Weekend reading: The perversity of the Lifetime Allowance for pensions

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• 1 Moongrazer April 8, 2017, 12:40 pm

  I too found myself in despair about the Lifetime Allowance when planning my long term retirement.

  A lifetime Contribution Allowance I could understand. After all, that would merely be a further restriction on the Annual Allowance (making it essentially 25 years at the current £40,000 limit).

  All this current situation does is penalise anyone invests and dares to do well out of it.

  The absurd part is that investment stimulates​ the economy. Imagine if pension savers holes up with cold hard cash!
• 2 The Rhino April 8, 2017, 12:48 pm

  The LTA confuses me too. It’s obviously way too low. Although others have disagreed with me here on this point. Just make s pension planning even harder than it needs to be. I think ermine suggested you just dial up the bond s and dial back the equities if you’re running a SIPP and it looks like you might overshoot. I don’t see why it needs to be so punative. If one has a chunky pension you’re still going to be paying a good slug of higher rate tax. Isn’t that enough?
• 3 Uncertain April 8, 2017, 1:36 pm

  The TD direct Link takes me straight to a SIPP application and has nothing to do with the small caps ?
• 4 Michael April 8, 2017, 1:59 pm

  Perversely the reduction in LTA has proved a good thing for me. Two years ago it was a wake up call for me after decades of poor financial and investment planning. I started reading and in time had three spreadsheets projecting various PCLS/commutation scenarios for my pension. Based on those calculations I retired as an NHS consultant last week. The admittedly generous 1995 section NHS pension scheme I was in was part of a lifetime total remuneration package, long hours and low pay early on, give the NHS your youth and it will look after you in your old age was the promise. My first job as a doctor was an average of 104 hours a week. I did the work and then found that what I had worked for and paid into has retroactively been shrunk. My pension contribution rate was 13.5% plus 14.3% employer contribution. Contribution rates have gone up a lot over the years. Add in the shift in 2010 from RPI index to CPI meaning that in say twenty years my pension will in real terms be 20% less than it would have been. NHS pay however has not. In real terms allowing for inflation I was actually being paid less when I retired than when I was appointed as a consultant and NHS pay looks likely to fall further over the next few years.
  Bottom line the LTA is indeed a very good reason for experienced doctors to retire early but not the only one. Falling real pay due to rising inflation and forthcoming new consultant contract, increasing workload, changes in management culture and the uncertainty as to what the government will do next all have to be considered.
  I’m sixty and have three colleagues in the same department as myself planning retirement in their late fifties over the next couple of years because of the reduced LTA. Before the 2015 budget I planned to work well past sixty. I sadly predict 2016 will prove a bumper year for GP’s and NHS consultants retiring.
  As an aside I know a number of younger consultant colleagues who have left NHS practice to do 100% independent practice. The 2015 changes to the NHS pension and increasing contribution rates make it far less generous even before one considers 55% taxation. That and they no longer trust the government with their future pension.
  When in 2015 I discovered the concept of FIRE I was surprised to realise I had been in a position to retire early for several years. Since I have been extremely lucky in life so far and had a fantastic job that I loved early retirement never interested me. I remember a decade ago when many consultants worked well past sixty until age and health issues dictated retirement and reduced life span. They built up big pensions and wasted them by taking them late and dying younger than they might. Thanks to the LTA reduction I have retired still young enough to enjoy it in good health and I find surprisingly yes I am rather enjoying it 🙂
  I no longer make pension contributions, pay NI, pay tax at a 60% marginal rate or spend 60 hours a week working in the public sector for half what the private sector pays. Instead I have leisure, and a pension. Doesn’t really make economic sense for society as a whole but actually the LTA reduction has proved a great thing personally.
  For all those who envy the generous defined benefit schemes of the past in the public sector you might want to reflect that they were a very effective financial ball and chain to keep experienced workers despite the existence of better pay and conditions in the private sector.

  BTW thank you for a fantastic blog which has proved a hugely valuable resource for learning about personal finance and investing.
• 5 Jumper April 8, 2017, 2:00 pm

  Re: “once £1.8 million, but reduced again this week to just £1 million today”… a small correction. It actually reduced to £1 million on 6 April 2016, so just over a year ago.

  I retired from work at the beginning of March 2016, and took out FP2016 when it became available. The correlation between my actions and the latest in a long line of lifetime allowance reductions was not accidental.
• 6 FI Warrior April 8, 2017, 2:10 pm

  Until the young ‘uns vote enough to register on the govt.’s radar, they’ll continue to take it up the nought, it’s that simple; as for the other vulnerable groups, well, it’s open season on them all of the time, because they can’t fight back. Basically, this is what the social compact has become today, ‘I’m alright Jack, Britain’.
• 7 Richard April 8, 2017, 2:40 pm

  @Micheal – interesting post. Of course like many industries the plan must be to get rid of the older more expensive workers in favour of cheaper younger workers on newer contracts. Cheaper today and cheaper over the long term due to much worse pension benefits. False economy in the short term as all the experience vanishes. But eventually it will work it’s way through and no one will remeber the good old days (maybe…). The issue for the NHS is will they retain talent if private pays a lot more? Can private soak up enough people? Esp as everyone else gets poorer at the same time.
• 8 rick24 April 8, 2017, 2:46 pm

  So that’s why so many doctors are retiring early! I hadn’t even realised what the lifetime allowance meant. Now that I do…it doesn’t concern me anyway, as I doubt I will be receiving a pension of 50,000 p.a. On the other hand, if we have hyperinflation at some stage, we might be needing metaphorical (electronic) wheelbarrows to collect our pensions. Let’s hope it will be adjusted upwards in that case.
• 9 FIRE v London April 8, 2017, 3:27 pm

  @Investor – right behind you here as usual.
  One point for the younger readers is that you might not think you are anywhere near the £1m cap but you might surprise yourself. Assuming 7% long term annual return, no change in the Lifetime Allowance, this works out as roughly (relative to age R when you retire):
  – a £500k cap at age R-10
  – a £250k cap at age R-20
  – a £125k cap at age R-30.
  – a £63k cap at age R-40.
  I.e. if you are 30, plan to retire at 70, and you have about £60k of retirement savings, then you are very possibly at your cap already. Or if you are 45 and have £350k savings and haven’t quite worked out when you’ll retire, be careful before you contribute more to your pension!
• 10 JonWB April 8, 2017, 3:45 pm

  Ros Altmann is hardly neutral in this debate. She is on public record as having cashed in two final salary pension schemes. As an individual in that position, she (and any beneficiaries of her estate) are likely to be much better off if the Lifetime Allowance is scrapped. It’s almost a certainty that Altmann has exceeded the lifetime allowance already (even if she took protection, at the £1.8M level), given (a) her background and (b) the transfer values offered in recent years.

