maxed out pension

[CatherineHeathcliffe]

Namechanged since I suspect I might be about to get flamed.

If you are maxed out on your pension (in terms of tax free sum) would you continue to put money in?

I own my own business and currently make a company contribution only into the pension each year (generally the max with then a small income by PAYE and dividends).

The problem is - for the op - that she won’t be able to draw out income from the pension without hitting the higher tax band. She won’t have enough ‘living years’ once she drains rien in the pension to withdraw income at the lower bands of tax.

When are you looking to retire?
What's your target income when you do?
Are you planning on taking a lump sum or a phased drawdown?
What's your strategy for your business longer term and exit?
What do your other assets look like e.g. ISA total value, GIA etc.

May still be worth it given the corporation tax impact.

Yes Ive hit the £60k this tax year (and have no carry over). We are about to go into another tax year though.

Each year I take from the business

£60k company pension contribution
c £12k salary
c38k divs

DH earns a high salary and so we effectively live on his income so I can structure mine to be tax efficient and drip feed it out of the business over a period of time.

They are risky and sometimes yield good returns!

Bravo on excellent financial planning. In this case and if it's not worth overpaying your mortgage, I would not be putting more into the pension, but would put it into a global ETF within a GIA. Yes, the profits will be taxed, but it sounds like you may not be using your CGT allowance in which case I would be realising the gains every year that I hit 3k profit.

Currently have:

House - c£2.2m no mortgage
Second property £150k - no mortgage
Maxed out on Premium bonds £100k
£350k S&S Isa
£650k other savings
My pension £1.1m
DH pensions £800k plus a FS pension of about £12k a year

Both DC at university - they currently have c£80k each.

DH earns about £300k (varies as he is a partner).

I'm 51 DH is 55.

We are not using our CGT allowance, thats correct

The actual blends used if you buy the correct funds reduce the risk significantly which is in part why the gov has reduced the tax wrote off on them.

I got a 15k tax rebate and averaged over 8% last year... thats after IFA fees.

Zero complaints.

You do need to pick the right funds and my ifa does that for me.

It's probably not worth paying in any more. You don't gain from employer contribution matches, so it's tax and NI impacts only.

I think your income level would mean you'd be taxed more on a normal drawdown approach (into the 40% band than you would be on your pay.
Pay the tax now for income up to 100k (avoiding the 60% trap) and either stick the money in ISAs or gift to your children.

You are probably at the stage where buying a whole of life insurance is worthwhile. The payout on death is tax free to the recipient.

This sounds like something to explore

DH wants to retire at 60 (five years). I will stop at the same time but won't be able to take my pension (but there will be money in the business still to give me the same level of income). The business is just me (I'm a lawyer) so it ends with me.

whole of life insurance isn't something I'd thought about either - thank you

I would still pay some more into pension as tax rules change quite frequently and mitigates against losses. You might want to do mix of annuity and drawdown when time comes. I would aim for £1.5m.
Pay into your kids pensions and ISAs
VCTs?

After ISAs for you all each year, no mortgages, no other debt, pension maxed out, I’d just go full on investments GIA. Yes you pay tax but such is life.

Next stop - how best to avoid IHT.

Employ your children in their holidays, pay them a decent amount and also pay in to a pension for them.

Can you buy properties for your children? Maybe not just now but once they finish university.

You can take money out of your maxed-out pension to invest in certain funds/stocks. DH has started doing this. I'll ask him what the scheme is called, but it is government incentive to invest in basically start-up companies. I think he gets taxed on what he takes out at 10%.

ETA: Looking back a few posts, someone has mentioned VCTs - I think that is it.

How to claim VCT tax relief | Octopus Investments

The government constantly finds wonderful ways to spend other people's money, doesn't it?

Yes. The OP’s estate’s IHT liability is around £2m. It is extremely difficult to avoid IHT and have enough to fund later years care and living during retirement.

However - in their shoes I would consider remortgaging the house and gifting this amount to the children. Hoping that both will live for another 7 years.
That will mitigate a potential 40% iht tax on the amounted gifted. It also raises this gifting cash without a capital gain subject to tax.

I think the OP and her husband pay a pretty hefty amount of tax each year.

There is also the option of leaving retained earnings in the corporate structure. You’ll pay corporate tax on it only. Then when you close your business you’re eligible to take that cash out under generous tax terms for Business Asset Disposal. It used to be tax free for the first £10m but that’s been cut. I think tax is now about 18% - still much better than dividends at higher tax rates. I’m planning on doing this when I retire in 8-10 years.

The money we don't spend is left in the business as retained earnings - we have a business account with interactive investor and I manage all the business stocks and shares. When we shut the business down in a few years we will benefit Business Asset disposal relief to take the retained funds out of the business at a lower tax rate.
Someone on here once mentioned funds could be self-managed reasonably well until you hit £4-5million and after that you needed a wealth manager to help you access more appropriate financial instruments that weren't available to the retail market. We won't get to that point (I'd hope to be retired by then).

You have so much wealth that you and your husband will be very comfortable for the rest of your lives.

I’d be thinking how to start giving more to set my kids up tax efficiently. Starting to give amounts each year so you do it over a few of decades so it’s hopefully never subject to inheritance tax.

If you open life isas for them then you can save towards house deposit for them and government add 25% (max £4k per year, government add £1k for free). This account can stay open and you can carry on saving into it for them even after house purchase. It can convert to pension saving account that they can access from 50 I think it is.

Also setting up and paying into an actual pension for them already. If you start in teens/ twenties they can amass a lot!

Thats what I’d do if I had your funds by your stage in life and young adult children.

You are not investing in funds as such but actual companies, that’s why there’s a 30% income tax write off - to be reduced to 20% from April.

OP could get a £60k income tax write off but would need to pay herself more first.

It may still be worth putting £60k into the pension, much less so when the rules change and there’s NI to be paid.

Personally, I would stop putting money into a pension well before the threshold is reached as the pension will grow over it anyway.

Once you reach such levels of assets, mitigating inheritance tax has to be a priority.

I have name changed for this as I have no desire to be harassed on here.

We are in a similar situation and use GIAs as even with the changes to CGT, it’s still better than higher rate tax. We stopped adding to pensions quite a few yeas ago as we were worried about the lifetime allowance rules at the time but have still ended up with £2m just in them at age 48. The problem with pensions is that they keep changing the rules making them less attractive given how restrictive they are on access anyway.

I am happy to manage our GIAs as my degree was in this area (I also manage our SIPPs and ISAs). If you haven’t I would suggest JISAs and pensions for children - we did this too and it has worked well and obviously that is all outside of our estate now too with years of compounding.

You don’t have to get too involved with individual shares - we use funds and ETFs and these work well for us and also diversify the risk.

@FlashAbe where did you see the reference to £4-5m as I’m not sure what structurally changes to management at that point or is to do with access to lower cost versions of funds and wealth manager access to them?

Depends on how effort intensive (initially only) you want to be. I can DM you