Exceeding lifetime pension allowance

[JapanRed]

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

[JapanRed]

Thanks Leo, can you expand on your second paragraph?
25% on taxable drawdowns?
55% on tax free cash?

[JapanRed]

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]

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?

[JapanRed]

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]

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...

[JapanRed]

Pheo said:

I really wish they would get rid of the taper which kicks in at 100k, in that at the moment my marginal tax rate seems to be about 65%; makes it seem pointless getting a pay rise.

Mind you, if they do so by removing the higher rate relief on pensions, it’ll completely screw me overnight. Sigh.

I’ve got it on good information that the taper will be raised in the budget.

[JapanRed]

p1doc said:

Mr Pointy said:

That simply demonstrates that doctors are grossly overpaid and/or their pension arrangements are far too generous (thanks Tony Blair). A good first step would be to cut their pay by at least a third.

doctors did not decide pension arrangements government did and constantly move goalposts such as 2015 forced from old scheme to new scheme increasing pension age from 60-68
lots of doctors I know are refusing extra shifts or be stung by back payments up to 2-3 yrs out of date as capita/SPPA cannot give accurate figures
it will be fine as likely in 10yrs there will be no full time gp's left anywhere due to increasing workload and retiring of gp's who are burnt out
rant over lol

Completely agree.

[JapanRed]

BritPop said:

Have you worked out your current NHS pension value?

You should be able to login to the NHS Total Rewards website to get a valuation for your scheme(s).

You're probably in two schemes - the 1995 one and the 2015 one. Take your 1995 annual pension and multiply by 20, then add your lump sum. That should tell you your total pot value for that scheme. There isn't a lump sum in the 2015 scheme, so just take your annual 2015 scheme pension and multiply by 20. Add the two together and you'll get your total value.

Thanks mate I didn’t realise that this was how you calculated a pots “value”. Seems like I might not hit lifetime limit after all so could potentially put a bit extra in.

Say someone was 5 years from retirement and still earning good money. If they checked their “pot values” and it came close to, or exceeded, the lifetime allowance, would it be prudent to stop paying into the pension, or would they still benefit from paying in?

[JapanRed]

2 GKC said:

JapanRed said:

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

That first line is pretty unlikely isn’t it?

No it’s not unlikely at all. £40k per year in the NHS pension scheme for 40 years, assuming 4% growth per year would end up close to £1M

Edited by JapanRed on Wednesday 26th February 21:05

[JapanRed]

LeoSayer said:

JapanRed said:

Say someone was 5 years from retirement and still earning good money. If they checked their “pot values” and it came close to, or exceeded, the lifetime allowance, would it be prudent to stop paying into the pension, or would they still benefit from paying in?

Depends on the circumstances.

Does the firm match your contributions? If so, then the benefit of this 'free money' may exceed the LTA charges. That is, unless your firm offers you an alternative way of getting the matching.

What rate of tax will you be getting relief on? If it's one of those high marginal rates then it may still make sense to pay the LTA charge.

Your marginal rate of tax you expect to pay when you draw on your pension can also influence whether it is worth it.

Ah that’s great thanks. Plenty to think about I guess.

[JapanRed]

2 GKC said:

JapanRed said:

No it’s not unlikely at all. £40k per year in the NHS pension scheme for 40 years, assuming 4% growth per year would end up close to £1M

Edited by JapanRed on Wednesday 26th February 21:05

He didn’t say NHS pension though did he?

He was quoting my OP where I was discussing my own (NHS) pension, which £40k for 40 years would end up around £1M as per my example above. What’s difficult to understand here?

[JapanRed]

BritPop said:

JapanRed said:

Thanks mate I didn’t realise that this was how you calculated a pots “value”. Seems like I might not hit lifetime limit after all so could potentially put a bit extra in.

Say someone was 5 years from retirement and still earning good money. If they checked their “pot values” and it came close to, or exceeded, the lifetime allowance, would it be prudent to stop paying into the pension, or would they still benefit from paying in?

Which NHS pension schemes are you in? I only assumed 1995 and 2015 because of your age. The NHS pension is incredibly complicated!

The 1995 scheme is based on final salary, whereas the 2015 is career average earnings (which might not be too different for you). Also, it will differ if you're in hospital medicine or general practice.

I also don't think your Ltd company will be able to make a contribution directly to the NHS pension scheme, if that's how you were thinking about making an additional contribution to top up.

Yes I am in the 1995 and 2015 schemes.

I’ve got a telephone call scheduled with Nik from Intelligent Money on Tuesday so hopefully find out a bit more about whether I should pay in a lump sum, and if so, how to go about it.