This pension lifetime allowance thing.
Discussion
Having just checked my pensions statements recently it occurred to me that it is highly probable I'll go through it at some point.
So is my understanding correct that basically everything over the threshold is taxed at 55% & you then still pay income tax on that amount when you draw it? So for every 100 over the threshold you pay 55% tax then your marginal tax rate on the 45% that's left? Leaving you potentially with 27 out of every 100 over the threshold?
Second question; is the value determined at the point you start to draw from the pot? So any growth after this point would not be penalized?
So is my understanding correct that basically everything over the threshold is taxed at 55% & you then still pay income tax on that amount when you draw it? So for every 100 over the threshold you pay 55% tax then your marginal tax rate on the 45% that's left? Leaving you potentially with 27 out of every 100 over the threshold?
Second question; is the value determined at the point you start to draw from the pot? So any growth after this point would not be penalized?
I believe there is a tax charge of 25% of the value of the pot over the lifetime limit, taken from the pot when it moves into drawdown or you buy an annuity, and any income taken thereafter is taxed through income tax PAYE. You only get 25% tax free cash up to the lifetime limit. If you pay tax at 40% you would receive 60% of 75% of the portion of your pot over the lifetime limit, therefore only receiving 45%, the 55% does not therefore apply to pensioners paying standard rate income tax only.
I am not a financial adviser and someone may be along to correct me or explain it better.
I am not a financial adviser and someone may be along to correct me or explain it better.
It is 55% tax charge if taking as a lump sum and 25% if taking it as an income, if you then add in income tax there's very little difference in actual cost to you.
The point of assessment is broadly correct on when you take funds, but there are others, such as 75th birthday, transfer overseas etc etc.
There are protections that can be put in place, Fixed or Individual 2016, but you need specific advice and understanding around this relevant to your situation.
The point of assessment is broadly correct on when you take funds, but there are others, such as 75th birthday, transfer overseas etc etc.
There are protections that can be put in place, Fixed or Individual 2016, but you need specific advice and understanding around this relevant to your situation.
GT03ROB said:
Having just checked my pensions statements recently it occurred to me that it is highly probable I'll go through it at some point.
So is my understanding correct that basically everything over the threshold is taxed at 55% & you then still pay income tax on that amount when you draw it? So for every 100 over the threshold you pay 55% tax then your marginal tax rate on the 45% that's left? Leaving you potentially with 27 out of every 100 over the threshold?
Second question; is the value determined at the point you start to draw from the pot? So any growth after this point would not be penalized?
I started a thread on this a couple of weeks ago so I think I can now answer the first part of your question based on my understanding from that thread.So is my understanding correct that basically everything over the threshold is taxed at 55% & you then still pay income tax on that amount when you draw it? So for every 100 over the threshold you pay 55% tax then your marginal tax rate on the 45% that's left? Leaving you potentially with 27 out of every 100 over the threshold?
Second question; is the value determined at the point you start to draw from the pot? So any growth after this point would not be penalized?
Lets assume your amount over the lifetime allowance was £100,000. If you take this as a lump sum you pay 55% tax. So you would receive £45,000 in your pocket.
If you took this amount as an income instead you would first pay 25% tax e.g. £25,000, plus income tax e.g. 40% on £75,000 which would be £30,000, so the combined tax would be £55,000. So you would still receive £45,000 in your pocket.
Credit to Purple Moonlight for this info, as I have just lifted it from his contribution to my thread.
Depending on how soon you are going to retire, I would wait to see what happens to pension tax relief and the lifetime allowance. It may well change before this becomes an actual problem (btw I have the same issue).
There's been a lot of commentary about likely changes to pension tax relief i.e. pegging it not at your highest rate of tax, but at a fixed amount - say 25%. This is because, apparently, higher rate tax payers claim the largest chunk of pension tax relief, so the low rate tax payers are subsidising higher rate tax payers pensions. Of course. Absolutely zero correlating commentary about higher rate tax payers contributing the largest chunk of tax, and thereby subsidising all the lower rate payers...but I digress.
The lifetime allowance is a stupid cutoff because it penalises people who have saved for their retirement and/or made good investment decisions. So, the commentary is suggesting that when the pension tax relief goes to flat rate, the sop will be that the lifetime allowance will be axed.
But it's all politics so anything could happen. If Corbyn gets in then any pension anywhere near the lifetime allowance would be fscked anyway - either by a colossal drop in value, or by McDonnell lowering the lifetime allowance further.
It's a bit annoying because I might have chosen to have topped up my pension last year and this but while the lifetime allowance exists I might just be exacerbating the problem, so I've held off, and once the annual allowance is gone, it's gone.
There's been a lot of commentary about likely changes to pension tax relief i.e. pegging it not at your highest rate of tax, but at a fixed amount - say 25%. This is because, apparently, higher rate tax payers claim the largest chunk of pension tax relief, so the low rate tax payers are subsidising higher rate tax payers pensions. Of course. Absolutely zero correlating commentary about higher rate tax payers contributing the largest chunk of tax, and thereby subsidising all the lower rate payers...but I digress.
The lifetime allowance is a stupid cutoff because it penalises people who have saved for their retirement and/or made good investment decisions. So, the commentary is suggesting that when the pension tax relief goes to flat rate, the sop will be that the lifetime allowance will be axed.
But it's all politics so anything could happen. If Corbyn gets in then any pension anywhere near the lifetime allowance would be fscked anyway - either by a colossal drop in value, or by McDonnell lowering the lifetime allowance further.
It's a bit annoying because I might have chosen to have topped up my pension last year and this but while the lifetime allowance exists I might just be exacerbating the problem, so I've held off, and once the annual allowance is gone, it's gone.
