The Lemon Fool

True

Also think about what a person throwing 40K a year into a pension is going to do as they get closer to 55 and closer to the LTA.

Do they keep buying shares? Downside the share price falls and they lose money upside the share rise and they exceed the LTA, so not really an upside then.
Do they just stay in cash? Small loss but more predictable growth to the LTA target.

The LTA is going to drive undesirable behaviours in the well heeled.

ayshfm1 wrote:True

Also think about what a person throwing 40K a year into a pension is going to do as they get closer to 55 and closer to the LTA.

A person throwing 40K a year into a pension over a working lifetime is poorly-advised. They'll go well over, and would obviously do better to pay the tax up front. Unless perhaps they have a good wheeze - maybe for example jurisdiction-hopping to be out of HMRC's clutches when the LTA is assessed.

A person who has a few good years in a working lifetime might want to throw in 40k or more in a good year, and nothing in a lesser year. My SIPP nudged above half the LTA when I took the lump sum, based on three good years of 40k contributions and about 20k total over the rest of my life.

UncleEbenezer wrote:A person throwing 40K a year into a pension over a working lifetime is poorly-advised.

The problem, of course, is that this was good advice up to a few years ago, and before the government more than halved the LTA in real terms in just five years.

Those earlier pension saving years cannot now be relived in a different way. And there is no way of knowing if worse is to follow.

ayshfm1 wrote:I was surprised it was frozen, I expected it to be abolished, probably along with reduction to 30K limit on what could be invested in a year.

Why?

It is too easy to get to 1 million + 70K at 55 (57 is even easier) and the tax treatment is so shocking it near mandates anyone who does mange it, to retire. These people are the one paying lots of taxes, it's akin to killing the golden geese.

Force transition high earners into retirement. Brilliant plan! The LTA made sense historically, today it looks lethal.

A reduction of the annual allowance to £30k would just reinstate all the problems they had with Doctors refusing to do overtime because of the Annual Allowance taper.

Far better they refuse overtime, than just retire. Moreover if overtime is on the agenda - hire more Doctors.

Also don't agree that chucking 40K a year into a pension is a bad idea, tax is potentially 40% NI another 2% even a standard rate is 20% + 12% NI. On the way out much lower, 25% lump sum + 12K personal allowance + 20% tax,

It becomes a bad idea ONLY if you hit the LTA, which is my point no sane person does, as LTA appears exit stage left and since there is no upside for investment risk don't take any.

LTA becomes a target to hit, which once done means you win and quit the game.

My point stands - LTA drives behaviours that are undesirable.

No this not hypothetical

ayshfm1 wrote:It becomes a bad idea ONLY if you hit the LTA, which is my point no sane person does, as LTA appears exit stage left and since there is no upside for investment risk don't take any.

LTA can be more difficult to avoid for those in defined benefit schemes. These days that's nearly exclusively the public sector. The benefits will continue to accrue based on salary and time. Investment risk is not something the beneficiary can control.

ayshfm1 wrote:My point stands - LTA drives behaviours that are undesirable.

No this not hypothetical

In case it wasn't clear in my last post, I agree entirely with that point.

My point was that since a pension is a lifetime thing, if you're going to limit it then the only remotely sensible way to do that is on a lifetime basis. The LTA does that. An annual limit that was cumulative would also do that: for example, if £40k/year were cumulative, then the person who at age 50 suddenly gets very rich after 30 years on minimum wage would have a personal limit of £1.2 million (30x40k) that year. But an annual limit with limited or no carry-back heavily penalises that person.

The severe perverse incentives in the current nonsensical mess would be much-mitigated if the penalties for going over the limit were less drastic. Starting with the principle that you never pay more tax than you would have done in the absence of the pension.

UncleEbenezer wrote: in my view, the LTA makes a lot more sense than annual contribution limits that just serve to penalise anyone with a lumpy income.

I agree, also I think the LTA should relate to inputs, not asset values. The current system penalises successful investment decisions.

Urbandreamer wrote: There is actually a PENALTY for working in the NHS beyond a certain point.

In my professional career I had the privilege of working what-ever hours were required to get the job done, without extra remuneration. Highly paid hospital consultants have a problem with the pension arrangements only because they get paid extra for working extra hours. I'd imagine teachers are green with envy.

jonesa1 wrote:

Urbandreamer wrote: There is actually a PENALTY for working in the NHS beyond a certain point.

In my professional career I had the privilege of working what-ever hours were required to get the job done, without extra remuneration.

