Increased lifetime allowance - would you work longer?

[Kermit power]

I've just been reading about Jeremy Hunt proposing to increase the pensions lifetime allowance to encourage people to work longer.

Would this make you work longer???

My personal view is that I'm working until I can comfortably afford not to work. Between plans to move away from the South East and take cash out of our house and various other bits and pieces, I doubt I'll actually need to get up to the current lifetime allowance before retiring early anyway, but if I did expect to exceed it, then increasing the allowance would surely mean I could retire earlier not later?

The key points as I understand it are the following:

1. The first £1.07m in my pot is my lifetime allowance, and going over that doesn't mean I pay anything on it, I'll only pay on the amount I exceed it by.

2. Let's say I currently exceed the LTA by £300k. If I wanted to take that as a lump sum, I'd be taxed at 55%, so would only keep £135k. If I took it as drawdown, on the other hand, I'd only lose 24%, but hey, that's still £75k less to play with.

So, assuming I'm working towards being able to draw a certain amount of income from my pension and other investments in retirement, if the chancellor increases the LTA, meaning I would, in my above scenario, be able to keep hold of an additional £75k to £165k of my own money, and I'd decided for sake of argument that I wanted £40k net annual income to live on, why on earth wouldn't I just retire 2 to 4 years earlier than currently planned?

I know that quite a lot of doctors have been stopping work when they hit the LTA because they're not going to be increasing the value of their pension as quickly, but I don't understand how anyone can actually end up worse off as a result of exceeding the LTA as it stands, nor how increasing it would actually make anyone work for longer?

[Kermit power]

Four Litre said:

To get some proper perspective on this I would love to know the % of people that this is really a problem for.

It must be extremely low and certainly not something that will make a blind bit of difference in the real world. If you've managed to save £1m in a pension your either extremely wealthy and pensions wont be your only investment, or you've lived like a hermit and get all hot and bothered downstairs when your statement comes in.

Not necessarily.

I'm not up to a million yet, but apart from capital appreciation in my family home, basically all my savings are in pensions.

Given that my employer puts in £2.5 for every £1 I do, and HMRC puts in 40p for every 60p I do, why would I put my savings anywhere else?

[Kermit power]

Scolmore said:

This will almost certainly allow/cause me to work longer.

I see it as a good thing for the country - people building their pension pots are doing the responsible thing & providing for the future; they're not planning to spend their time being a burden to the state.

As others have said, the current cap certainly doesn't buy an exorbitant lifestyle.

Would you actively choose to work longer though? And if so, how much longer?

Obviously a lot for me depends on investment growth, as I'm on DC pensions, not DB, so I do understand it being a more clear-cut issue for those on DB such as doctors, but for me, if I do hit even the current LTA, it wouldn't be before I reach around 62 or 63, and I'd view every year worked beyond 60 as a year of retirement lost rather than an extra year of pension contributions gained.

I think Earthdweller makes a very valid point, as I may in theory want to continue with some sort of part time work in retirement - or at least have the option to if I start to get bored - but I see no incentive in doing that if I'm getting clobbered very quickly for tax, given that I'd effectively be starting out on a zero tax allowance as that'll all be going on my pension.

People like GT03ROB saying that £1m doesn't exactly buy you a luxury lifestyle should be a little careful where they voice that sentiment though, as I'm sure there's quite a few pubs around the country where expressing that sort of view might result in a certain amount of disdain from the rest of the clientele!

Even if you see no investment return whatsoever on your capital once you retire, once you take in to account the fact that 25% is tax free, a £1m pot equates to around 30 years' earnings for someone earning the UK median average of £38,131, and once you add in the actual State pension of £10.6k from whenever your retirement age is, you're not going to be a million miles from having more in your pension pot - at a time where you're not going to be paying a mortgage or rent and likely have much lower outgoings as well - than many people will actually earn in their entire careers before they even think about saving some of it for their retirement. £1m is also not far off 10x the average retirement pot of £107k according to the ONS.

[Kermit power]

Crumpet said:

No, it wouldn’t make me work longer. I plan to be retired by 58-60, so 20 years of contributions left to go and my pot will be what it will be - hopefully somewhere around the existing LTA.

What does worry me, and extending the cap only makes me even more suspicious, is that they’ll means test the state pension. I’ve been doing all my calculations based on receiving the state pension at 68 but should probably base it around receiving none at all.

