked out beneficial
Thanks for that link Craig. I’ve read it and although complicated, does help a little.

I don’t suppose there is an easy calculation to work out whether it’s beneficial to pay in extra over the LTA is there?

Using rounded figures - say I pay in £100k tomorrow from my limited company (using my last 3 years unused annual allowance) and this takes me £100k over my LTA, I really need that £100k to be worth £125k (if taken as income) or £155k (if taken as lump sum) when I retire, in order to break even. Is this correct?

If the above is correct then I have 33 years (I’m 35 now and will take pension ages 68) for my pension to grow by 25 or 55%, which it should do, based on historical returns....

Does this make sense or have I got it all wrong?

gangzoom

6,251 posts

214 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
Thanks gangzoom. It is indeed NHS but I don’t think I will be covered by the budget announcement. I don’t earn over £100k from my NHS PAYE as I’m part time. I do rest of my work through ltd co and take dividends to top myself up to £99k per year. Hence having a surplus in ltd co.
That's far too complicated arrangement for my simple brain, I just rely on my PAYE and pay what ever tax bill am suppose to be due.

I think I should go and see an accountant too smile.

craig1912

3,273 posts

111 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
Thanks for that link Craig. I’ve read it and although complicated, does help a little.

I don’t suppose there is an easy calculation to work out whether it’s beneficial to pay in extra over the LTA is there?

Using rounded figures - say I pay in £100k tomorrow from my limited company (using my last 3 years unused annual allowance) and this takes me £100k over my LTA, I really need that £100k to be worth £125k (if taken as income) or £155k (if taken as lump sum) when I retire, in order to break even. Is this correct?

If the above is correct then I have 33 years (I’m 35 now and will take pension ages 68) for my pension to grow by 25 or 55%, which it should do, based on historical returns....

Does this make sense or have I got it all wrong?
That £100k you paid in hasn’t cost £100k though, has it? Company or you have tax relief. You don’t automatically trigger the LTA when you retire, only when you crystallise in excess and take the money.
Who knows what returns will be over next 33 years and who knows if an LTA will exist?
The sort of money you are talking about I think I would take professional advice.

chip*

1,004 posts

227 months

Tuesday 11th February 2020
quotequote all
JR,

There are a number of moving parts to your question i.e. will you be a basis/high rate taxpayer retiree? Will the pension regulatory landscape remain the same in 30 years time? Given your fortunate position, it's probably worthwhile investing on a regulated financial planner to crunch the numbers for you.

JapanRed

Original Poster:

1,559 posts

110 months

Tuesday 11th February 2020
quotequote all
craig1912 said:
JapanRed said:
Thanks for that link Craig. I’ve read it and although complicated, does help a little.

I don’t suppose there is an easy calculation to work out whether it’s beneficial to pay in extra over the LTA is there?

Using rounded figures - say I pay in £100k tomorrow from my limited company (using my last 3 years unused annual allowance) and this takes me £100k over my LTA, I really need that £100k to be worth £125k (if taken as income) or £155k (if taken as lump sum) when I retire, in order to break even. Is this correct?

If the above is correct then I have 33 years (I’m 35 now and will take pension ages 68) for my pension to grow by 25 or 55%, which it should do, based on historical returns....

Does this make sense or have I got it all wrong?
That £100k you paid in hasn’t cost £100k though, has it? Company or you have tax relief. You don’t automatically trigger the LTA when you retire, only when you crystallise in excess and take the money.
Who knows what returns will be over next 33 years and who knows if an LTA will exist?
The sort of money you are talking about I think I would take professional advice.
I’m not sure whether it has or hasn’t actually cost £100k. How will the company (or I) get tax relief on it? If the company pays out £100k surely it will cost £100k...

Apologies in advance if I’m being thick here.

JapanRed

Original Poster:

1,559 posts

110 months

Tuesday 11th February 2020
quotequote all
chip* said:
JR,

There are a number of moving parts to your question i.e. will you be a basis/high rate taxpayer retiree? Will the pension regulatory landscape remain the same in 30 years time? Given your fortunate position, it's probably worthwhile investing on a regulated financial planner to crunch the numbers for you.
As per my OP I’ve got an appt with a FA. Used one in the past who wasn’t particularly helpful, mainly because it’s hard to crunch numbers based on a 30 year horizon when we don’t know what that Horizon will look like at the time (as you eluded to...

