Stopping pension contributions

[Mitchammer]

Morning all,

I am a long term lurker on here, and previously on TMF. I have been trying to get my head around pension rules over recent months, and would really appreciate some confirmation of (or correction to) my basic understanding from those of you with a better grasp of things.

Situation:
- I am early 40's
- I have 3 pension pots:

• A frozen DB pot that currently would pay £21k p.a when I hit 65. This increases at the lower of 2% per year and inflation
  A SIPP with c£100k of equities
  A DC scheme (Euro denominated) currently worth c£150k

- I recently started a new job and pension contributions of 10% of salary would be the default (half from me, half from employer)
- My employment income will mean that I will have my annual allowance tapered to £10k.
- ISA allowances fully utilised each year.

My basic cals:
- The LTA has been coming down, but most recently was increased by CPI. Best case would seem to be further growth at CPI.
- I assume inflation averaging at 2% per year, so my DB 'value' increases by 2% per year, as does the LTA.
- I assume a total nominal return of 8% annually (bit of a guess based on minimal research) on my SIPP and DC scheme. Not sure if this is right, and I suppose I could reallocate to very low risk assets so that these grow more slowly... but then I have a 15+ year investment horizon).
- On the basis of the above, I would hit the LTA by the time I am in my mid/late 50's.

My initial conclusions
- I still don't feel like I understand all of the rules (protected LTA's, etc.)
- There seems little point in me continuing to contribute to pensions, as I have a small allowance each year now and will then get hit with more tax on the way out, too.
- I should probably ask my employer to stop pension contributions and instead convert what they would have put into my pension to salary. I think my employer would be open to this.
- We should use my wife's (who has used less than 10% of her LTA and is self-employed with a small income) pension allowance as and when it makes sense to in preference to me saving anything else.
- I can keep an eye on things and reconsider my position if the LTA moves in a different way, the rules change, or the returns on my DC/SIPP investments differ materially from expectations.

Any thoughts welcome on the above - appreciate it's only a partial picture, but am concerned there may be huge things I am completely missing in my understanding of the rules!

Thanks in advance,
Mitchammer

[Alaric]

- I assume a total nominal return of 8% annually (bit of a guess based on minimal research) on my SIPP and DC scheme. Not sure if this is right, and I suppose I could reallocate to very low risk assets so that these grow more slowly... but then I have a 15+ year investment horizon).
- On the basis of the above, I would hit the LTA by the time I am in my mid/late 50's.

Getting an 8% return for 15 years is on the favourable side of investment assumptions. You should probably also try a pessimistic one, say 0% to 2%. The DB income would be valued at a 20* multiplier, so you are currently quite a way short of hitting the lifetime allowance.

Under George Osborne, the Government seemed to be going in the direction of amalgamating pensions and ISAs. If it ever did so, or moved in that direction, a sensible step would be to abolish lifetime allowances and just cap the pension contribution instead. Taxation worries that the investments might perform too well are then removed.

[DrBunsenHoneydew]

The key thing is the age when you actually want to retire and draw your pensions. Do you want to go at age 55 or 65 or what?
If you draw the DB at age 55 it will be reduced 40% or so for taking it 10 years early, and would form about 25% of your LTA.
If you draw the DB at age 60 it will be reduced 20-25% for taking it 5 years early, and would form about 33% of your LTA.
If you leave the DB until age 65, it will form 40% of your LTA.
If the SIPP & DC grow at 8% nominal (=6% real) they will double in real value every 12 years.
So at about age 55 they will form about 50% of your LTA then, and about 100% at age 65.
So you will hit the LTA at about age 60 with no further contributions.

[Alaric]

The key thing is the age when you actually want to retire and draw your pensions. Do you want to go at age 55 or 65 or what?

As the rules and practice currently stand, you can make the DB's contribution to the lifetime allowance what you want it to be. It's always valued at 20* the annual amount, but practice is that the scheme would usually reduce the pension income to compensate for having to pay it earlier. Being a deferred pension from an ex-employer, it's not as if you are forced to give up work in order to take the benefits.

[Mitchammer]

Thanks for your responses Alaric and DrBH. I'll have a think about potential timings/investment returns and run a few scenarios.

Regs,
Mitchammer