Indeed. I used to regard that as precisely what distinguished the professional from the unionised clock-watcher (back in the days when "unionised" was tending towards a dirty word). But isn't the issue with quacks simply one of such high pay and pensions that they fall foul of the LTA, rather than anything to do with overtime?

Likewise. Overtime at a certain level in private business is not a thing and from what I saw of Doctors salaries they all out earn me.

jonesa1 wrote:

Urbandreamer wrote: There is actually a PENALTY for working in the NHS beyond a certain point.

In my professional career I had the privilege of working what-ever hours were required to get the job done. Highly paid hospital consultants have a problem with the pension arrangements only because they get paid extra for working extra hours. I'd imagine teachers are green with envy.

Indeed, they could in theory work for free. However if they do get paid at all, auto-enrolment put's them into a pension scheme. This can be a problem if they have protected their LTA under the 2016 legislation that requires them to not make further contributions to their pension.

Some of us remember the political problems caused by hospital consultants being paid.
https://www.theguardian.com/society/201 ... -tax-bills
There was talk at the time of making NHS staff a special case, subject to different pension rules than the rest of the people.
https://www.stevebrine.com/NHSpensionsdebate

Steve Brine told the House that senior staff were effectively having to pay more in tax than they were earning, if they did extra work.

This of course pre-dates Covid. Since then a number of people have returned to help in the NHS, causing them problems becuase they automatically get put back into the pension scheme when paying into one invalidated their protected LTA.

I should point out that these rules are set by the govenrment and that if we were to point fingers there really is only one target to point them at.

ayshfm1 wrote:Far better they refuse overtime, than just retire. Moreover if overtime is on the agenda - hire more Doctors.

Also don't agree that chucking 40K a year into a pension is a bad idea, tax is potentially 40% NI another 2% even a standard rate is 20% + 12% NI. On the way out much lower, 25% lump sum + 12K personal allowance + 20% tax,

It becomes a bad idea ONLY if you hit the LTA, which is my point no sane person does, as LTA appears exit stage left and since there is no upside for investment risk don't take any.

LTA becomes a target to hit, which once done means you win and quit the game.

My point stands - LTA drives behaviours that are undesirable.

No this not hypothetical

No, there may be good reasons to exceed the LTA. Exceeding the LTA, paying a 25% charge and drawing at basic rate is equivalent to paying 40% tax. That is not onerous. It is just handing back higher rate tax relief. The money in the pension, grows free of income tax and CGT, and still escapes inheritance tax. Furthermore, contributions made under salary sacrifice still result in reduced NI. Then there are employer contributions to consider.

The LTA is intended to limit income tax relief, which is what it does. That does not make other benefits redundant.

Limiting tax relief on the way in makes more sense to me, but is not without drawbacks. Investors experiencing a poor period of stock market returns would be disinsentivised from making additional contributions after hitting their tax relief limit.

Interesting thread. In April 2014 I took fixed protection of £1.5M. This concentrated the mind as I had already had one vesting event and the next one would be in 2016 with the final one next month (Oct 2021). The one next month has the best inflation protection and guarantee (UK Govn).
Ergo I didn't want to bugger up the one next month by exceeding the £1.5M when it is paid. Went to 40% cash for the period 2014 to 2016 on my SIPP. Only after vesting my Sipp in Oct 16 did I go back to a proper portfolio. The result is next month I should be under the 1.5M by about 20k.

The great advantage of stopping pension contributions from 2014 is that I have built a decent pension for my wife and we have enjoyed building a VCT portfolio. The ISA's have had a good innings as well.

Motto.....get the pension out of the way ASAP.

flyer61 wrote:Interesting thread. In April 2014 I took fixed protection of £1.5M. This concentrated the mind as I had already had one vesting event and the next one would be in 2016 with the final one next month (Oct 2021). The one next month has the best inflation protection and guarantee (UK Govn).
Ergo I didn't want to bugger up the one next month by exceeding the £1.5M when it is paid. Went to 40% cash for the period 2014 to 2016 on my SIPP. Only after vesting my Sipp in Oct 16 did I go back to a proper portfolio. The result is next month I should be under the 1.5M by about 20k.

The great advantage of stopping pension contributions from 2014 is that I have built a decent pension for my wife and we have enjoyed building a VCT portfolio. The ISA's have had a good innings as well.

Motto.....get the pension out of the way ASAP.

Unless I have missed something, that makes little sense to me. Why give up growth just because you don't get to keep all of it? Cutting off your nose to spite your face?

