Making sure you don't exceed the Pension LTA

[vand]

I knocked up this little spreadsheet to help people determine if they are on course to exceed the pension LTA:
https://docs.google.com/spreadsheets/d/1MT8CtQsNWSDkDlUFFUk4U-3bpxV3hab9qVaXFWdm_eQ/edit#gid=2069368132

I think that there is a "danger" that too much focus on your pension too soon could quite easily result in hitting the LTA before you reach pension access age.

We know that money compounding at 7% doubles every 10 years, and money compounding at 10% doubles every 7 years.  If you are, lets say, 40 years old and have been smashing the pension contributions for the last few years and have already amassed let's say £200k there.. you are still 18 years from retirement and it's quite conceivable that just a couple more years heavy contributions could put you on course to hit the LTA.

I mean, this is a nice problem to have in theory... but it is a problem nonetheless.

This is what I'm currently juggling with. While I still have 14 years until I can access my pension, and "only" about £227k in my pension right now but I figure that maybe as few as another 4 years of maxing out my pension, combined with the internal growth could put me on course to exceed the LTA.

You can also factor in the "free" £720/pa you can get by contributing £2880 which the govt will gross up to £3600 even if you are FI and with no income (so eg you can move money across from your ISA) which all helps at the margins.

This exercise has also completely convinced me against making any additional J-SIPP contributions, as while the idea of 58years' of compounding would be awesome, it also means that my child would basically never be able to get her own tax breaks, so I put solely into her J-ISA instead.

[ExitViaTheCashRamp]

Nice work ! I've never really thought about the LTA - but you are right with investment growth being the free money machine it is, I really should have been keeping an eye on this.

[cerat0n1a]

We know that money compounding at 7% doubles every 10 years, and money compounding at 10% doubles every 7 years.  If you are, lets say, 40 years old and have been smashing the pension contributions for the last few years and have already amassed let's say £200k there.. you are still 18 years from retirement and it's quite conceivable that just a couple more years heavy contributions could put you on course to hit the LTA.

If my investments consistently grow at 7% above inflation for the next 10 years, I'll happily pay the LTA tax charge on the excess - I expect returns to be a good bit lower than that.  If you have £1 million+ in your pension, you're going to be paying income tax on some of it as it comes out anyway.

I have heard of naughty people divorcing and the resulting split in half of the pension across two rather than one lifetime allowances avoided the problem (and seemingly allowed them to avoid paying CGT on their second home when they moved back in together some time later).

[vand]

We know that money compounding at 7% doubles every 10 years, and money compounding at 10% doubles every 7 years.  If you are, lets say, 40 years old and have been smashing the pension contributions for the last few years and have already amassed let's say £200k there.. you are still 18 years from retirement and it's quite conceivable that just a couple more years heavy contributions could put you on course to hit the LTA.

If my investments consistently grow at 7% above inflation for the next 10 years, I'll happily pay the LTA tax charge on the excess - I expect returns to be a good bit lower than that.  If you have £1 million+ in your pension, you're going to be paying income tax on some of it as it comes out anyway.

I have heard of naughty people divorcing and the resulting split in half of the pension across two rather than one lifetime allowances avoided the problem (and seemingly allowed them to avoid paying CGT on their second home when they moved back in together some time later).

It’s not inconceivable that the markets won’t deliver that sort of return.. or at least we’ll have another couple of years of 20%+ returns which will do most of the heavy lifting required, by which point you can just adopt a much less aggressive portfolio and sidestep a large chuck of the next bear market. I know on these forums that claims around market timing tend to trip the bullshitometer, but imo smart capital allocation can deliver those sort of returns, eg someone like Rit Capital who have a long term track record of participating in 70% of the upside of bull markets but only 36% of the downside in bear markets to deliver a long term record of 12%.

At any rate, I’d always rather pay less tax than more, regardless of how much growth my portfolio has generated.

[Borgo Panigale]

Also, for those like me of a certain age, the 20x valuation of defined benefit pensions with inflation+ indexing, can eat up a fair proportion of the LTA.  A quick bout of inflation and the LTA doesn't seem so high.  I have a deferred pension that I last contributed to in 1994 that has grown to generate just over £20k and is at a valuation of over 400k. 

One of the reasons I decided to split my investments between SIPP and ISAs a few years ago. 

I also initially decided on a  two-country retirement plan that has at least allowed me to manage the tax exposure reasonably well even at the cost of a bit of some currency risk.

[helloyou]

Isn't the LTA based on realised gain?

If you're so concerned about it, why don't you just keep most of your stock and only sell what you need?

That way, you mostly won't have to worry above reaching this limit?

Let say you contributed a total of £900k and it worth a total of £2M by the time you reach pension...

Then just sell small chunk during each withdrawal to be below the LTA?

For example, sell £50k so your total realised is £950k so below the LTA? Then your realised pension pot would be smaller and worth £900k again? Then repeat every year?

[helloyou]

Actually I checked and my assumption was wrong, the LTA withdrawal is based on the total withdrawn, called the benefit crystallisation event (BCE):
"

The legislation specifies the occasions when a scheme administrator must check whether the pension benefits arising (crystallising) at that point exceed a member’s available lifetime allowance. These occasions are known as benefit crystallisation events (BCEs).

