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Risk of Exceeding LTA - Salary Supplement alternative

shootingstar
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Risk of Exceeding LTA - Salary Supplement alternative

#402413

Postby shootingstar » April 7th, 2021, 7:41 pm

Fellow fools, I am quite far off retirement in my early 40s

I am an active investor (including individual stocks/funds/VCTs/EIS schemes) and have saved significant amounts into my pension as well as had good investment performance in recent years (from stocks i have invested in and picked myself) such that the value of my pot is currently c.£500k (mostly in a SIPP but also including the value of an old DB scheme at 20x estimated annual income)

My employer is paying 8% of salary into my SIPP which i am matching with 4%

Whilst my pot is still quite a way off the LTA, i am now actually at the point where i am thinking the pot could easily hit the LTA before i retire if the investment performance continues to be solid (the pot is largely invested in equities)

I am thinking to ask my employer to actually stop paying into my pension and instead pay me a "salary supplement", but I'm doing some homework around this first.

I was curious if there are other fools in a similar circumstance? or if anyone has any thoughts on what factors I should be considering for and against reducing my ongoing contributions and taking on the salary supplement?

Many thanks

xxd09
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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402468

Postby xxd09 » April 7th, 2021, 11:34 pm

Some have advocated the use of Bonds in their SIPPS in this scenario
This allows you to continue to access your employers contributions bit SIPP will grow slower
Put as much as you can of the equity part of your portfolio in your ISA in order to maintain your portfolio growth-no ceiling on ISAs yet!
xxd09

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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402473

Postby wanderer » April 7th, 2021, 11:55 pm

I remember broaching the subject with a lot of trepidation at my employer. I was worried that it would be seen as a highly unusual request and therefore refused because it wasn't in line with the company policy. However, it turned out to be amazingly straightforward and not actually that uncommon. As long as one could demonstrate that LTA was likely to be an issue and signed to this effect, they were very accommodating.

The terms were that I would receive the max employer contribution as a monthly cash payment, less a deduction to reflect the additional employer's national insurance contribution so that costs were neutral to the company. Obviously, I also then had to pay tax and NI on the receipts but at least the money was in my pocket rather than trapped in an equally inefficient and inflexible tax wrapper.

I had to commit to not being allowed to re-enter the scheme again, so there was no way back once I was out. I decided this was fine because if I wanted to get back into pensions, I would use my SIPP instead.

My death in service benefit was also linked to the pension scheme but they had an additional section just for people like me that opted out due to LTA, so that worked out okay in the end: something worth checking before making the jump though.

In the event they won't accommodate a request to opt out then it may not be the end of the world to keep contributing anyway, especially for the next few years at least.

Higher rate tax relief - if that's relevant for you - is on borrowed time, you're still young in age terms and putting in some good chunky contributions now with the tax relief and letting them compound for 15 years isn't the worst thing in the world even if you have to pay a slightly higher tax rate on some of it on the way out. Plus pension funds have IHT advantages if that's relevant and - who knows- maybe one day we'll get another George Osborne in number 11 who will do something positive for people who've worked hard and been prudent in building up a pension pot. If that happens then you will be pleased to have put a bit more in the pension locker when decent tax reliefs were still available.

In my case, I did - in fact - subsequently put a bit of money into my SIPP to use up some carry forward relief, but it was a marginal call, based on the assumption that higher rate tax relief was on its way out. Now that the LTA is frozen for at least 4 years, there will be no more going in before I retire.

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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402476

Postby JohnB » April 8th, 2021, 12:11 am

If it is to be cost neutral to your employer your marginal rate of tax might be huge, 40%+2%+13.8%, much the same as BRT pension income when over LTA

With HRT relief likely to go, I'd keep pumping your pension

wanderer
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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402478

Postby wanderer » April 8th, 2021, 1:44 am

The tax differences are dependent on both the marginal tax rate and the ratio of the employer/employee contributions. One advantage of having it paid rather than invested in an LTA-busting pension scheme is you don't need to subject the employee contribution to a 55% rate on withdrawal.

If I've calculated it correctly then at a 40% tax rate and based on employer/employee contributions of 8 and 4 respectively:

Paying in to pension above the LTA:
Employee contribution of £4 means forgoing £2.32 of net income today (ie £4 taxed at 42%.) In return for that the pot benefits from a boost of 4 + 8 = 12. Tax paid on withdrawal at 55% will be £6.60, so net income received out of the pot is £5.40 for each £2.32 (net) contributed by the employee.