  If there are public sector workers retiring early, then that has to be a good thing for the country as it will, after all, reduce public expenditure and provide better career progression for those that remain in a public sector that is shrinking, particularly where the masses are subject to 1% pay cap or thereabouts unless they get promotion and move up. From what I can tell, in nearly every mature industry, the new employees have much worse contractual terms than the existing employees who have been employed for a long time.

  Those public sector employees will feel cheated (and rightly so at the individual level). But collectively, the country has massively over promised and unfunded any number of liabilities and continues to do so. Wage growth is poor due to the contingent liabilities and shortfall for the DB pensions, those worst hit are the newer employees who are often not even members of the DB pension scheme.

  The real danger is that the Lifetime Allowance encourages those in the private sector to retire early. Anything that is encouraging early retirement for them (as opposed to the public sector) is terrible for tax receipts. When early retirement hits, it is a savage reduction in tax for the treasury, due to both Employer and Employee National Insurance just disappearing. To understand how serious this is, consider the following:

  £50,000 through PAYE generates for 2017/18:

  Employers National Insurance = £5,773.37
  Employee National Insurance = £4,523.52
  Income Tax = £8,696.40
  Net Pay = £36,780.08
  Total Tax = £18,993.29

  £50,000 through pension income generates:

  Net Pay = £41,303.60
  Total Tax (all Income Tax) = £8,696.40

  £33,333.33 (2/3rds of £50,000) through pension income generates

  Net Pay = £28,968.46
  Total Tax (all Income Tax) = £4,364.87

  Someone in the private sector on £50K who retires on £50K sees the treasury down £10K per year in tax revenue…..
  Or more likely, someone in the private sector on £50K who retires on £33.3K sees the treasury down £14.6K per year in tax revenue…..

  So if someone on £50K retires at 55, rather than 65, that is at least £100K in lost tax revenue and quite possibly as much as £150K, from a single individual due to behavourial economics through policy choices successive Governments and the Treasury has made.

  Given that disparity, if too many avail themselves of early retirement, it is obvious that either the private pension age will have to rise from 55 to try and stop it (and just be aware that they was a report to parliament that suggested a private pension age of state pension age minus 5 years, so 62/63 already for most if adopted) and/or taxes on pensions will have to rise to close the gap with PAYE.
• 11 Gregory April 8, 2017, 4:46 pm

  Thanks for Greenblatt video. It reinforces my belief: CEE is cheap, good (low debts) and “off the beaten path”.
• 12 The Investor April 8, 2017, 5:01 pm

  @Uncertain — Very interesting observation re: that link, thanks! It seems that they are interrupting my link — if you hover over the link you’ll see it is meant to go to a particular page, which is their small cap article. I’m not happy. 🙁
• 13 The Investor April 8, 2017, 5:05 pm

  @Jumper — Gosh, that’s quite a slip, apologies all. Fixed now.
• 14 CollReg April 8, 2017, 5:08 pm

  Ros Altman simplifies things somewhat. Senior doctors can simply stop paying in to their pension schemes, freezing their benefits at whatever level – many did this before the last reduction in the LTA. They’re much more likely to be leaving because they no longer care to put up with this Government’s mistreatment of the NHS, the terms of the new consultant contract are likely to be insulting (when considering the work done, experience brought and private sector valuation of the same work) and their wages are not even stagnating but falling in real terms (5 years pay freeze followed by the current 5 years of pay ‘restraint’ @ 1%).

  Nonetheless she has a point that a LTCA would be fairer and more sane. At least the government have promised that the LTA will climb with inflation from 2018, which may even be nicely front-loaded by Brexit-induced devaluation of the pound/inflation. From my perspective as someone setting out on a medical career, I am left with a quandry: even the current ‘career average salary’ defined benefit scheme would see me meet the current LTA some time in my mid-50s, and while inflation adjustment may delay that a little later, it is still likely to be before the end of my working life.

  Despite this I am quite keen on the idea of FIRE – not least because I don’t trust future governments with either my public sector or state pensions, and also because I want to retire while I’m young enough to enjoy it (see Michael’s comments about previous generations of doctors working themselves in to the ground). So it is going to be an ISA life for me – not quite as tax advantageous as a pension but while the LTA remains there is little benefit to a public servant of a private pension because a pound in there is worth about a 5th of a pound in a defined benefit scheme (I know that’s not quite how it works, but it is a reasonable approximation).
• 15 Elef April 8, 2017, 5:37 pm

  I don’t understand the lifetime allowance from a logical point of view. I presume the intention is to limit the amount of tax relief that wealth individuals receive on their pension pots. So the obvious thing to me would be to do just that! Once you have received say £x in notional tax relief you no longer receive any more. The two issues I see are: 1. What about the gain on investment on the relief? In respect of that, I think good on the individual if they have “outperformed”. They have allocated capital in a beneficial way. The lifetime allowance punishes good/lucky investors and encourages distortive behaviour. 2. The govt realised they can’t limit tax relief due to the Page system and came up with the lifetime allowance as a work around. This seems to me to be a case of scratching ones left with the right hand – if this is truly a reason then fixing the PAYE system should be preferred (not to mention for all the other issues it suffers).

  In summary it seems like they have come up with a great way to discourage saving and long term investment via a pension. Am I missing something?
• 16 Uncertain April 8, 2017, 7:25 pm

  ”Very interesting observation re: that link, thanks! It seems that they are interrupting my link — if you hover over the link you’ll see it is meant to go to a particular page, which is their small cap article. I’m not happy.” @The Investor

  I have managed to get to it via google following your info. I thoroughly enjoy your articles and find your links very useful, but for anyone else taking the trouble, it is not one of the better ones.
• 17 Molar Bear April 9, 2017, 7:49 am

  This may sound like a very stupid question – why are they retiring? Can the doctors simply not just stop their pension contributions and continue to work without a pension but take money as taxed income instead?