When a BCE occurs, the scheme administrator compares the value of the member’s pension benefits to the member’s lifetime allowance that is still available. Any crystallising amount that exceeds the level of lifetime allowance available is charged to tax under the lifetime allowance charge"

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088100#:~:text=SI%20%2D%202009%2F1171-,What%20is%20a%20benefit%20crystallisation%20event%20(BCE),benefit%20crystallisation%20events%20(BCEs).

So if your pension is £2M and you withdraw £1M at once, you won't be stung with the LTA charge. But if you withdraw later any amount above the LTA then you'd have to pay it.

Good thing is that it increases with inflation... so every year it goes up by £25k assuming 2.5% inflation.


So another strategy, if you were to end up with an enormous amount above the LTA (ie. £2M), to withdraw the max at once £1M, then the remaining years just withdraw the amount allowed from inflation £25k.

That doesn't sound too bad either to withdraw it like that.

[vand]

Actually I checked and my assumption was wrong, the LTA withdrawal is based on the total withdrawn, called the benefit crystallisation event (BCE):
"

The legislation specifies the occasions when a scheme administrator must check whether the pension benefits arising (crystallising) at that point exceed a member’s available lifetime allowance. These occasions are known as benefit crystallisation events (BCEs).

When a BCE occurs, the scheme administrator compares the value of the member’s pension benefits to the member’s lifetime allowance that is still available. Any crystallising amount that exceeds the level of lifetime allowance available is charged to tax under the lifetime allowance charge"

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088100#:~:text=SI%20%2D%202009%2F1171-,What%20is%20a%20benefit%20crystallisation%20event%20(BCE),benefit%20crystallisation%20events%20(BCEs).

So if your pension is £2M and you withdraw £1M at once, you won't be stung with the LTA charge. But if you withdraw later any amount above the LTA then you'd have to pay it.

Good thing is that it increases with inflation... so every year it goes up by £25k assuming 2.5% inflation.


So another strategy, if you were to end up with an enormous amount above the LTA (ie. £2M), to withdraw the max at once £1M, then the remaining years just withdraw the amount allowed from inflation £25k.

That doesn't sound too bad either to withdraw it like that.

That’s a terrible suggestion - if you only withdraw 2.5% of a portfolio every year that is still growing 9 or 10% then over time you will only end up with ever more capital tied up. It doesn’t fundamentally solve the problem of how to get your money out without incurring punitive taxes.

All withdrawal simulation models using only an inflationary withdrawal end up with a portfolio much larger than original.

[helloyou]

That’s a terrible suggestion - if you only withdraw 2.5% of a portfolio every year that is still growing 9 or 10% then over time you will only end up with ever more capital tied up. It doesn’t fundamentally solve the problem of how to get your money out without incurring punitive taxes.

All withdrawal simulation models using only an inflationary withdrawal end up with a portfolio much larger than original.

That's actually a good point. So probably stop adding when your pension reach £800k.... Although you could still move abroad for a year and withdraw a large amount to avoid the tax?

[vand]

800k 2yrs before access is not a problem, 800k 10yrs out from access certainly would be.

That's kinda the whole point of this discussion. The younger you are the eaiser it would be to overshoot the LTA if you overcontribute and/or your investments do even slightly better than forecast.

Having 200k in your pension by the time you are 30 is too much imo unless you plan to grow it very conservatively for the next 38 years.

You want to monitor the growth trajectory to make sure you flirt with the LTA but never actually manage to cross it.

As this is fundamentally a result of compounding, if it does look like you are on course to exceed the LTA then one option is to adopt a much less aggressive asset allocation within your pension vehicles. Your upside is already capped by tax rules, so why not reduce your risk and cap your downside accordingly. You can then, if you want, use ISA allowance to handle the aggressive side of your portfolio. 

It's not ideal as tou don't have access to the same portions of your portfolio until pension access age, but it might be doable with some careful jigging around.

[cerat0n1a]

So if your pension is £2M and you withdraw £1M at once, you won't be stung with the LTA charge. But if you withdraw later any amount above the LTA then you'd have to pay it.

You would pay income tax at 45% on most of that £1m though. Seems a bit stupid to try to avoid the LTA by paying more income tax instead.

Although you could still move abroad for a year and withdraw a large amount to avoid the tax?

Moving abroad for a year wouldn't help in this case - the money is clearly "earned" in the UK and would be taxed there. It is possible to move UK pensions abroad (google QROPS for details) and some people have done that to avoid LTA or to reduce tax payments. At the moment, transfers within the EEA are tax free and transfers outside Europe incur 25% tax. Some of the equivalents in Europe are relatively generous in terms of taxation and flexibility of withdrawal (e.g. Cyprus potentially allows you to take out the whole thing as a tax-free lump sum). You have to assume that Brexit will put a stop to all of this though.

It's important to remember that being above the LTA just means that you pay some extra tax on the excess amount. It's analogous to CGT. If  I can arrange sales of shares or other assets to avoid paying it, I should do so. But I shouldn't avoid profitable investments in case I make too much profit and have to pay some of it as tax.

