Key thresholds for pension contributions/withdrawals

[vand]

What are the key numbers and thresholds that we have identified that one should be aware of around pensions contributions/withdrawals and restriction rules? I have:

Contributions

• £2,880 net - annual amount you can contribute with no other earned income
• £10,000 gross - annual amount you can contribute if you have already triggered MPAA
• Contributions at standard tax band (£12,570 - £50,270) - you will gain standard rate tax relief ie 20% (+ NIC relief if via salary sacrifice, ie 8%)
• Contributions at higher rate tax band (£50,270 - £100,000) - you will gain higher rate tax relief ie 40% (+ NIC relief if via salary sacrifice ie 2%)
• Contributions at the band of personal allowance withdrawal (£100,000 - £125,140) - you will gain relief higher rate tax ie 40%,the £1 withdrawal of personal allowance for every £2 of income, 33.3%, (+ NIC relief if via salary sacrifice, ie 2%)
• Contributions at the additional rate tax (> £125,140) - you will gain additional rate tax relief ie 45%  (+ NIC relief if via salary sacrifice ie 2%)
• 60k or your annual taxable income - the maxium amount you can ordinarily contribute in any given tax year
• 3yrs - the number of years of unused carry forward available, provided conditions are met that you have sufficient income in the current year + have been a member of the pension scheme during that time

Withdrawals

• £1,073,000 - this is the cap on the amount of a pot that is eligible for the 25% tax-free portion. 
• 25% - the amount of the pot that can be taken tax-free
• £268,250 - this is the result of the 2 points above - ie the maximum amount that can be taken out as the tax free portion (but this is not the same as the total amount you can get out tax-free due to the annual personal allowance.. see next)
• £12,570 - the annual personal allowance limit - this is the amount you are can take tax free once you have taken all of the tax-free element of your pension
• £16,760 - the amount you can take tax-free on an ongoing basis when taking into account the personal allowance + 25% tax free element (provided your pot is large enough to support that annual amount)
• £50,270 - the upper limit of the basic standard rate of tax, and the amount which you can take out and remain at the standard rate bax band once you have exhausted all your tax-free element
• £67,026 - the maximum amount you can withdrawal on an ongoing basis and remain a basic rate tax pay, taking into account the 25% tax-free element, and provided your pot is large enough to sustain these withdrawals

Other

• 55yo - current pension access age, rising to 57 in 2028 and 58 very likely at some unconfirmed point in future
• 75yo - Withdrawal of 25% lump sum allowance, inheritance benefits subject to tax

please add or clarify as your knowledge allows - this is not a straightforward topic!

[MisterA]

I didn't really learn anything because I knew all the limits that relate to me, but this a great post, really useful.

[Jay Ritchie]

hi

Not sure if I missed it but I think significant figures would include:

- employers NI saving (if passed back, inside IR35, own company etc)

- student loan saving - marginal 9%

- 60% tax trap (in reality 62% with NI - 71% with student loans)

- for people in Scotland some lower tax traps to watch out for.

[vand]

There's another very important but unclear zone which I find a lot of people don't appreciate with UK pensions, which is:

- above ~1m - pension starts to lose its TFLS advantage over ISA due to the max TFLS cap (you may still get net tax advantage from income tax relief and salary sacrifice)

- above ~1.6m - while it this depends on your withdrawal rate, the principle is that there is no advantage to having an amount in a pension where you are paying 40% marginal rate income tax on it vs just paying that up front and putting it into an ISA.  Assuming a 4% WR this number comes to (67026 * 25) = £1.676m.  If you draw a 5% WR then the number is 1.34m

Also, this doesn't mean that your pension needs to reach those numbers by pension access age - the likelihood is that with continual growth of the invested pot, even while you are drawing down from it they are likely to reach those numbers at some point even as you are drawing from them.

So, there's a zone starting at about £1m where the pension's advantage over ISAs is gradually reduced... first through the capping of the TFLS amount, and then naturally by the income tax bands, where, realistically, if you are trending above ~£1.5m, or are otherwise certain to be paying higher rate income tax on withdrawals (or inheritance tax on death) the pensions offer no further advantage and indeed becomes a drawback due to its inflexibility.

[PhilB]

There's another very important but unclear zone which I find a lot of people don't appreciate with UK pensions, which is:

- above ~1m - pension starts to lose its TFLS advantage over ISA due to the max TFLS cap (you may still get net tax advantage from income tax relief and salary sacrifice)

- above ~1.6m - while it this depends on your withdrawal rate, the principle is that there is no advantage to having an amount in a pension where you are paying 40% marginal rate income tax on it vs just paying that up front and putting it into an ISA.  Assuming a 4% WR this number comes to (67026 * 25) = £1.676m.  If you draw a 5% WR then the number is 1.34m

Also, this doesn't mean that your pension needs to reach those numbers by pension access age - the likelihood is that with continual growth of the invested pot, even while you are drawing down from it they are likely to reach those numbers at some point even as you are drawing from them.

So, there's a zone starting at about £1m where the pension's advantage over ISAs is gradually reduced... first through the capping of the TFLS amount, and then naturally by the income tax bands, where, realistically, if you are trending above ~£1.5m, or are otherwise certain to be paying higher rate income tax on withdrawals (or inheritance tax on death) the pensions offer no further advantage and indeed becomes a drawback due to its inflexibility.

Slight correction, with 4% WR your number to hit HRT is actually £1,525k - your calcs above take you over the TFLS limit.  Realistically you hit the issue much sooner than that because of the state pension.  If you retire at the same point you start your £12k state pension then the number drops to £1,225 for 4% withdrawal.

It can still be worth contributing if you get enhanced relief via salary sacrifice or by keeping child benefit or avoiding student loan repayments / parental contributions, but you are right that it becomes much less attractive.  I can say from personal experience that the prospect of 40% tax in retirement can easily sneak up on you, either via good investment returns or via unplanned income sources using up the 20% band you planned to use to move pension to ISAs.  It's definitely a good problem to have though :)

One other number I would add is (state pension age - retirement age)* £16,760.  The amount of pension you can get out completely tax free using your personal allowance, absent any other income.  A good number for the lower earner to target in a couple with unequal income / pension provision.  Reduce this by £3.6k pa if you also want to put in £2,880 pa in retirement and get that out tax free.