Thanks for the input.
It does just go to show what a mess the whole pensions arena appears to be in. It appears to have become a political football, with all sorts of complications along the way.
The question arose as I have around 2/3rds of the LTA already blocked out with a DB scheme. I'm currently in a DC scheme where the company matches me & adds 3%, so it's getting 13% of my salary. If I don't contribute another penny even with just 3% annual growth I'm through the LTA. Looks like I'm still better off going through the LTA, plus it should be indexed which reduces the exposure further.
It does just go to show what a mess the whole pensions arena appears to be in. It appears to have become a political football, with all sorts of complications along the way.
The question arose as I have around 2/3rds of the LTA already blocked out with a DB scheme. I'm currently in a DC scheme where the company matches me & adds 3%, so it's getting 13% of my salary. If I don't contribute another penny even with just 3% annual growth I'm through the LTA. Looks like I'm still better off going through the LTA, plus it should be indexed which reduces the exposure further.
Rob,
In an ideal world, retirement would be a completely distinct macro, and folk would have the sense of certainty to plan ahead. Alas, unless just a few years from retirement, I’d be pretty circumspect about pretty much all future regulatory aspects (of LTA etc). Generation Xers still have at least a few years to go before they’re ripe for plucking - it’s the younger boomers who should probably be gulping a little now.
In an ideal world, retirement would be a completely distinct macro, and folk would have the sense of certainty to plan ahead. Alas, unless just a few years from retirement, I’d be pretty circumspect about pretty much all future regulatory aspects (of LTA etc). Generation Xers still have at least a few years to go before they’re ripe for plucking - it’s the younger boomers who should probably be gulping a little now.
GT03ROB said:
As either an antique X'er or new born boomer, dependent on definitions...... I assume based on this I'm f
ked!
After pensions, the single largest concentration of wealth is in property, physical bricks and mortar. Now even that’s wobbling. The issue that the state has is that it needs to make housing more affordable, but in doing so, it cuts off a future revenue stream. I’d be conducting at least one threat analysis through that (very basic!) prism. ked!GT03ROB said:
What a brilliant idea..... 
Would it work??
I'm not aware of any specific anti avoidance legislation stopping it, but HMRC could try to argue it's intentional tax evasion. I doubt they would even find out though.Would it work??
You would need a formal Pension Sharing Order issued by the Court.
One of you would also have to lie on the divorce application, not that that is uncommon.
Ginge R said:
GT03ROB said:
As either an antique X'er or new born boomer, dependent on definitions...... I assume based on this I'm fked!
After pensions, the single largest concentration of wealth is in property, physical bricks and mortar. Now even that’s wobbling. The issue that the state has is that it needs to make housing more affordable, but in doing so, it cuts off a future revenue stream. I’d be conducting at least one threat analysis through that (very basic!) prism. ked!
so my pensions fked, me properties are fked, me ISA's are fked, I'm doomed. Bloody snowflakes..... I'm gonna blame them 
PhilboSE said:
So, the commentary is suggesting that when the pension tax relief goes to flat rate, the sop will be that the lifetime allowance will be axed.
You're making the fatal mistake of assuming a Government will both give (for high earners) as well as take. Not even the Cons will get mileage with "tax cuts for millionaires". Osborne wimped a watered down version of change in 2016, which was expected to bring in the flat rate, but never mentioned killing the LTA. https://www.bbc.co.uk/news/uk-35732604
They've f
ked about with it quite a lot since it was introduced, so if there is one thing likely, it's more of that...LTA History:
2006/2007
£1,500,000
2007/2008
£1,600,000
2008/2009
£1,650,000
2009/2010
£1,750,000
2010/2011
£1,800,000
2011/2012
£1,800,000
2012/2013
£1,500,000
2013/2014
£1,500,000
2014/2015
£1,250,000
2015/2016
£1,250,000
2016/2017
£1,000,000
2017/2018
£1,000,000
2018/2019
£1,030,000
Croutons said:
PhilboSE said:
So, the commentary is suggesting that when the pension tax relief goes to flat rate, the sop will be that the lifetime allowance will be axed.
You're making the fatal mistake of assuming a Government will both give (for high earners) as well as take. k about with the system in the meantime anyway. Much like yourself, as a higher rate tax payer I'm not expecting any favours from anyone.I must admit I do get annoyed though when lazy journos trot out the "higher rate tax payers claiming pension tax relief at the higher rate is unfair" bit.
In any event, I would hope any mistakes wouldn't be fatal, just pecuniary.
EddieSteadyGo said:
I started a thread on this a couple of weeks ago so I think I can now answer the first part of your question based on my understanding from that thread.
Lets assume your amount over the lifetime allowance was £100,000. If you take this as a lump sum you pay 55% tax. So you would receive £45,000 in your pocket.
If you took this amount as an income instead you would first pay 25% tax e.g. £25,000, plus income tax e.g. 40% on £75,000 which would be £30,000, so the combined tax would be £55,000. So you would still receive £45,000 in your pocket.
Credit to Purple Moonlight for this info, as I have just lifted it from his contribution to my thread.
The answer to your question on legal costs in drawing up a will is circa £300. Not bad I thought. Lets assume your amount over the lifetime allowance was £100,000. If you take this as a lump sum you pay 55% tax. So you would receive £45,000 in your pocket.
If you took this amount as an income instead you would first pay 25% tax e.g. £25,000, plus income tax e.g. 40% on £75,000 which would be £30,000, so the combined tax would be £55,000. So you would still receive £45,000 in your pocket.
Credit to Purple Moonlight for this info, as I have just lifted it from his contribution to my thread.
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