[helloyou]

Having 200k in your pension by the time you are 30 is too much imo unless you plan to grow it very conservatively for the next 38 years.

Or if you plan to FIRE in your 30s. My pension access is 20 years away and should reach £250k by next April as I'm gradually unwinding my LTD. (Any tax needing to be paid from my LTD goes into my pension so I only paid £60 in corporation tax this year)

For people looking to FIRE in their 30-40s, it make sense to fill it as much as possible because the pension growth is likely to be very limited once you stop working.


And by the way, pension access is at 57. So someone who is 30 can have access after 27 years, not 38!

[vand]

Having 200k in your pension by the time you are 30 is too much imo unless you plan to grow it very conservatively for the next 38 years.

Or if you plan to FIRE in your 30s. My pension access is 20 years away and should reach £250k by next April as I'm gradually unwinding my LTD. (Any tax needing to be paid from my LTD goes into my pension so I only paid £60 in corporation tax this year)

For people looking to FIRE in their 30-40s, it make sense to fill it as much as possible because the pension growth is likely to be very limited once you stop working.


And by the way, pension access is at 57. So someone who is 30 can have access after 27 years, not 38!

yes, it is linked to state pension age, which is proposed to be increased to 68 for those born after 05/04/1978 but this is yet to be officially confirmed. I think it's pretty inevitable this will happen if you look at the way the country's public finances have gone, and in fact I expect it to be further increased too for younger generations.

But I think 200k can easily grow to reach the LTA if you have enough time ahead of you. For a 30yr, a real 5.1% CAGR over 28 years will get you there without any further contributions.

And, personally, I think I can do significantly better than the 5-6% long term real return of the market. 

[helloyou]

yes, it is linked to state pension age, which is proposed to be increased to 68 for those born after 05/04/1978 but this is yet to be officially confirmed. I think it's pretty inevitable this will happen if you look at the way the country's public finances have gone, and in fact I expect it to be further increased too for younger generations.

But I think 200k can easily grow to reach the LTA if you have enough time ahead of you. For a 30yr, a real 5.1% CAGR over 28 years will get you there without any further contributions.

And, personally, I think I can do significantly better than the 5-6% long term real return of the market.

Wouah if that was to happen, it would blow up so many people pension plan... There were so many sad story when the women state pension only moved 6 years from 60 to 66. Imagine a 10 years difference for everyone! I sincerely can't imagine it happening.

I think they are going to inflate the currency out and money will worth way less. That's the best way to get rid of debt without massive complain and strike from the population...


And for £200k to reach LTA in 30 years, it needs a yearly gain of 8% because the LTA also increase with inflation. Assuming inflation goes up by 2.5%/year!

[helloyou]

Also, I can't see how delaying access to the personal pension would be in any way beneficial to the government.

There are no tax paid when we contribute to pension, and actually, we are saving on tax! So, if anything, they'd want to decrease the benefit of contributing on the pension than to delay it.

Also, tax are paid when people are withdrawing their pension, so why would they want to delay this?

[PropJoe]

@helloyou Personal pension access is 10 years earlier, so 58 - don't panic! The reason the government do delay access is to make you work longer... contributing to industry and paying tax. You almost certainly pay less tax on your pension that when you're working.

My company has a really generous pension and I over-contribute so currently on track to hit about 530k when I stop contributing at age 42.
I project forward using a real return of 4% so that means I still won't hit the LTA until I'm 60, i.e.    530k * (1.04^18) = 1.073 mill
Also, the pension automatically shifts towards a more conservative (lower returning) asset allocation as I get older. Obviously this is flexible and I can adjust to my risk appetite.

I think it's a nice problem to have, I'm already maxing out the ISA so any LTA tax that I do incur is a trade-off against potential CGT that I would incur by investing more in taxable accounts.
I know you can be more clever with CGT... harvesting etc but I haven't looked into that in much detail.

I plan to live off the pension interest, leaving the main pot intact to pass on to my children.

[vand]

Haha, yeah when I said "linked to the state pension age" I forgot to say 10 years before.

The SP at 65 with triple lock guarantee is clearly not sustainable from a public finance perspective given the demographics at play, so they are effectively gradually enforcing "one more year" x3 at a national level.. which I fully expect to become x5 or more by the time most millenials are able elegible.  If you are able to RE before this SP age then great, but this is simply not an option for most people.

[vand]

@helloyou Personal pension access is 10 years earlier, so 58 - don't panic! The reason the government do delay access is to make you work longer... contributing to industry and paying tax. You almost certainly pay less tax on your pension that when you're working.

My company has a really generous pension and I over-contribute so currently on track to hit about 530k when I stop contributing at age 42.
I project forward using a real return of 4% so that means I still won't hit the LTA until I'm 60, i.e.    530k * (1.04^18) = 1.073 mill
Also, the pension automatically shifts towards a more conservative (lower returning) asset allocation as I get older. Obviously this is flexible and I can adjust to my risk appetite.