  Also, with regards to the LTA – I’m 30 and have already decided to stop contributing based on a projection of possibly hitting it by retirement age and market gains at 7%! I’d rather have 40% taxed now than 55% later, with the additional penalty of not having access to it and the goal posts shifting it’s a bit of a no brainer. The 25% tax free lump sum was the only thing keeping me going but clearly the LTA is a luxury rich man’s allowance they will keep squeezing..
• 18 John B April 9, 2017, 8:44 am

  The 7% you and @FireVLondon quote seems optimistic in a world where the 4% SWR is criticised. Did you mean before inflation? The LTA will hit so many people if it isn’t coupled to inflation, and I do suspect that promise might be broken by the Tories, and certainly by Labour. If they do index link it I will scrape under the limit in 8 years when I can get my greedy mitts on it, but if I were 30, I’d have no idea what might happen, which is why its such a foolish constraint.

  If the government set a lifetime tax relief pot, index linked, you could give an 18 year old a £200k or £400k allowance to work through, but how would you set the figure for a 50 year old who already had pensions running. One of the big problems of tax changes is the transitional changes to achieve a new steady state, and pensions are such long timescales the complexities last well beyond political horizons.
• 19 CollReg April 9, 2017, 8:55 am

  @John B, I think the disparity between a 7% real return and a 3-4% SWR is that the 7% is a long term historical average return, whereas the SWR implies it is being withdrawn every year, come rain or shine. Essentially they’re measuring different things.

  There can easily be single or periods of several years where returns are flat or even negative. Thus if you take too large a bite out of your capital during the famine years, you might deplete your pot such that it does not recover sufficiently even when the next bull market comes along. By keeping such a large (expected) margin between returns and withdrawals it ensures your pot grows in the vast majority of years, giving you plenty of scope to weather the years it does not.
• 20 Rishi April 9, 2017, 10:01 am

  Work till 55 retire… keep your pension invested. Definitely use the lifetime ISA (pension substitute with LTA and tax implications) if any money is still left use it on remaining ISA allowance.
  Then at 55, take pension (ideally you and your partner) till tax free allowance (11kish today inflation adjusted close to or just under 20k for anyone in their 30s and 15kish for anyone in their 40s). Take the rest of the expenses from income from ISA (capital erosion if required) Cant use LISA till 60 so capital and returns there stay intact. rinse repeat till 60 then include LISA. Rinse repeat. That way, people atleast stand a chance of enjoying their time on the planet for best part of 15-20 yrs before their legs give up and are confined mostly to their house and local market.
  LTA is a boon. It will help a lot of ppl realise that their time is better spent doign things they enjoy rather than getting payed (no pension contributions) roughly the same amount that will be taken away as (55%!!) tax in 10-12 yrs time.
• 21 The Rhino April 9, 2017, 11:22 am

  @rishi – interesting. Id come to a different conclusion on the LISA. Tuesdays article eagerly awaited.

  I don’t think i need the LTA and punative taxation to remind me that life is short
• 22 Richard April 9, 2017, 12:21 pm

  @Molar Bear – yes, but if you are a doctor earning say £100k total package and then you total package becomes £80k you are likely to be quite miffed. Remeber the employer would have to pay employer NI if they gave the pension contribution to the doctor as salary so it would make them more expensive (meaning they probably wouldnt give them). And if the aim is to get rid of expensive doctors and replace with cheaper younger ones then you want to make them leave, not pay them more.

  I agree with the contribution based lifetime limit – seems much more sensible. But I assume DB schemes will again be overly generous in their calculation of this.

  Maybe just a maximum amount of tax relief over a lifetime you are allowed to have. Everyone has the same amount.
• 23 Rishi April 9, 2017, 1:57 pm

  @Rhino : and yet we have read cases (in this very section) of doctors working to death (almost literally!).

  Nudges deliberate or otherwise are great to make people stop and think / reassess the situation. The LTA will do a lot of good as it has the effect of providing this unintentional nudge. Some like you may not need it, for some its a God send.
• 24 The Rhino April 9, 2017, 3:03 pm

  Isn’t there a best selling book called nudge on that very subject? I should get round to reading it
• 25 Jumper April 9, 2017, 5:19 pm

  @Rishi, interesting perspective; that the LTA may be bad news for the Exchequer and perhaps for society in general, but potentially good news for some of the individuals affected?

  So… is this the government acting against its own best interests in order to benefit individuals, or just poorly thought out policy that happens to have that effect? (Rhetorical!)

  As mentioned above, I retired early as a direct response to the latest LTA reduction, which would have seen £63k wiped off my retirement in extra tax and/or lost income had I not done so. In practice it’s been great, and I should have gone earlier but lacked the intestinal fortitude to make the leap until effectively pushed.

  Since going, I’ve discovered that a lot of the things that I like doing most — exercise, drawing, learning, cycling, swimming, sunbathing(!) — are relatively inexpensive, and even the more expensive things like travel become less so when you have the flexibility to go any time and at short notice. I am far fitter and mentally much better balanced than I was a few years ago. Much of the key is to be happy in your own company. I’m sure not everyone is like me, but for anyone that is, I’d say come on in, the water’s lovely.

  My guess is that I have around 1.5x to 2x what I will need for retirement, giving a lot of freedom to re-plan. A move abroad may now well be on the cards, not least to put some distance between myself and the neverending nonsense pensions screw-tightening pathway the government now seems wedded to. That way at least I hope to have some retirement income stability, and not be forced to re-plan my retirement annually on each budget. I have a decent pensions ‘contingency’, but it is not infinite.
• 26 JonWB April 9, 2017, 8:51 pm

  Interesting discussion. Pensions are really, really complicated once the LTA is in focus.

  Whilst the Lifetime Contribution Allowance (LTCA) looks like a sensible idea, from a practical perspective, it is a non-starter. No-one has the data for what has been contributed to date (or the rate of relief obtained on those contributions) for any individual. Ros Altmann must know all this having been pensions minister, so I’m really not sure why she is advocating it now, other than to stick the oar in with her former employers.