Taking the cash now whilst cost neutral for employer:
Your pay packet benefits from both your £4 today, plus the equivalent of the employer contribution less their NI costs. 4 + (8 × 0.862) = £10.89. This comes to you through PAYE taxed at 42% so £4.57 tax to pay. Net income received is £6.32. Plus, this is a bird in the hand.

It may be that I've made a mistake in these calcs (it's late after all!) - if so then please call me out! Maths hasn't been my strongest point of late so if I am embarrassing myself I apologise in advance!!!

moorfield
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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402495

Postby moorfield » April 8th, 2021, 8:47 am

shootingstar wrote:
My employer is paying 8% of salary into my SIPP which i am matching with 4%

Whilst my pot is still quite a way off the LTA, i am now actually at the point where i am thinking the pot could easily hit the LTA before i retire if the investment performance continues to be solid (the pot is largely invested in equities)




I would just keep taking your employer's contribution while you are working. Exceeding the LTA before you retire is a very nice problem to have.

Embrace it - a better question to ask might be "Strategies for drawing down a SIPP that has exceeded the LTA" ...

dealtn
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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402503

Postby dealtn » April 8th, 2021, 9:15 am

wanderer wrote:The tax differences are dependent on both the marginal tax rate and the ratio of the employer/employee contributions. One advantage of having it paid rather than invested in an LTA-busting pension scheme is you don't need to subject the employee contribution to a 55% rate on withdrawal.

If I've calculated it correctly then at a 40% tax rate and based on employer/employee contributions of 8 and 4 respectively:

Paying in to pension above the LTA:
Employee contribution of £4 means forgoing £2.32 of net income today (ie £4 taxed at 42%.) In return for that the pot benefits from a boost of 4 + 8 = 12. Tax paid on withdrawal at 55% will be £6.60, so net income received out of the pot is £5.40 for each £2.32 (net) contributed by the employee.

Taking the cash now whilst cost neutral for employer:
Your pay packet benefits from both your £4 today, plus the equivalent of the employer contribution less their NI costs. 4 + (8 × 0.862) = £10.89. This comes to you through PAYE taxed at 42% so £4.57 tax to pay. Net income received is £6.32. Plus, this is a bird in the hand.

It may be that I've made a mistake in these calcs (it's late after all!) - if so then please call me out! Maths hasn't been my strongest point of late so if I am embarrassing myself I apologise in advance!!!


Doesn't look like you are comparing like for like.

Cashflows are on different dates, and there is no assumption on growth.

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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402603

Postby TUK020 » April 8th, 2021, 1:19 pm

Assuming this is not any form of Defined Benefit....

Keep making max payments into your DC pension. Moments before it hits LTA, (or indeed on any market crash from now on) crystalize the pot (which will enable to withdraw tax free lump sum, if wanted). This freezes the %LTA, even if the remaining pot continues to grow in value (there is another valuation event at age 75, but that's a separate problem).

At this point, stop all pension contributions, and take the extra in salary, or reduced hours.

Summary, keep it cranked up to max contributions until you get to LTA, or until they change the tax relief rules, in which case review then.

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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402617

Postby JohnB » April 8th, 2021, 2:12 pm

The OP won't be able to crystalise until 58, which is 15 years away for them. I agree they can get from <50% to 75% of LTA without worry, but I'd not push it too hard.

wanderer
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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402682

Postby wanderer » April 8th, 2021, 5:54 pm

TUK020 wrote:Keep making max payments into your DC pension. Moments before it hits LTA, (or indeed on any market crash from now on) crystalize the pot (which will enable to withdraw tax free lump sum, if wanted). This freezes the %LTA, even if the remaining pot continues to grow in value (there is another valuation event at age 75, but that's a separate problem).


Isn't the problem that the OP expects to exceed the LTA before age 57, which would be the first opportunity to crystalize the pot?

dealtn wrote:Doesn't look like you are comparing like for like.

Cashflows are on different dates, and there is no assumption on growth.


I'm assuming growth rates are the same inside or outside a pension wrapper and tax rates are applied consistently over time.

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Re: Risk of Exceeding LTA - Salary Supplement alternative

#402797

Postby TUK020 » April 9th, 2021, 7:46 am

wanderer wrote:
TUK020 wrote:Keep making max payments into your DC pension. Moments before it hits LTA, (or indeed on any market crash from now on) crystalize the pot (which will enable to withdraw tax free lump sum, if wanted). This freezes the %LTA, even if the remaining pot continues to grow in value (there is another valuation event at age 75, but that's a separate problem).


Isn't the problem that the OP expects to exceed the LTA before age 57, which would be the first opportunity to crystalize the pot?



Good point. On this time horizon, there is a bigger risk that the government will move the goalposts several times before then anyway


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