I think it's a nice problem to have, I'm already maxing out the ISA so any LTA tax that I do incur is a trade-off against potential CGT that I would incur by investing more in taxable accounts.
I know you can be more clever with CGT... harvesting etc but I haven't looked into that in much detail.

I plan to live off the pension interest, leaving the main pot intact to pass on to my children.

If you are effectively never intending to draw down into any capital from your pension portfolio with the aim of passing it on as an inheritance, isn't the best option simply to leave it invested fully in equities? The reason for reducing equity exposure as you approach the drawdown phase is because a more stable portfolio supports a higher withdrawal rate even though it sacrifices some growth, but as your aim will not be to find the optimal portfolio that supports the highest withdrawal rate, but the portfolio that will continue to grow the most while sustaining relatively small withdrawals then the balance shifts back to a heavily equity dominated composition.

I appreciate you might still be a little way from having to consider these things.

[PhilB]

So if your pension is £2M and you withdraw £1M at once, you won't be stung with the LTA charge. But if you withdraw later any amount above the LTA then you'd have to pay it.

Good thing is that it increases with inflation... so every year it goes up by £25k assuming 2.5% inflation.


So another strategy, if you were to end up with an enormous amount above the LTA (ie. £2M), to withdraw the max at once £1M, then the remaining years just withdraw the amount allowed from inflation £25k.

That doesn't sound too bad either to withdraw it like that.

I'm afraid that doesn't work.  The only thing that gets increased by inflation is the LTA and you only benefit from that to the extent that you still have some LTA unused.  In your above strategy you have already used the full allowance so the whole of the remaining £1M, including any subsequent growth, is subject to the LTA charge when a relevant BCE occurs.

I plan to live off the pension interest, leaving the main pot intact to pass on to my children.

If you are over the LTA you will need to take care to withdraw ALL growth from the pension, not just real terms growth, until you reach 75.  The BCE at age 75 for funds in drawdown compares the value to the original nominal value when put into drawdown with no allowance for inflation.

I expect to need to over-withdraw from the pension until age 75 and then reduce / stop withdrawals after that to allow it to build again for inheritance purposes - always supposing they don't change the rules of course.

As to the overall question of how to plan contributions wrt the LTA, I think the best solution is probably to aim so that a reasonable growth rate gets you to the LTA and if you go over try to think of that as good news. 

Don't forget that if you are a 40% tax payer while contributing and 20% in retirement then the LTA just puts you back to where you would have been if you'd used an ISA instead (apart from having locked the money away).  If you have salary sacrifice then you could still be quids in.  Of course it's always possible that tax rates may be higher than that when you retire :o(

[PropJoe]

If you are over the LTA you will need to take care to withdraw ALL growth from the pension, not just real terms growth, until you reach 75.  The BCE at age 75 for funds in drawdown compares the value to the original nominal value when put into drawdown with no allowance for inflation.

I expect to need to over-withdraw from the pension until age 75 and then reduce / stop withdrawals after that to allow it to build again for inheritance purposes - always supposing they don't change the rules of course.

Good advice, I really need to read more about drawdown and BCE's.
Although based on my current plans, I think I will have to over-withdraw as well.
I do wonder how I'll be able to manage all this stuff when I'm 75... I guess I need to train up the kids and get them to help when I start to lose my faculties!

On the subject of drawdown, have any peeps done much research on providers? Just wondering what sort of fees we can expect to pay.

[PhilB]

Vanguard have shaken up the market by having no fees for drawdown.  II have followed suit and that's currently where I'm planning to transfer all my pensions in the spring - they have a combined fixed fee of £240 pa for a SIPP, an ISA and an unwrapped trading account.

[helloyou]

Vanguard have shaken up the market by having no fees for drawdown.  II have followed suit and that's currently where I'm planning to transfer all my pensions in the spring - they have a combined fixed fee of £240 pa for a SIPP, an ISA and an unwrapped trading account.

I'm waiting for Trading212 and Freetrade to open their SIPP access. Then I'll decide from there.

For now I have my ISA on Trading212 (transferred from Vanguard) and planning to transfer my SIPP from Vanguard as well.

Vanguard is good on small amount (<£20k) but the fees become quite high when you have more than £100k in.

[PropJoe]

Vanguard have shaken up the market by having no fees for drawdown.  II have followed suit and that's currently where I'm planning to transfer all my pensions in the spring - they have a combined fixed fee of £240 pa for a SIPP, an ISA and an unwrapped trading account.

Awesome, I didn't know VG offered drawdown now. I have my ISA and Unwrapped account with them already. Just checked on their website, and it seems to suggest the cap is £375 pa, still very reasonable.

[vand]

Well I just found out I'm approximately £18k richer than I thought I was..

On the theme of continual optimisation, one of my goals this year is to finally reclaim all my old pensions from employer pension schemes that I have worked for in the past.  I've sort of been putting it off until I think I have over >250k to consolidate under Fidelity where their fee then drops from 0.35% to 0.2% on all assets (so the total amount actually drops once you cross the threshold), which I must say is a very good deal.

