Anyone else in a well paid job and struggling to even imagine hitting pension caps??

[Avacadoandtoast]

AIBU or does it feel like only a dream to be able to hit even if you are in top percentile of earners? I am in a well paid job (over 6 figures) and even contributing a 18% of my salary a month I will be no where close to the lifetime allowance by the time I retire.

Help me - where am I going wrong? Do others contribute much more than this and require less for the ‘now’?

Have you only been paying in for a short time? If you have 20 years to retirement you must be in 40s now. If you'd started paying in during your 20's, even on a lower salary you would have 20 years of contributions and compound investment growth.

DH is mid 40s, earns a bit less than you but pays a similar % in. His pot is worth c£350k.

Are you aiming for a £1m pension pot? If so then yes you would need to increase your contributions. But I'd suggest thinking about how much you need to retire on, what other assets you have, when you might be best placed to maximise pension contributions.

Exactly! If you put 26-36% of your salary for your entire working life, you could have just as good a pension.

Very few people make the level of contributions that were made into old style DB schemes. Yes lots of it was from employers, but lots of schemes make members contribute a lot too.

Most people think 5% pension is normal. My recommendation is 15% minimum for most people. People don’t want to do it though as not having to pay for pensions means more current money available. Recent wage deflation has also left many unable to afford it.

Pension poverty is a disaster waiting to happen

The vast majority of people who get anywhere near the lifetime allowance are in the public sector. Even higher earners don’t have anything like the funds the taxpayer puts into public sector pensions. I have two doctor friends who have already hit the lifetime limit before 50.

If higher earners had employers who contributed 20%+ to their pension, there's no reason why they wouldn't get to the £1mil. mark as well.

Poor employer contributions are a big issue

In the past, many big companies used to offer defined benefit schemes. Similar public sector schemes now need the employer to contribute 20%+. Private sector employers now get away with a 3% contribution. It's pathetically small. Employees should make up the difference if they want that £1mil pension pot.

Earn £100k, put away £24k per year (topped up to £40k by tax relief), with compound interest there you go ... £1mil. after 20-25 years.

That was the latest figure. It's been increasing at 1000% a year. The forecast for this year was they'd recoup £100m in tax from people breaching the LTA. In 4 years it was forecast to be closer to £1bn per year. So evidently it was on target to hit a lot more than 7000 people going forward

Spot on @Sunsetintheeast I think there is a lot of ignorance and unwillingness around saving into pensions. There will be huge swathes of people trying to survive on the state pension or a little more than, which won’t go very far at all.

Not read entire thread but the lta is not defined by how much is in your pot at any given time but by how much your draw over time.
ie if you retire with £600,000 and took say £45,000 per year and adjusted that for inflation you’d hit the lta after 17 years. How much of your £600,000 would be left is another matter.

i took out fixed protection in 2014 and not paid into a pension since but due to be above would breach my lta of 1.5m after 12 years or so. Reason if have a big pot is im older and could pension my entire earnings if needed. So when i got pretty big bonuses rather than buying flash cars etc I put 80% in my pension.

Not read entire thread but the lta is not defined by how much is in your pot at any given time but by how much your draw over time.
ie if you retire with £600,000 and took say £45,000 per year and adjusted that for inflation you’d hit the lta after 17 years. How much of your £600,000 would be left is another matter

er yes it is. You are totally and utterly incorrect.

^ @XVII

Each BCE tests the amount against the LTA. The PCLS forms part of this but the taking of the PCLS in full would trigger a full test. The UFFLS would be a mistake because of the full test at 75 that would be less than an allocation to drawdown. You need to check your understanding.

Ok fair enough i have misinterpreted what qualifies as a bce regarding draw down and thought system designed to stop people over 55 taking just enough out each year so the dont breach the lta

Even in the public sector, it's a small minority who will be hitting the pension cap, only the very highest public sector earners.