  I have transferred my DC pension 3 times already. I am under no obligation to keep a record of contributions other than to evidence any carry forward allowances I have used. Likewise, as far as I know, my former pension providers are not obliged to keep records of contributions going back to my 20s (the earliest of which would have been 17+ years ago) as I have ceased using them as a provider and transferred my pension to another provider. Moreover, even though I have used carry forward allowances and keep meticulous contribution records for myself in a spreadsheet, I’ve never been asked to produce them, even though I have exceeded the annual allowance several times and needed to rely on carried forward allowances.

  It is the deficiency in the historical record keeping for pensions, at the individual level, which has led to the LTA in it’s current form, rather than being able to adopt something less blunt/fairer.

  I’m ignoring the threat of the LTA and I just keep on going with contributions even though I have a large SIPP already (> £900K). These are the main reasons to do so:

  1) I receive more than 55% up front relief so in my case a 55% tax charge on the way out isn’t punitive.
  2) I can choose when to crystallise between 55 and 75, so I sit tight and wait, confident I will be able to crystallise after the LTA has been removed.
  3) The LTA only applies (under current legislation) when I am 75 (or earlier, if I die before 75) and I’m confident the LTA will be removed at some stage in the next 34 years (I’m 41).
  4) After maxing out ISAs there isn’t anything better at the moment as an investment vehicle (unless you feel the need to use significant leverage).
  5) As my salary sacrifice was setup before the £150K taper was announced, I’ve got grandfathered rights (I will hit this if I went back up to 5 days per week working right now) which means I can earn up to £150K and contribute £40K to pensions without being subject to the taper and I don’t want to lose that valuable benefit.
  6) The current reliefs that are given (Income Tax, all National Insurance and Corporation Tax) won’t all last – so there is definitely an incentive to continue for now, because once the reliefs are cut, I will no longer contribute to my SIPP.
  7) There is zero reporting requirement for me personally with pensions. I can buy and sell a huge range of securities, without having to keep detailed records or consider any tax implications on any of the individual securities.

  The really hard thing to evaluate with the LTA was the savage reduction in the LTA level and whether to take Fixed Protection at any stage. Rather than up front relief versus tax paid later, it is more about the LTA decreasing from £1.8M -> £1M (but only being announced periodically). Only being able to crystallise £1M at 55 rather than £1.8M makes a big difference. It’s very hard to model, especially as you don’t know if the LTA will be £1M, less than £1M or more than £1M in X years time.

  My wife took fixed protection at £1.25M in her 30s. We then decided to let it lapse when she got a new job with a very good DB pension on a six figure salary and the (public sector) employer would not offer cash in lieu of pension. The LTA is supposed to be indexed from 2018 (and we knew that at the time we let Fixed Protection lapse), so there is every chance that it will be more than £1.25M by the time she triggers a benefit crystallisation event as 2% CPI inflation would be enough to see the LTA > £1.25M by the time she is 55.

  All things considered, my retirement strategy involves backing the horse that is “the LTA will definitely be gone in 34 years and probably gone in 14 years”.

  It’s all a bit of a crapshoot as to the best approach…. If the LTA goes, I’ll be a massive winner, if it stays (and the indexing goes or CPI is well below 2% per annum), then I’m probably a moderate loser.
• 27 Stoozbet April 9, 2017, 9:48 pm

  I’m an IFA with extensive experience advising doctors. For anyone to leave the NHS pension scheme simply because of a LTA issue is in most cases a big mistake.

  Running some basic numbers on it assuming a doctor is above the LTA & earns £100k, in the new 2015 version of the scheme for that year’s contributions their pension will have increased by around £1,851 per year. Valued for LTA purposes (multiplied by 20) it increases their LTA value by £37,020. The only way the tax can be paid is for the scheme to pay a 25% tax charge at retirement and then reduce the member’s benefits by an actuarial factor. Working this through it reduces their income by £550. Or to put it another way their pension income has only increased by £1,301 (rather than the £1,852 it would have done if the LTA tax was not applied).

  A doctor earning £100k will pay £13,500 in contributions to purchase £1,301 of pension income from state pension age even if they are above the lifetime allowance. This is still a phenomenally good deal.
• 28 Hotairmail April 10, 2017, 8:34 am

  A bit like CGT, the Lifetime Allowance is simply a tax on the money supply, inflation to you and me. Why should someone who simply leaves their fund in a tracker and does not earn their gains get to keep all their gains? Well, quite, I agree with you….CGT itself is iniquitous and all these so called complexities seem to be about compensating for the iniquitous CGT….like having pensions and ISA’s etc.

  Frankly, no one in the pension industry has covered themselves with glory, quite the opposite in fact. From gouging Scottish endowment companies, private pension companies, company pensions to public pensions – they have all done us a disservice. They deserve to be put out of business and out of their misery. Company pensions are simply a diversion and (was) a risk that they really shouldn’t have to bear. The Lifetime Allowance itself is really just a back door mechanism that is designed to provide a fig leaf to the fact that public pensions are a busted flush. I’m amazed the government managed to get away with it – they saw that public sector staff failed to realise what was going on and quickly pushed home their advantage by reducing the amount.

  Personally, I would sweep away the entire pensions edifice and simply have a decent basic state pension and abolish CGT. Replace with a relatively minor % annual Wealth Tax covering all asssets such as Land and Property.
• 29 The Rhino April 10, 2017, 9:25 am

  I have also on occasion thought that not allowing for inflation in CGT is iniquitous. I am pretty sure that I, personally, am not responsible for the countries inflation rate, yet I am taxed from the CGT perspective as though I am. Thats definitely not right..
• 30 Elef April 10, 2017, 10:17 am

  @hotairmail @rhino

  Especially when companies get indexation allowance to offset the effects of inflation.
• 31 John B April 10, 2017, 10:45 am

  And that CGT is use it or lose it, with no carry forward, which just encourages churn. The fairest CGT would have an allowance that could be carried forward, index linked and applied to all assets, including main residences. Apart from its complexity, its introduction would upset the many people that feel their house is inviolable cash generator, so it ain’t going to happen.
• 32 John B April 10, 2017, 10:51 am

  … and replace inheritance tax. The advantage of CGT over an annual wealth tax is that it can be rolled up to be paid when people realise their assets, so avoiding the granny-in-a-mansion problem.
• 33 The Austrian April 10, 2017, 10:59 am

  IIRC the LTA does not apply to the MP’s pensions, nor judges I believe… The LTA is evidently broken, but there’s next to no political capital in changing it. So don’t expect any changes soon. There’s no need for a LTCA, with all the bureaucracy that would involve, there’s already an Annual Allowance, and that should also simply go up with inflation.