First port of call was tracking down my pension form a company I worked for for 2 years between 2004-2005. I had quite a job actually digging up the required details as the company is no longer trading and doesn't appear on the Goverment's (very useful) pension database (https://www.findpensioncontacts.service.gov.uk/)

Anyway, I finally managed to track it down through some old paperwork, and turns out that I had wayyyyy more in there than I thought, thanks (of course) to the power of just leaving it alone for 15 years and allowing it to compound. It was only a 5% employer contribution (no match necessary) for 2 years, so I didn't think it was worth very much, it has grown to a substantial sum during that time.

So that's me about 5-6% closer to FI than I thought I was.

Who knows how much my other old pensions have grown by when I finally manage to track them all down... but a damn good way to kick off the year

[helloyou]

Well I just found out I'm approximately £18k richer than I thought I was..

On the theme of continual optimisation, one of my goals this year is to finally reclaim all my old pensions from employer pension schemes that I have worked for in the past.  I've sort of been putting it off until I think I have over >250k to consolidate under Fidelity where their fee then drops from 0.35% to 0.2% on all assets (so the total amount actually drops once you cross the threshold), which I must say is a very good deal.

First port of call was tracking down my pension form a company I worked for for 2 years between 2004-2005. I had quite a job actually digging up the required details as the company is no longer trading and doesn't appear on the Goverment's (very useful) pension database (https://www.findpensioncontacts.service.gov.uk/)

Anyway, I finally managed to track it down through some old paperwork, and turns out that I had wayyyyy more in there than I thought, thanks (of course) to the power of just leaving it alone for 15 years and allowing it to compound. It was only a 5% employer contribution (no match necessary) for 2 years, so I didn't think it was worth very much, it has grown to a substantial sum during that time.

So that's me about 5-6% closer to FI than I thought I was.

Who knows how much my other old pensions have grown by when I finally manage to track them all down... but a damn good way to kick off the year

Exactly my case when I decided to start my SIPP few months ago... and realised I needed to have pension open at least 4 years ago to be able to add £160k tax free... and by digging around I found out I had £10k in pension saved!

I recommend anyone to do that to save on fee and get better return

[vand]

Yeah, I've already transferred it over to Fidelity.
Put the request in yesterday around 5pm, money is in my Fidelity account by lunchtime today!

I went for cash transfer rather than in-specie, but still. It was all in equities which put my AA out of whack so I need to redistribute it anyways.

[MisterA]

Regarding LTA, surely the trick is to plan with your partner, assuming that you have one. So that you're effectively doubling the LTA. If you both happened to hit the LTA, wow!

[shackleford]

Anyway, I finally managed to track it down through some old paperwork, and turns out that I had wayyyyy more in there than I thought, thanks (of course) to the power of just leaving it alone for 15 years and allowing it to compound. It was only a 5% employer contribution (no match necessary) for 2 years, so I didn't think it was worth very much, it has grown to a substantial sum during that time.

Good for you!  I think the maxim is something like "the best investors are the ones who are either dead or forgot their login details". 

Annoyingly, I am fully on top of all my pension pots after moving one into my current work one a few years back, so no nice pension surprises for me in the future.

On the LTA, I am actually reasonably close to being the hypothetical 40 year old in your OP, but I can't see it being an issue for me - I don't think I'll last that long at work! 

[PhilB]

Regarding LTA, surely the trick is to plan with your partner, assuming that you have one. So that you're effectively doubling the LTA. If you both happened to hit the LTA, wow!

That rather relies on both partners having a sufficiently above-median income for the LTA to be an issue in the first place. 

[vand]

On the continuing theme of pensions.. I've just been through the exercise of adding up all the fees I am paying... and rather ashamed to confess that it seems I'm bleeding away about £5k/yr in Platform fees and especially OCFs in my main work pension, which is held with Scottish Widows (I'm happy to name & shame in this instance).

here are their OCFs for all their pension funds: https://adviser.scottishwidows.co.uk/assets/literature/docs/47122A.pdf
How they can get away with 1% OCF on the most basic tracker on top of a 0.4% platform charge is appalling - 1.4% just for the most basic investment possible!

I do hold several active funds in some more esoteric sectors, so I accept that my fees are always going to be higher than someone with a simple low cost passive strategy.

Hopefully by consolidating it all together under my SIPP I'll be able to cut my fees by at least half while still giving myself exposure to everything I had before.

Saving £2-3k in fees is just as good as getting a 2-3k payrise, right?

[PhilB]

That is indeed shocking - if true.  Have you checked that you are definitely paying the full whack as it is pretty common with work schemes for the provider to quote a high headline rate and then negotiate a significant discount with the employer for specific schemes.  I can't remember exactly but I'm pretty sure the discount on one of mine was something like 0.7%

[cerat0n1a]

Hopefully by consolidating it all together under my SIPP I'll be able to cut my fees by at least half while still giving myself exposure to everything I had before.

The only thing to be aware of here is that a SIPP doesn't have the same level of FSCS protection as a personal pension if the provider goes bust. It's limited to £85K for a SIPP but the full amount for a personal pension. You can of course choose to ignore that, or mitigate it by splitting your SIPP over more than one provider.