Whilst I know a lot of people fear means testing happening, I really can't see it. I think it would be viewed as just too big a betrayal of the social contract even by people not directly impacted by it. At best, they might be able to get away with it by providing 10-15 years' notice, but even then I can't see it.

[Kermit power]

TriumphStag3.0V8 said:

Whilst I understand the sentiment among most people of "woah, (just over) a million pounds in a pension = rich bd", and accepting that a lot of people will not get anywhere near that, it is not as much as the headline number makes you think.
Assuming that someone with a maxed-out pension pot buys an annuity with all of it, depending on the terms of the annuity (spouse/dependents pensions etc), then that would be between £30K and £40K a year of income, which of course would be taxed.

A comfortable amount to live on in retirement, absolutely - but hardly luxurious and lavish (I appreciate people's view on what is lavish is subjective).

I am probably going to hit the current threshold by the time I hit retirement age. From my perspective, it is about time high earners were not hammered at every opportunity, and this is a small step to giving something back to those that contribute the most.

Changing the topic slightly - there is clearly a lack of understanding amongst the general population as to how pensions work (including the state pension) - I really think that this is something that should be taught properly in schools, along with mortgages and taxation in general (far more useful that learning trigonometry). I have taken on younger staff in their 20's (educated, professional roles) who knew very little about, and had little interest in pensions, didn't understand mortgages etc (and were horrified by the concept of stamp duty).

Personally, I think EVERYONE should be horrified by the concept of Stamp Duty!

I'm in my fifties, and only in my second property.

Back when we bought our first, my expectation was that we'd do as my parents' generation and others before them had done and move to gradually larger houses over time, and a few years down the line, that's exactly what we did.

When the time came to move again, though, between all the various costs of moving, but above all stamp duty, we discovered that we'd be shelling out the best part of £40k before we'd spent so much as a penny on actually increasing the size of our house!

So what did we do? The same as almost every other homeowner in our street. We extended and converted the loft instead.

We got our extra space, but there is now a yawning chasm from the rung below on the ladder, so it's even harder than before for younger people to move on up.

Stamp Duty is evil.

[Kermit power]

TriumphStag3.0V8 said:

Kermit power said:

TriumphStag3.0V8 said:

Whilst I understand the sentiment among most people of "woah, (just over) a million pounds in a pension = rich bd", and accepting that a lot of people will not get anywhere near that, it is not as much as the headline number makes you think.
Assuming that someone with a maxed-out pension pot buys an annuity with all of it, depending on the terms of the annuity (spouse/dependents pensions etc), then that would be between £30K and £40K a year of income, which of course would be taxed.

A comfortable amount to live on in retirement, absolutely - but hardly luxurious and lavish (I appreciate people's view on what is lavish is subjective).

I am probably going to hit the current threshold by the time I hit retirement age. From my perspective, it is about time high earners were not hammered at every opportunity, and this is a small step to giving something back to those that contribute the most.

Changing the topic slightly - there is clearly a lack of understanding amongst the general population as to how pensions work (including the state pension) - I really think that this is something that should be taught properly in schools, along with mortgages and taxation in general (far more useful that learning trigonometry). I have taken on younger staff in their 20's (educated, professional roles) who knew very little about, and had little interest in pensions, didn't understand mortgages etc (and were horrified by the concept of stamp duty).

Personally, I think EVERYONE should be horrified by the concept of Stamp Duty!

I'm in my fifties, and only in my second property.

Back when we bought our first, my expectation was that we'd do as my parents' generation and others before them had done and move to gradually larger houses over time, and a few years down the line, that's exactly what we did.

When the time came to move again, though, between all the various costs of moving, but above all stamp duty, we discovered that we'd be shelling out the best part of £40k before we'd spent so much as a penny on actually increasing the size of our house!

So what did we do? The same as almost every other homeowner in our street. We extended and converted the loft instead.

We got our extra space, but there is now a yawning chasm from the rung below on the ladder, so it's even harder than before for younger people to move on up.

Stamp Duty is evil.

Oh, I agree completely. We had the same challenge, but there was absolutely no scope to extend our last house, so we had no choice but to spend the money (actually pretty close to £40k as well) for the priveledge of spending more on a bigger house.

That's what we thought - and three architects agreed with us - when we sold our first house!

That house now has a rear extension which was always sort of possible but made the house too big for the plot, and a loft conversion which, unless they've spent an absolute fortune dropping the height of the floors and ceilings internally, can't have more than about a 6' ceiling height in the loft itself, and must've turned one of the existing bedrooms from a double to a single to fit in the extra staircase!