  Interesting how few providers are involved with the LISA, that went live with zero fanfare in the week. Presumably because it’s an open secret that this will be scrapped as soon as possible…?
• 34 Naeclue April 10, 2017, 11:10 am

  With respect to DC pensions, Altman has conveniently disregarded a number of pertinent facts in her analysis:
  1. Up to 25% of the pot can be taken free of income tax
  2. Instead of paying 55% tax on exceeding the LTA, most people I suspect will opt to pay only 25% and leave the remaining excess amount in the pension fund
  3. Tax is only paid on the EXCESS above the LTA, not on all of it and this issue is mainly one for higher rate taxpayers who are winning hand over fist on the amount that does not exceed the LTA.

  As one example, I think I am likely to exceed the LTA by the time of my 75th birthday crystallization event, despite drawing the maximum I can without going into higher rate tax (my LTA is £1.8m and it is most unlikely that the index linking of the current £1m will exceed £1.8m by then). However, I have already taken out a 25% tax free pension commencement lump sum. That means if I do exceed the LTA and take a lump sum on the excess, then I would only actually pay 55% on the remaining 75%, not 100%. That works out as 41.25% net tax. As I received higher rate tax relief and NI savings on my contributions, I am still a net winner even on the excess. Far more likely though is I will opt to pay 25% tax on the excess, leave the remainder invested and continue to withdraw at the basic rate of 20%. Then I will only end up paying 30% tax IN TOTAL on the excess above the LTA, once the initial 25% tax free PCLS is taken into consideration. On the amount I am withdrawing now, I am paying under 15% net tax once the 25% tax free lump sum I have already taken is properly taken into consideration (0% personal allowance + 20% basic rate tax) .

  As SIPPs can now be passed to beneficiaries free of inheritance or other taxes, then even if I fail to withdraw all of my pension pot, my beneficiaries should still be able to draw it down at basic rate, or lower tax.
• 35 Naeclue April 10, 2017, 11:20 am

  With respect to CGT, I think treating it the same way as with Corporation Tax on capital gains would be a much better system. Completely abolish CGT, inflation link acquisition costs and treat the difference between the disposal value and inflated acquisition value as income in the year of disposal. A small (£1k-£2k) annual allowance could be kept to avoid overwhelming the HMRC with immaterial gains.
• 36 Stoozbet April 10, 2017, 11:31 am

  @Naeclue You make some very good points however just to correct your figures the maximum Tax Free Cash you can take is 25% of your Lifetime Allowance.

  As you highlight – you personally are unlikely to be affected by this, but I thought I should correct for the record.
• 37 Naeclue April 10, 2017, 12:43 pm

  @stoozebet, yes that is why I said “Up to 25%”. If someone is over the LTA when they crystallise, then they will not be able to get the full 25%. I agree this is well worth pointing out.

  £1m LTA I think is too low, but even so I suspect that most of those who manage to exceed that amount are still likely to have been higher rate taxpayers and so will still likely be winners overall from the current system provided they are mostly taxed at basic rate in drawdown and that really is largely a matter of personal choice.

  Limiting the amount of up front tax relief available does make far more sense as it much simpler to understand, but as JonWB has pointed out, getting from where we are now to such a system might be quite difficult. I have a feeling that at one point this was the system we had, or something close to it.
• 38 Naeclue April 10, 2017, 1:02 pm

  @stoozebet, in your experience do you find that many people choose to pay 55% on their LTA excess and take a lump sum, or do most just pay the 25% and leave the rest in the fund? Paying 55% just seems barmy to me, but I suppose there may be personal circumstances or preferences that take precedence.
• 39 Stoozbet April 10, 2017, 1:16 pm

  @Naeclue Apologies I mis-interpreted what you were saying.

  Most of my clients are doctors with the NHS being a DB scheme there is no option to take it as a lump sum. If there is an excess the scheme will pay a tax bill of 25% when the member takes benefits and will reduce the DB pension income by an actuarial factor in order to account for having paid this tax bill.

  They use the tables on page 5 of this wonderful document http://www.nhsbsa.nhs.uk/Documents/Pensions/Lifetime_Allowance_Charge_factsheet_V5_(09.2015).pdf

  So in my example above in post 22 if there is an excess of £37,020 thus a 25% LTA charge of £9,255. If they are in the 2015 scheme & have a retirement age of 68 then this charge would be divided by 16.82 and their pension income is reduced by £550 per year.

  With defined contribution pensions it’s down to individual circumstances but the inheritance tax benefits to pensions mean preserving as much within that wrapper as possible is usually the preferred route hence not taking it out in one go & paying 55%.
• 40 Factor April 10, 2017, 4:06 pm

  @TI “…….. when they got their first Austin Allegro.”

  Back in the day I had the misfortune to buy one, brand new, and it was unquestionably the worst car I have ever owned! Still, I am feeling happily virtuous today, having finally achieved a 100% ISA’d portfolio 🙂
• 41 JonWB April 10, 2017, 4:51 pm

  I should point out that I use the 55% tax charge on the excess LTA as a ‘tax to worst’ position. I suspect that in my case, it is likely I would not take all the excess as cash at 75 with a 55% tax charge, there is every chance it would remain in the pension with the 25% charge. But it is very hard to tell this far out.

  Whilst I’m reasonably convinced the LTA will go before I’m 75, I think there will be other changes before I hit minimum private pension age which are foreseeable:

  – Pension income won’t be taxed at 20% (I reckon it will be something like 30% eventually, equal or just slightly less than the flat rate pensions tax relief when adopted but time shifted by 5 or 10 years before it is brought in. Maybe the 12% Employee NI will be abolished and income tax becomes 32% at the basic rate, phased over 12 years and pension income tax is swept up in that).
  – The pension freedoms will be rolled back, at least in part (I just can’t see something so generous staying over the very long term, particularly if the LTA is abolished and there are some big pension pots).
  – I’m currently 50/50 on the 25% tax free lump sum staying, but at worst, I’m hoping if it goes, there will be some form of opt out on future contributions to take something akin to Fixed Protection so it can be kept and if a uniform flat rate relief comes in at say 30%, I will have stopped contributing anyway.
• 42 Naeclue April 10, 2017, 5:28 pm

  I cannot see pension income being taxed at 30% when most existing pensioners and savers only received tax relief at 20% as it would be grossly unfair. I suppose it could happen if some form of protection is offered to those who previously contributed with only 20% relief. Similarly with the 25% tax free PCLS. This was promised as part of the deal to make pension contributions. To take it away from those to whom it was promised would be hugely unpopular.