[vand]

That is indeed shocking - if true.  Have you checked that you are definitely paying the full whack as it is pretty common with work schemes for the provider to quote a high headline rate and then negotiate a significant discount with the employer for specific schemes.  I can't remember exactly but I'm pretty sure the discount on one of mine was something like 0.7%

I messed up the spreadsheet so original number I thought I was paying is not correct.

Yes, I do get a discount through my employer - I'm pretty sure it's a 0.5% discount off their standard baseline 1% platform charge which I can work out from the monthly "AMC adj" figure that appears on the the unit history statement. (https://www.reddit.com/r/UKPersonalFinance/comments/e2wkpu/pension_charges_comparison_scottish_widows/)

Even with the funds I am in I'm paying about £3150/yr on my SW pension with roughly £175k of AUM, so about 1.8%. Yikes, that hurts just typing it. 

I do hold some active funds with higher OCFs.. one at 1.995% and one at 1.725%. I'm not complaining too much, as the funds have done very well, but the galling thing is that the same funds are available on Fidelity for 0.95% and 1.04%, and the higher fees are purely due the share class that SW have.


In total my fees across all my platforms are about £3700 on £290k of AUM, or 1.276%

By consolidating down to just a single SIPP I'll be knocking this down to about £1470, or 0.51% of ongoing annual charges, plus one-off transaction fees of about £220 (0.07%).

So, I'll be saving myself approx £2010 (0.7%) in the first year and £2230 (0.77%) per year thereafter. 

Worth doing!

[helloyou]

That is indeed shocking - if true.  Have you checked that you are definitely paying the full whack as it is pretty common with work schemes for the provider to quote a high headline rate and then negotiate a significant discount with the employer for specific schemes.  I can't remember exactly but I'm pretty sure the discount on one of mine was something like 0.7%

I messed up the spreadsheet so original number I thought I was paying is not correct.

Yes, I do get a discount through my employer - I'm pretty sure it's a 0.5% discount off their standard baseline 1% platform charge which I can work out from the monthly "AMC adj" figure that appears on the the unit history statement. (https://www.reddit.com/r/UKPersonalFinance/comments/e2wkpu/pension_charges_comparison_scottish_widows/)

Even with the funds I am in I'm paying about £3150/yr on my SW pension with roughly £175k of AUM, so about 1.8%. Yikes, that hurts just typing it. 

I do hold some active funds with higher OCFs.. one at 1.995% and one at 1.725%. I'm not complaining too much, as the funds have done very well, but the galling thing is that the same funds are available on Fidelity for 0.95% and 1.04%, and the higher fees are purely due the share class that SW have.


In total my fees across all my platforms are about £3700 on £290k of AUM, or 1.276%

By consolidating down to just a single SIPP I'll be knocking this down to about £1470, or 0.51% of ongoing annual charges, plus one-off transaction fees of about £220 (0.07%).

So, I'll be saving myself approx £2010 (0.7%) in the first year and £2230 (0.77%) per year thereafter. 

Worth doing!

Yeah fees are the first thing to kill off! well done! I gotta do the same with my parents who just took a high fee financial instrument with a lock in period of 5 years...

[frugledoc]

Okay I’ve just done a quick check. 
I’m 42
NHS pension “valuation” - £500,000
SIPP value.     - £90,000

Planning on retiring 50 - 55
I’m not contributing anything to SIPP any more but NHS pension seems to use almost all of the annual allowance.

I think I’ll just carry on regardless.  Suspect government tinkering will probably encourage me to opt out of further contributions to my NHS pension in the next few years.

[vand]

Another 10k recovered from an old work pension that's been sitting there quietly growing away in the corner since 2002, so £30k recovered, all in all.

I mean, you don't need to explain how compounding works to me.. but I am absolutely delighted to have found that much, as I honestly thought it was going to be well less than half that amount.. it's not like I was earning megabucks back then (hey, it's not like I'm earning megabuck now even hahaha).

Takes me to £256k in pensions.. not a big enough pot to concern myself with the LTA just yet, but I figure if I max out my £40k annual limit for the next 3 years plus some moderate internal growth would take me to the point where then starting to taper back might not be the worst idea in the world.. just in case the future is even brighter than any of us are expecting.

[helloyou]

Well done doing that. I wish I could find back £30k! I only got £11k back after 8 years forgetting these.

Also, thinking again about the LTA, I wouldn't mind putting a bit over, like having £500k-700k before stopping contribution even if there are more than 10-15 years left before withdrawal is possible.

There can always be a downturn at some stage in the future which could depress the stock market and potential earning as well.

Once tax are paid, you can't get it back because the market is down. So if you can save 20-25% tax earlier, it would make sense to do that just in case.


That way, if there is a downturn, then the additional contribution would have been very handy. And if there isn't... then having exceeded a bit the LTA isn't that bad as a protection against downturn.

[vand]

Well done doing that. I wish I could find back £30k! I only got £11k back after 8 years forgetting these.

Also, thinking again about the LTA, I wouldn't mind putting a bit over, like having £500k-700k before stopping contribution even if there are more than 10-15 years left before withdrawal is possible.