Neither me (mix of DC and DB pension pots) nor DH (who is well paid private sector) will be anywhere near it.

This is due to the fact that lots of people don't earn enough to be able to afford decent pension contributions though. Only higher earning households have got enough spare to accumulate even a moderately good pension pot.

It's one of the many knock-on effects of austerity and the lack of growth we've seen over the past decade. Aside from a small elite, the majority are worse off and having to stretch their earnings further to cover essentials.

Earn £100k, put away £24k per year (topped up to £40k by tax relief), with compound interest there you go ... £1mil. after 20-25 years.

But not many people (at all) are earning those sorts of sums for that long to enable them to put away 40% of their earnings… I’ve struggled to get to 24% contribution on lower but decent salary, but I couldn’t have done that when we had nursery fees for example.

Most people in any scenario don't get a million pound pension fund. That's because you need to both 1. earn a ton and 2. pay (either you or your employer) into your pension at a high %.

Exactly right @ArcticSkewer

ive just seen the additional bit about the annual allowance rising to £60k. How exactly is that supposed to benefit anyone apart from the absolutely minted? What is the supposed doctor rationale here?

It’s to do with how the annual allowance is calculated for defined benefit (generally public sector) pension schemes - it is based on a multiple of the increase in pension for the year, not the amount contributed. Depending on the scheme, a fairly modest rise in salary could take someone over the annual allowance. They then have to pay a fairly hefty tax charge, which they may or may not be able to afford.

Say you are a Dr and have so far accrued an annual DB pension of £40k pa. Inflation this year is 10%, it goes up to £44k. The AA usage is deemed to be £4k x 20, i.e. £80k. You only had £40k AA so need to pay tax on the excess £40k increase.
You say sod it, I would rather retire and have my annual pension of £40k paid to me, thanks v much.
(Not exactly this but v similar).

@ArcticSkewer @ScandiNoirNuit there are lots of ways to get to £1M - start early, increase your % as your salary increases, consider employer contributions when evaluating job offers, and most important see good returns. Break out the Excel and run the numbers - 40-50 years of saving + compound interest really adds up. A fatalist attitude keeps people from taking the steps to get there though.

most people who get there probably aren’t contributing the max every year, but it is helpful to have room for extra contributions in particular years when you get a stellar bonus or find yourself with unexpected wiggle room in your budget (Covid was that for us when we could no longer travel and we’re spending less in general). I am self employed so have a realistic erratic income - one year I might use the full limit to help manage taxes, while another year I might contribute nothing. In later years people generally have more to save as salaries rise m children leave and retirement becomes a bigger priority.

I am American and was raised to always prioritise savings (pension in particular) as there is no expectation of state support. It is a mindset and a choice - I had maybe 2 proper vacations (not just trips to see family) in my entire childhood, but my parents paid for university and had multiple $M for retirement (which they will need btw). given the amount I see people spending on holidays here each year, a lot more could be put into pensions, it just isn’t prioritised.

That is not correct. Inflation is not counted in the same way. Only step increases and pay rises will trigger input. However almost every consultant will face the tax

The above is exactly how my DB pension AA charges worked.

Plus its intent is to demonstrate how DB pensions can lead to AA charges and why the £40k allowance was raised.

Well for one, ONGOING input is multiplied by 16 not 20.

Inflation is not included in Annual Input. Pensions are measured as follows:

Closing value £0.00= (£0.00 x 16) + £0.00
Less Opening value £0.00= ((£0.00 x 16) + £0.00) uprated by CPI @ 3.1% (or whichever measure)
Estimated pension input amount = xx .xx

I don’t think you’re understanding your statement.

Except that’s not how it works!

Ah, thanks, you are right, it was 16x not 20x.

So now we know more than half of people in work with £1mil. in pension pots are in the private sector.

www.theguardian.com/politics/2023/mar/21/jeremy-hunt-pensions-tax-break-expected-to-help-nearly-as-many-bankers-as-doctors