  I suspect some form of LTA will stay. Otherwise an inheritance tax loophole is created for the rich to siphon tax relief into a SIPP with no intention of actually using it to fund retirement. It will just continually build up, eventually being passed untaxed to beneficiaries. In fact it would not surprise me if yet another crystallisation event was introduced at the point of death to test the increase in the size of the pot, in much the same way as is done now with the age 75 test, in order to mitigate against this form of tax avoidance. The idea of a DC pension is that it should fund retirement with any remaining funds being passed to beneficiaries, not to build a fund that is simply passed free of inheritance tax to beneficiaries!
• 43 Jumper April 10, 2017, 5:44 pm

  I’ll go on record as opining that the largest problem with the LTA is not so much its existence, but rather its continual and repeated reductions.

  Each cut is a large ‘step change’ that effectively invalidates a heap of prior planning based on the rules in place at the time. Unless you can take one of the ‘protections’ — and not everyone can, or can predict whether or not they should — LTA reductions reach into PAST contributions and taxes those at higher rates than originally anticipated, as well as capturing a larger chunk of the gain on those PAST contributions. This is quite different to cuts to the annual allowance, which (naturally!) only affect future contributions. And taking protection is not without its price. Under fixed protection you can no longer make any future pension contributions at all.

  People who saved assiduously in the past and are now hitting the newly reduced LTAs would likely have been better off to have made lower pension contributions earlier on in their careers so that they could make higher ones now. However, past years cannot be relived a different way. This message is not lost. The government has revealed itself to be completely untrustworthy on pensions, and this turns many people off the subject entirely.

  As for scrapping the LTA, I’m not sure how the government could do this without now severely ticking off people who have been cornered into taking significant actions to avoid being damaged by the LTA and its many cuts. Would I be able to take back my job, and receive compensation for the missed year(s) of pension contributions not made due to taking out fixed protection?!
• 44 JonWB April 10, 2017, 9:30 pm

  @Naeclue – Who are these people who only got 20% relief though? Maybe I have misunderstood, but don’t all occupational schemes use employer contributions (even if the employee gives up some pay as part of the deal). Employee and Employer NI has changed over the years, but on a combined basis, it has always been well over 12%. That means all of those pension members had more than 30% relief on the way in for their funding. Or have I got that wrong?

  No doubt there are people who have made personal pension contributions to DC pension schemes when they only received 20% income tax relief. If they were taxed at 32% on the way out, that would be grossly unfair, but whilst the volume of such individuals might be significant, I’d expect the value to be small compared to total volume and total value for pensions. Maybe they get a 10-12% boost on the value of their current pension pot as compensation to make it work. Even with the compensation that must end up being a big net positive for the treasury if they can get 30-32% tax on nearly all future pension income, rather than 20% tax as is the case now.

  I agree that a benefit crystallisation event on death seems a likely addition in future and that in an of itself is a watering down of the existing pension freedoms.

  @Jumper – Yes, I agree. There is an awful lot of “what if, then, else” which is altered through these sorts of things and so is in the end it is retrospective anyway, or at least has retrospective elements.

  Some retrospective changes are probably needed in future otherwise all the changes end up heaped on the younger generations and so much of that runway has been used already, I’m not sure there is much left to use.
• 45 Jumper April 10, 2017, 10:56 pm

  In an article published today, Richard Harrington disagrees with Ros Altmann. Or at least, has been told to disagree by those in Treasury who pull his strings and for whom he must absorb bullets (possibly his only function in government). Includes the statement that the LTA is four times larger than it needs to be. And other evidence of complete lack of understanding of the real world.

  http://citywire.co.uk/new-model-adviser/news/pensions-minister-lifetime-allowance-is-more-than-enough-to-retire-on/a1007682
• 46 Richard April 11, 2017, 6:22 am

  @JonWB – surely though as you say in post 26, working out who only got 20% tax relief in their pensions (and what element of their pension got 20% if they have earned over the HRT limit some years) would make it unworkable. They would have to in either case either make some general assumption to apply to schemes (so someone at least will lose out).
• 47 JonWB April 11, 2017, 7:57 am

  @Richard – Agreed. Working out who would get any one of rebate of 12% into their pension is a minefield, it’s bound to create unworthy winners and unfair losers, but in future they might just decide to do it based on pot value of a DC pension as the correlation might be good enough (or that might be the justification). But I can see them ignoring it altogether. They didn’t guarantee that income tax would be 20% in X years time and if Employee NI goes and is replaced with higher income tax, it just gets swept up. Besides, if we ever get there, the message will be something like 30% up front relief, you get the 25% tax free lump sum and you are taxed at 30% on the way out.

  It is scandalous that successive governments and the Treasury have allowed such wide variation in up front reliefs with no contribution records having to be kept at the individual level. The problems they have now are a complete result of their own past inaction, coupled with very poor planning and a total lack of foresight.

  @Jumper – It’s an interesting position for the pensions minister to take. We have clamped down on pensions, so why not use the ISA instead.