There can always be a downturn at some stage in the future which could depress the stock market and potential earning as well.

Once tax are paid, you can't get it back because the market is down. So if you can save 20-25% tax earlier, it would make sense to do that just in case.


That way, if there is a downturn, then the additional contribution would have been very handy. And if there isn't... then having exceeded a bit the LTA isn't that bad as a protection against downturn.

Personally I'm leaning toward erring on the cautious side, leaving 10-15% headspace in the pension.

My thinking is that you just never know what opportunities the future holds, and how likely is it that I'll never get another job even if I am happily FI? 

A nice job opening could always present itself somewhere down the line that is too good to turn down with a nice big employer match to take advantage of.. so why overfill your pension today?  Better to leave some breathing space in your pension wrapper and make full use of your ISA.

Plus, if you're a standard rate tax payer like me and on on track to max out the pension then its likely you'll be paying considerable amount of basic rate tax when drawing on it, so the advantage over an ISA is not as great when you start talking about 4% annual withdrawal on a £750k pension pot.

[helloyou]

Yes I saw your point. It's about whether you see the glass half full or half empty.

I'm fairly risk adverse and I like to be ready for the bad case scenario. In fact, I consider risk as more important than reward.

Yes I can go much over my LTA if the market keeps going up the way it did...

But at the same time, it could perform much worse... we never know.

If the market perform much worse than expected, I'd be very glad I'd have saved in tax even if its just basic tax rate. I'd feel I made the right choice in hingsight.

If the market is performing better and/or I get a great opportunity to top up even more my pension leading to significantly higher than expected LTA.. then I'd say it's a nice problem to have.


Its much better in my view to have put too much than not enough. After, all I care is to have a good lifestyle in the future and not worry about money. Paying a bit more in tax isn't a bad thing if it gives me a bigger chance to be financially secure in the future.

Its not a big deal to pay more in tax if I'm already financially secure. The opposite is not true.

[vand]

Yes I saw your point. It's about whether you see the glass half full or half empty.

I'm fairly risk adverse and I like to be ready for the bad case scenario. In fact, I consider risk as more important than reward.

Yes I can go much over my LTA if the market keeps going up the way it did...

But at the same time, it could perform much worse... we never know.

If the market perform much worse than expected, I'd be very glad I'd have saved in tax even if its just basic tax rate. I'd feel I made the right choice in hingsight.

If the market is performing better and/or I get a great opportunity to top up even more my pension leading to significantly higher than expected LTA.. then I'd say it's a nice problem to have.


Its much better in my view to have put too much than not enough. After, all I care is to have a good lifestyle in the future and not worry about money. Paying a bit more in tax isn't a bad thing if it gives me a bigger chance to be financially secure in the future.

Its not a big deal to pay more in tax if I'm already financially secure. The opposite is not true.

Well I always like to extend the logic. How much would you be willing to put into your SIPP if there was a punitive 100% marginal tax rate on anything above the LTA?

You would obviously not want to go a penny over the LTA, and the chances are you would leave yourself some breathing room to allow for something that you can't control (market returns) putting a cap on your overall wealth. Continuing to contribute to your pension when you are well on course to exceed such a LTA is the equivilent of guaranteed 100% loss those contributions!

Another way to look at it is you can draw up individual scenarios where the market returns 3,4,5,6,7,8,9,10%pa and what your total pot would be under each of those scenarios, assign each one a probability, and then work out your most expected outcome. Sure, it could underperform and you could be "fine", but it could also overperform and you'd be much worse off. IMO it's poor planning to continue to plow money in when your most likely expected outcome exceeds the LTA. The most likely outcome is that you will be less well off than you might otherwise be when you can finally access that money.

[helloyou]

Yes I recognise it's likely I'd be less well off. But it's a risk I happy to take in exchange to have additional safety to live well for long time.

In my mind, by being millionaire would already be a great achievement and it's enough to not have to worry about money. Getting much more is great but not as important as being able to have financial security.

I see it as an insurance cost. And to take your analogy, even if it was 100% over the LTA, it would make sense to add a bit more. Like up to £500k when there are still 10-15 years down the line.


To some extent, you can argue it's poor planning because I would most likely earn way less than what I should... but I'd say it's insurance which I pay in case of bad scenario. The hope is that it doesn't happen. But if it does, I added way more protection than without doing so.

[PhilB]

The important thing is to know the price you are paying for your protection before you can make a rational decision.

For a basic rate tax payer without salary sacrifice and with enough already saved to cover their PA in retirement, an £80 investment in the pension nets an eventual £5 gain if below the LTA threshhold vs a £20 loss if over it*.  Add in the risk of basic rate tax increasing eroding that £5 gain, the inflexibility of locking the money away for longer, etc. and this starts to look like a very expensive policy...

* Below LTA £80 -> £100 -> £85 when withdrawn with 25% tax free, 75% taxed at 20%
   Over LTA £80 -> £100 -> £60 when subject to 25% LTA charge then taxed at 20%

[sea_saw]

Should that have been £85, PhilB? I speak as a pension ignoramus thanks to my DB scheme.

