The Lemon Fool

Hi folks. My earnings will exceed £100K this year and I have been advised to pay into a SIPP to keep my adjusted notional income under £100K and avoid the problem of losing my personal allowance. However my existing DB pension arrangements mean I'm pretty certain to exceed the lifetime allowance. So the choice is between paying an extra 20% tax on my income over £100K now, versus avoiding that tax but paying 55% tax on the amount by which my future pension pot exceeds LTA. My calculations suggest that for someone earning between £100K and £125K the benefit of avoiding the loss of personal allowance outweigh the downside of paying a higher rate of tax on your LTA exceeding pension at some point in the future but frankly I am not entirely convinced by my own sums! Has anyone done this calculation and come to a view on it? Thanks in advance for your help.

It's always difficult to plan ahead like that as you don't really know what future changes will be made to tax and savings.

Personally I'm pretty sure I'd save the tax now, when it might mean more and give yourself more time to deal with the next problem. With inflation and a few years in the tank there might be more calls to increase allowances but I doubt it would get a sympathetic hearing right now.

After all you might fall of your yacht and drown before getting to pension age.

I was struggling with this issue some 3 years ago, and solved the problem by moving to a 4 day week.
A couple of years later I would have moved to a 2 day week, but that wasn't really feasible for the role, and so retired.
I felt that although I enjoyed my work, I didn't enjoy it enough to continue with the stress and commute to wind up paying a marginal tax rate of 65%.
If you are able to flex your working hours, you will find that you gain 50% extra weekend, for very little take home pay difference.

TUK020 wrote:I was struggling with this issue some 3 years ago, and solved the problem by moving to a 4 day week.
A couple of years later I would have moved to a 2 day week, but that wasn't really feasible for the role, and so retired.
I felt that although I enjoyed my work, I didn't enjoy it enough to continue with the stress and commute to wind up paying a marginal tax rate of 65%.
If you are able to flex your working hours, you will find that you gain 50% extra weekend, for very little take home pay difference.

I can understand your attitude but there is something wrong with a tax system that drives you and others no doubt, to take that action. Yet no one seems to be doing anything about it.

Dod

Dod101 wrote: I can understand your attitude but there is something wrong with a tax system that drives you and others no doubt, to take that action. Yet no one seems to be doing anything about it.

Dod

Mr Kwarteng wanted to do something about it and was booed off-stage for his pains.

Robbing Peter to pay Paul works well when the Pauls have more votes than the Peters.

Crumbly wrote:Hi folks. My earnings will exceed £100K this year and I have been advised to pay into a SIPP to keep my adjusted notional income under £100K and avoid the problem of losing my personal allowance. However my existing DB pension arrangements mean I'm pretty certain to exceed the lifetime allowance.

Use the SIPP while the stunt is still available. Anyway if you turn up your toes at the right time (i.e. before age 75) might not the SIPP be particularly valuable to your widow?

Crumbly wrote:Hi folks. My earnings will exceed £100K this year and I have been advised to pay into a SIPP to keep my adjusted notional income under £100K and avoid the problem of losing my personal allowance. However my existing DB pension arrangements mean I'm pretty certain to exceed the lifetime allowance.

Use the SIPP while the stunt is still available. Anyway if you turn up your toes at the right time (i.e. before age 75) might not the SIPP be particularly valuable to your widow?

And if you are old enough (55) consider immediately withdrawing the tax-free lump sum from the SIPP while that stunt is still available - but not a penny more because if you did the latter you'd then you'd be restricted to £4k p.a. as the amount you can contribute to all your pensions.

Stylised arithmetic: every £80 of income you subscribe to your SIPP grows to £100 because of the tax rebate your provider claims from HMRC. Then you'll get a £40 tax rebate in the sense that your personal income tax bill for that tax year will be reduced by the aforesaid £40. Thus the net cost to you of that £100 in the SIPP is £80 - £40 = £40.

Withdraw 25% tax-free from the SIPP i.e. withdraw £25. You are now out of pocket by only £15. But you have £75 left in the SIPP. You'll still be handsomely in profit even if the LTA penalty does hit you.

Admission: I've never been in this position myself so I'd welcome any corrections that are necessary.

Crumbly wrote:Hi folks. My earnings will exceed £100K this year and I have been advised to pay into a SIPP to keep my adjusted notional income under £100K and avoid the problem of losing my personal allowance. However my existing DB pension arrangements mean I'm pretty certain to exceed the lifetime allowance.

We are in a similar situation. Remember that the LTA is a mixture of a "cumulative" (before 75) and "point in time" (at 75) allowance - one can draw down an income at the higher rate income tax band [£50k pa (or £67k pa using UFPLS if a lump sum is not needed)] from age 55 for roughly 20 years before the LTA is charged. That is what I plan to do. If I am fit and healthy still at 75, can draw enough income to continue living comfortably, and retain capital that can be passed on, then I am winning.

Contribute just enough to keep your earnings below £100k while you are doing so, and plan to retire early. A nice problem to have.

Thanks everyone, a range of helpful suggestions/options. I like the point that I know the downsides of paying more tax now, whereas the risks of having a tax bill when I retire is less certain.