  Does anyone think they will impose a Lifetime Allowance on ISAs? I think it is more likely than not in the future now the subscription limits have gone from £7K -> £20K, the sole purpose of which seems to have been a quick fix to divert pension contributions.
• 48 The Austrian April 11, 2017, 9:22 am

  @JonWB It seems almost inevitable there will be an ISA cap at some point. The State just cannot stop spending and micro-managing, and so it simply needs the tax money. Like pensions it will start with a very high cap that thanks to inflation and ‘one off’ shocks like the (inevitable) next financial downturn, slowly starts to bite – frog in the pot style. After all, how many votes are lost by taxing ISA millionaires? Then those with £800k? etc, etc.
• 49 Naeclue April 11, 2017, 11:19 am

  @JonWB Basic rate taxpayers only get 20% tax relief on their contributions to pensions. The position changes for anyone in receipt of an employer’s contribution to their pension if you consider that contribution to be foregone pay. As you say, employer and employee NI would be paid if the employer’s contribution was paid to the employee instead of being redirected to a pension scheme.
• 50 David April 11, 2017, 11:37 am

  @ JonWB #44 & @ Naeclue #49

  I think it depends whether you are in “Relief at source” or a “Net pay” scheme. With Relief at source employee contributions are taken after deduction of tax and national insurance rather than from gross pay (as with a SIPP) and then you can claim the tax back but never the NI. Whereas with net pay you never paid the NI in the first place perhaps? Or is that how AVCs work? Perhaps somebody reading this can confirm.
• 51 Naeclue April 11, 2017, 11:43 am

  Interesting comment from Richard Harrington which may indicate the direction of travel on this. His comments about averages and £1m being a sufficient limit for state assistance are not unreasonable apart from the inconsistency between the public and private sectors. To level the playing field the multiplier for valuing DB pensions should have moved upwards with declining annuity rates. I would give up my SIPP in an instant if I could swap it for a public sector style indexed linked annuity of 5% with all the other benefits, even though I would probably end up paying more tax that way. When I started contributing to my personal pension (initially a stakeholder), that is exactly the sort of thing I was expecting to end up with.

  If it was not for the pension freedoms introduced by Osborne I am sure there would be an even bigger outcry against the unfairness between DB and DC pensions.

  For those attempting to save now I think the implications of what Harrington are saying are clear – don’t make an all out bet on pensions as your sole retirement savings vehicle. Better to use ISA and definitely LISA as well, along with property for the PRR tax break.
• 52 Gadgetmind April 11, 2017, 4:03 pm

  My long-standing retirement plans are to stop working next year at age 55. I never expected LTA to be an issue, but the double wammy of the drop to £1m and sterling dropping by 20%, means I have already exceeded it in my DC pension pots.

  I’m still contributing as I’m avoiding tax at 60%+ and the LTA charge is effectively 40% tax, plus markets dropping by 10% would see my clear so timing might worth for me.
• 53 marked April 11, 2017, 6:00 pm

  So it’s interesting, as I quite often read about the unfairness of DB v DC, but surely in some cases DC is better? It’s IHT free and your dependents can utilize it (at their marginal rate of tax) should they need to. That doesn’t work with DB pensions.

  Also, there’s a big hoo haa about annuity rate of 3% per £100K or thereabouts when converting DC to an Annuity thus giving a max LTA of £1M yielding circa £30K in pension per year, but surely that’s only with respect to this decade’s low interest rates. The comparison is much more level should BOE rate be 5%. Back in the early noughties (2003/2004) you could get 8% per £100K. Given a DB with £1M will yield £50K, with DC and 8% annuity rate it’s only £600K needed. I do take the point we have no idea when interest rates will go up, but it does show the comparisons of DB -v- DC are variable and much less acute at “Normal” interest rate. We’re at an all time low in interest rates so that comparator will look bad, but what happens when we have interest rates back at 5%? What will DB providers offer as a multiple then to buyout? Much nearer 20, I’d prophesize.

  Personally if my DB provider offered a buyout of 35 times I’d bite their hand off.
• 54 The Investor April 12, 2017, 10:03 am

  @The Rhino @All — The Lifetime ISA article has had to be postponed, alas, due to Events, Events. Hopefully next week.
• 55 Naeclue April 12, 2017, 12:05 pm

  @marked, current joint annuity rates for a 65 year old with 60 year old spouse are closer to 2%, not 3%, and that is flat rate not index linked. As for accepting a buyout at 35 times, perhaps you would, but more to the point would you accept it at 20 times, which is the multiplier used to value the pension for testing against the LTA?
• 56 Naeclue April 12, 2017, 12:20 pm

  @Gadgetmind, why not stop work sooner? Or at least go part time, or more part time if you already are? I know some employers can be difficult about this sort of thing, but it sounds as though you are in a strong position to negotiate.
• 57 Gadgetmind April 12, 2017, 12:37 pm

  I’ve already dropped to a four day week (saved me £30k in tax per annum!) and am working for another year to 1) achieve orderly handover – people already know I’m on “final approach” so this is getting easier, 2) hold out for some share awards that vest.

  However, I’m making decisions day-to-day and doubt my six month notice period would be enforced. I’ve also got three years of “essential” spending held as cash, which gives me options.
• 58 Alan April 13, 2017, 6:17 pm

  AFAIK it is only Salary Sacrifice schemes where you save any of the NI as well as the tax. In normal circumstances NI is calculated against Gross Pay and your pension contribution is taken off Gross Pay before the tax take is calculated.

  So a BR taxpayer would save 20%, a HR taxpayer 40% and so on.

  Obviously NI doesn’t come into play when talking about a personal pension funded out of after tax & NI income.
• 59 Alex P April 14, 2017, 7:54 am

  Does anyone know a link to a calculator where one can obtain projections for their pension pot as against the increasing LTA, once it starts to become indexed.

  For instance, I”m just shy of 40, have about £400k in a SIPP, can only contribute £10k p.a. due to the relief taper. I’d like to browse some projections based on potential rates of return on my holdings vs potential rates of inflation.

  As things stand I’ve no idea whether I’ll hit the LTA or when.
• 60 Atlantic April 14, 2017, 1:03 pm

  A thank you to Altman for pointing out the perversity of the lifetime allowance whereby civil servants, local government employees, NHS employees etc can get a pension of up to £50k pa (index linked!) without having to concern themselves with the lifetime allowance. Whereby Joe or Jane Public in a money purchase scheme of size sufficient to buy a pension of around £20k (index linked) may find that they have used up all the allowance. The unfairness is quite staggering – I was aware of it but this is the first time I’ve seen it raised nationally.
  You may also think that you have escaped the lifetime allowance cap because your funds at retirement (say going into income draw-down) were under £1 m – think again because if you later buy an annuity or in any case at age 75 – the lifetime allowance calculations then look at any net growth on top of the value that you had at retirement.
• 61 Marco April 15, 2017, 10:35 am

  Atlantic, it is not black and white.