Getting much more is great but not as important as being able to have financial security.

How much less financial security do you have if you made those same investments in an ISA instead of a pension though?

Also, I would have thought if you did your savings in an ISA and approached the end of your career with room to spare in your pension, you could move the money over at that point? So no extra 'insurance' gained from doing it early. (Unless from salary sacrifice).

[helloyou]

The important thing is to know the price you are paying for your protection before you can make a rational decision.

For a basic rate tax payer without salary sacrifice and with enough already saved to cover their PA in retirement, an £80 investment in the pension nets an eventual £5 gain if below the LTA threshhold vs a £20 loss if over it*.  Add in the risk of basic rate tax increasing eroding that £5 gain, the inflexibility of locking the money away for longer, etc. and this starts to look like a very expensive policy...

* Below LTA £80 -> £100 -> £75 when withdrawn with 25% tax free, 75% taxed at 20%
   Over LTA £80 -> £100 -> £60 when subject to 25% LTA charge then taxed at 20%

It's not like I plan to intentionally go way over the LTA either.

I'd just plan for a very conservative gain, like 3-4% gain / year. So if I have saved £700k in pension and have 10 year left before withdrawing the pension. Then I'd add maybe up to £750k because a 3% compounded gain would reach £1M in 10 years.

Of course, there is the risk it may reach £1,5M with a 7% gain, but as the pension allowance go up with inflation, assuming it's at 2.5%, I'd just end up barely over the LTA at that time.

[PhilB]

Should that have been £85, PhilB? I speak as a pension ignoramus thanks to my DB scheme.

Oops!  I can add up, honest.  It's just typing I'm not so good at!

Now fixed.

[PhilB]

@helloyou I get where you are coming from that 'if returns are bad I'll be grateful for the extra, if returns are good then I don't care about the penalty because I have enough anyway', but I think @vand is right that this argument has to be coloured by the amounts involved and the probabilities.  Taking it to extremes, you wouldn't give up a good chance of gaining £1M for the certainty of gaining 10p unless you were really desperate for that 10p.

For a 20% taxpayer the pension gains are so small compared to the losses that I think most people would be aiming for a position where returns would have to be very good indeed to take them significantly over the LTA.

[helloyou]

@helloyou I get where you are coming from that 'if returns are bad I'll be grateful for the extra, if returns are good then I don't care about the penalty because I have enough anyway', but I think @vand is right that this argument has to be coloured by the amounts involved and the probabilities.  Taking it to extremes, you wouldn't give up a good chance of gaining £1M for the certainty of gaining 10p unless you were really desperate for that 10p.

For a 20% taxpayer the pension gains are so small compared to the losses that I think most people would be aiming for a position where returns would have to be very good indeed to take them significantly over the LTA.

Let's compare.
I save 19% in corporation tax + 7.5% in dividend tax so a total of 25% tax by staying in the 20% taxpayer bracket.
1. Market underperforming:
When I withdraw at retirement age, I get 25% tax break then 20% tax rate on the 75%. So I'd pay in total 15% tax.
My tax saving is 10% tax gain compared to not investing at all.

Note that this would also be the gain from investing in a pension, so following that logic, one could argue this is so low it doesn't worth having a pension at all if you are a basic tax rate payer!

2. Market overperforming
I pay 25% as LTA allowance fee + 20% tax = 45% tax.
But I saved 25% tax before, so in total I pay 20% additional tax.

So yes you are right, it's just 10% gain if the market underperform... but if the market overperform, it's also only 20% additional tax. So not that much higher as insurance policy.

[PhilB]

Sorry, I forgot that you worked via a ltd company.  That does make it a much more even bet. 

The tax charge over the LTA is only 40%, not 45% as you pay the 25% first and then 20% on the remaining 75%.

The numbers for a PAYE basic rate payer are 6.25% gain vs 25% loss.

In your case though it works out at 13.4% gain vs 19.9% loss which is a much more even proposition.

[helloyou]

Sorry, I forgot that you worked via a ltd company.  That does make it a much more even bet. 

The tax charge over the LTA is only 40%, not 45% as you pay the 25% first and then 20% on the remaining 75%.

The numbers for a PAYE basic rate payer are 6.25% gain vs 25% loss.

In your case though it works out at 13.4% gain vs 19.9% loss which is a much more even proposition.

Even via employer salary (PAYE) you could get more than 20% saving if you ask for direct employer contribution because of:
- saving from the national insurance contribution that is taken on top of the income tax
- potential employer contribution matching or scheme adding more to your pension

Its good to take these into consideration as well when doing the calculation!

[LightTripper]

It is something to be aware of.  I had assumed I was safely under, but using the 4% real growth assumption up thread, then in 12 years (when I can take it) my pension could be worth £1.3m.  Still, it's a nice problem to have I guess.  I'm using my ISA allowances, and a have been a top rate taxpayer - so I'm looking it as really just a deferral of tax.

Anyway, it's brave to make a bet on what the threshold will be or what the system will look like in 10 years time, let alone 20.  But I guess we can only ever plan based on what the rules are now.  I'm not going to put any more in, but also it's not a situation I would lose sleep over!