The annual allowance makes more sense in DC schemes, to limit contributions. But then the LTA unfairly penalises pot growth.

In DB schemes, the AA makes ZERO sense, as it is assessed on an annual growth of perceived value of benefits with an arbitrary x16 multiplier. Which means a tax charge can arise from year-to-year variation in salary, without there being an overall pension gain. However, LTA can claw back tax relief proportionately.

Scrap AA for DB schemes.
Scrap LTA for DC schemes.

Then we'd be making progress.

flyer61 wrote:Interesting thread. In April 2014 I took fixed protection of £1.5M. This concentrated the mind as I had already had one vesting event and the next one would be in 2016 with the final one next month (Oct 2021). The one next month has the best inflation protection and guarantee (UK Govn).
Ergo I didn't want to bugger up the one next month by exceeding the £1.5M when it is paid. Went to 40% cash for the period 2014 to 2016 on my SIPP. Only after vesting my Sipp in Oct 16 did I go back to a proper portfolio. The result is next month I should be under the 1.5M by about 20k.

The great advantage of stopping pension contributions from 2014 is that I have built a decent pension for my wife and we have enjoyed building a VCT portfolio. The ISA's have had a good innings as well.

Motto.....get the pension out of the way ASAP.

I'm not sure what all of that means but I must say you've done a great job of getting a good pension put together. Well done and I hope it keeps you in your later years too.

AiY

YoyoJohn wrote:The annual allowance makes more sense in DC schemes, to limit contributions. But then the LTA unfairly penalises pot growth.

In DB schemes, the AA makes ZERO sense, as it is assessed on an annual growth of perceived value of benefits with an arbitrary x16 multiplier. Which means a tax charge can arise from year-to-year variation in salary, without there being an overall pension gain. However, LTA can claw back tax relief proportionately.

Scrap AA for DB schemes.
Scrap LTA for DC schemes.

Then we'd be making progress.

Would that not introduce scope for paying into DB in excess of AA and then transferring into DC schemes whilst continuing to pay into DB? I realise this would be difficult to arrange for most DB members but employers tend to accommodate their more senior and better remunerated staff.

I think the bottom line is that we are in an era of tax raising (until we are in a stagflationary environment and a leader recognises that we need to do liberalise and let market forces work). So budgets are going to see tax rises regardless of who is in charge. I don't see any signs of Sunak suddenly deciding that higher borrowing, lower taxation, and encouraging retirement investing are his priorities. Same story with Labour but slightly different taxes given they need to offer an "alternative vision".

Unfortunately this topic is impossible to make judgements that don't include a political reading as governments set taxes and allowances. Allowance is just the flip side of tax. The differences between the parties are usually around "narrative" and haven't been substantial for some time. I certainly don't see any economic logic behind the structure of recent tax raising proposals.

YoyoJohn wrote:The annual allowance makes more sense in DC schemes, to limit contributions. But then the LTA unfairly penalises pot growth.

In DB schemes, the AA makes ZERO sense, as it is assessed on an annual growth of perceived value of benefits with an arbitrary x16 multiplier. Which means a tax charge can arise from year-to-year variation in salary, without there being an overall pension gain. However, LTA can claw back tax relief proportionately.

Scrap AA for DB schemes.
Scrap LTA for DC schemes.

Then we'd be making progress.

I just don't see how the LTA "unfairly penalises pot growth". The LTA limits tax relief, albeit in a cack-handed way. Can you provide an example to back up your assertion please?

AWOL wrote:Would that not introduce scope for paying into DB in excess of AA and then transferring into DC schemes whilst continuing to pay into DB?

This is a common misconception about DB schemes. You don't pay into them in any sense of a 'pot of money'. You effectively pay a membership fee. Which has zero relation to your ultimate pension. In the NHS, your monthly 'membership fee' is a % of your gross pay. Whilst there is tax relief on this membership fee, the contribution % is tiered upwards with salary, from 5% to 14.5%, effectively removing tax relief.

And at the end of every tax year, your likely pension is valued, using a formula HRMC created. This has nothing to do with what you have contributed in the year.

And if that assessed pension value is more than 40k more than last year's assessed value, then -> tax charge. Your actual 'contributions' that year might have only been 5-10k, but perhaps you have had a 3% pay rise this year. Or perhaps last year you took some unpaid parental leave. Both of which have artificially inflated the year-to-year 'valuation' of your future pension. -> tax charge. Next year, that valuation might go down again. But there is no such thing as a negative pension input amount.