  As an NHS Pension scheme member with a current pot of around 330k I look at the buyouts others are being offered with envy.
  1) I want to control my own investments
  2) It is a pain in the bum to calculate your annual allowance, and I suspect I have not fully utilised it
  3) DC pensions are inheritable, essentially tax free

  The NHS pension is really only appealing to the extremely risk averse, which I am not. I believe I could probably outperform it with an 80:20 portfolio, even without the employers contribution.
• 62 Marco April 15, 2017, 10:37 am

  Also, nobody really buys annuities these days anyway, so why would you compare your DB pension when the major advantage is you don’t have to buy an annuity
• 63 Gadgetmind April 15, 2017, 6:17 pm

  > The NHS pension is really only appealing to the extremely risk averse, which I am not. I believe I could probably outperform it with an 80:20 portfolio, even without the employers contribution.

  I really do encourage you to run the numbers. I’ve always been 100% DC and have managed everything myself for a decade, so like to be hands on and in control. When my wife got a job with the council, I looked closely at what LGPS had to offer, modelled us taking the money instead, and LGPS was 3-4 times better. Not just slightly better, but a huge multiple of what I could do by investing with 5% returns in the model. She’s in the scheme!
• 64 Naeclue April 16, 2017, 11:30 am

  @Marco, people are not buying annuities because annuity rates are so low. If I could get an index linked joint life annuity of just 3% I would buy one with part of my SIPP (then increase my equity allocation), but I cannot even get 1.5%.

  Over the last 10 years, a global equity tracker would have returned about 150% and gilts about 85%. After such returns it is very tempting to assume you would do better outside your NHS pension, but that would be falling into the trap of recency bias. Nobody knows what future returns are going to be and could be far worse than historical norms. If you have a decent indexed linked annuity then future returns are of no concern to you and if you want to leave a legacy just save out of your NHS pension. Or make regular gifts out of income if you are concerned about inheritance tax.
• 65 ivanopinion January 19, 2018, 12:50 pm

  Can anyone tell me in more detail how the LTA charges work (or point me to an explanation)? I’m finding it difficult to obtain information that gets down to the nitty gritty.
  Let’s assume you retire at 60, start drawing income, then if I understand right you just pay 25% on the income drawn. But is this just levied on a portion of the income? Is it proportional to how much you exceed the LTA? So, if your pot is valued for these purposes at £1.5m, your ‘excess’ pot is (1.5-1.0)/1.5=33% of your pot. (I’m assuming LTA is £1.0m and ignoring any uplift.)
  So, I’m guessing 33% of each income draw is taxed at 25% and the rest at your marginal income tax rate. Is that right? (If your marginal rate is 40%, I assume the 25% rate is irrelevant?)
  Is that calculation done on the basis of your pot after taking the 25% tax free lump sum? So, in my example, if you take 1.5/4=£375k tax free lump sum, leaving a pot valued at £1.125m, your excess proportion is 0.125/1.125=11.1%?
  Is each further income draw a separate crystallisation event, so you recalculate the excess proportion each time?
  I understand there is an automatic crystallisation event at age 75, if you are still alive and have money left in your pension. So, you revalue your pot then. Assuming it exceeds the LTA, is the excess all taxed at 55%, or can you carry on just paying tax at 25% on income drawn?
• 66 Andy1 May 16, 2018, 9:23 pm

  Great analysis and discussion. Annual allowance tax- tapered allowance for income over 110k and scheme pay tax makes calculations very difficult for DB scheme
• 67 Gadgetmind May 17, 2018, 8:01 am

  I ended up totally whammed with this taper in my DC pension. I unexpectedly hit full taper, have just done the paperwork for Scheme Pays of the Annual Allowance charge of 45% of the “excess” from a pot. I’ll then crystallize this pot with a good half of it in excess of the Annual Allowance, so another 25% tax charge. What’s left is then mine, subject to income tax!

  And this isn’t some hypothetical pounds that never existed, this is my money that I saved for my old age. Anyway, soddit, I’m now retired so someone else can pay the big bucks to hold the whole sorry mess together, I’m done!
• 68 Andy1 May 18, 2018, 7:12 am

  Gadgetmind- I agree!

  Is there a calculator for someone who is affected by scheme pays, tapered allowance tax , and ( later ) LTA taxes?

  I’m contemplating leaving ‘gold plated’ scheme and do contribute towards SIPP pension (max allowed 10-15k) after tapered allowance, so I’ve some control over expenses.

  Is it daft?

  Any expert comments?

  Thanks Andy
• 69 Gadgetmind May 18, 2018, 9:12 am

  I just use spreadsheets. The hard part is knowing what you’ll earn in the year, and by the time it became clear that I’d hit max taper, I’d already exceeded the £10k. I track all pension contributions in a spreadsheet, so could work out what carry forwards I had (a few £k due to some “March” payments being made by company after April 6th, etc.) and 45% tax is then due on excess.

  For LTA, it’s 25% tax on anything beyond (for 2018/19) £1,030,000 when you crystallize. More tax if you take excess as lump sum but maths says you’d be crazy to do this assuming not HR tax payer in retirement, so stick to 25% of the allowance as PCLS.

  If you crystallize in chunks, it all gets even harder and you need to track percentage of LTA used to date. I’m about to crystallize second chunk, with TAA charge and LTA charge, plus I’m paying TAA as scheme pays, then moving pot, and then crystallizing, so all good fun.

  Of course, I just wanted to save some money for my old age, but our government don’t seem to want people to do this.
• 70 Andy1 May 21, 2018, 8:41 pm

  Gadgetmind: If there is some tax planning activity whose purpose is to reduce tax on pension contribution; would it be classed as tax avoidance?
• 71 Gadgetmind May 22, 2018, 8:51 am

  Putting money into a pension, or ISA, is tax avoidance. As is reducing your working days/hours to drop out of higher tax brackets. And given the complexity of our tax system, there are hundreds of other similar activities that the vast majority of people use to avoid tax on a regular basis. I avoid all the tax that I possibly can, and so should you.
• 72 Andy1 May 22, 2018, 9:01 pm

  Thanks
  So if someone pays into DB pension scheme just for a month or two (to reduce annual allowance growth & tax if >40k growth p.a. ) This may be achievable by opting out off the scheme for rest of the year and rejoin in a year?
  This may increase the ‘virtual pot’ as well as save tax on growth by limiting growth up to 40k & keep death in service benefits by opting in within the year? is it avoidance?