TheHat

115 posts

50 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
I’m not sure whether it has or hasn’t actually cost £100k. How will the company (or I) get tax relief on it? If the company pays out £100k surely it will cost £100k...

Apologies in advance if I’m being thick here.
The company will be generating a "loss" of 100k so wont pay corporation tax on that amount.

AdeTuono

7,240 posts

226 months

Tuesday 11th February 2020
quotequote all
LeoSayer said:
The LTA increases with inflation every year.
Hmmmmm......



EddieSteadyGo

11,714 posts

202 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
I’m not sure whether it has or hasn’t actually cost £100k. How will the company (or I) get tax relief on it? If the company pays out £100k surely it will cost £100k...
If your company makes a payment on your behalf into a pension scheme, it would normally be an 'allowable expense'. This means the company will receive corporation tax relief on this amount. You personally wouldn't receive any tax relief as you wouldn't be saving any tax.


Cheib

23,110 posts

174 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
chip* said:
JR,

There are a number of moving parts to your question i.e. will you be a basis/high rate taxpayer retiree? Will the pension regulatory landscape remain the same in 30 years time? Given your fortunate position, it's probably worthwhile investing on a regulated financial planner to crunch the numbers for you.
As per my OP I’ve got an appt with a FA. Used one in the past who wasn’t particularly helpful, mainly because it’s hard to crunch numbers based on a 30 year horizon when we don’t know what that Horizon will look like at the time (as you eluded to...
I worked in finance for thirty years so would say am relatively comfortable with this kind of thing and it is bloody complicated. I’ve just done this exercise and I cashed in a final salary pension scheme.

My advice would be to keep paying in if you can and maximise your pension. For me personally I do not anticipate drawing down my pension initially and may well end up leaving it in until when I hit the one off test aged 75. Broadly with that you pay a tax of 25% of the amount in excess of your Lifetime Allowance.

One of my reasons for wanting to leave my pension intact is that it falls outside your estate for IHT purposes.

oop north

1,592 posts

127 months

Tuesday 11th February 2020
quotequote all
JapanRed said:
Thanks for that link Craig. I’ve read it and although complicated, does help a little.

I don’t suppose there is an easy calculation to work out whether it’s beneficial to pay in extra over the LTA is there?

Using rounded figures - say I pay in £100k tomorrow from my limited company (using my last 3 years unused annual allowance) and this takes me £100k over my LTA, I really need that £100k to be worth £125k (if taken as income) or £155k (if taken as lump sum) when I retire, in order to break even. Is this correct?

If the above is correct then I have 33 years (I’m 35 now and will take pension ages 68) for my pension to grow by 25 or 55%, which it should do, based on historical returns....

Does this make sense or have I got it all wrong?
If I understand correctly you have ltd co and also are salaried member of NHS pension scheme (could be GP I suppose). You most certainly do not have £40k unused allowance for last three years - the increases in your pension for the last three years (presumably under 2015 scheme) will have used some of that up

LeoSayer

7,299 posts

243 months

Wednesday 12th February 2020
quotequote all
AdeTuono said:
LeoSayer said:
The LTA increases with inflation every year.
Hmmmmm......


It's factually correct.

You didn't quote my crystal ball part.


Edited by LeoSayer on Wednesday 12th February 08:51

AdeTuono

7,240 posts

226 months

Wednesday 12th February 2020
quotequote all
LeoSayer said:
AdeTuono said:
LeoSayer said:
The LTA increases with inflation every year.
Hmmmmm......


It's factually correct.

You didn't quote my crystal ball part.


Edited by LeoSayer on Wednesday 12th February 08:51
I guess it's factually correct except for when it's been reduced by large amounts.

LeoSayer

7,299 posts

243 months

Wednesday 12th February 2020
quotequote all
AdeTuono said:
I guess it's factually correct except for when it's been reduced by large amounts.
Hence the need for a crystal ball.