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).

https://www.mumsnet.com/talk/investments/5462330-any-client-entertaining-from-your-wealth-manager-ps14m-invested
The poster was @DuchessofReality

You say the business will finish with you so what trading assets are you going to dispose of?

Retained earnings are not qualifying business trading assets.

Lifetime Allowance (LTA): Abolished c 2024. You no longer pay a tax charge for exceeding a total pot size.

Unfortunately, the tax free lump sum is still limited to 25% of what was the last LTA. There has also been constant speculation that it may be reduced.

That’s why the question has been asked - is it still worth putting money in that will all be taxed when you want to take it out?

Make your adult kids partners in the business and pay them PAYE or dividends straight into an ISA and a small proportion into Sipps for each of them as employer contributions

You can do the same with DH and make employer contribs into his pension, although he will likely hit the £1mill cut off before he retires too.

Maybe spend it?

Property for your kids or sharemarket. Or a boat, I hear they are good for using up money.

Actually quite seriously I think there is a good chance the world will go to shit over the next decade or so. So given you have plenty of money now I'd be seriously looking at buyong a property that can be off-grid (solar, battery), has a good water supply and plenty of space to grow food.

We are not really spenders. We have a lovely home and everything we need.

And actually £1m in a pension doesn’t give you as much income as you’d think.

Shares and securities I believe. Not that I am making this up - we have taken legal and tax advice on this, as part of our business financial planning.

We are not big fans of handing our kids over big sums of money atm.

I don't know about yours OP but ours are in the initial stages of building a career for themselves - they are getting a lot out of being (semi) financially independent adult (they live at home because they haven't decided where they want to live beyond 2 years). They are paying for their cars (loving that the car is theirs and they paid for it) - enjoying the satisfaction of seeing their back accounts increase month on month. I do not want to interrupt that beautiful feeling of learning to be adults - I'm proud of them, they are very level headed with their money. I don't want to give them a large sum of money from nowhere and disrupt their current trajectory. They will of course be very well off at some stage - but I don't want them to feel it was all handed to them, that they did not do it. Ds felt like that when he finished his degree - that he only got it because he came from a financially privileged background and anyone could have done it (and some on MN might agree with him), I want him to feel a sense of pride in what he achieves.
So even if it means we pay inheritance tax I'd rather not screw up their young minds and habits, with a large sum they haven't earned - not until they are a little older anyway.

Maxed on Premium Bonds
Maxed for this year S&S ISA

in 5 weeks you will have £20,000 that you can invest in cash and S&S ISAs, in the new tax year.
can you put into your DC Premium bonds?

My sister is in a similar situation but has decided to pay taxes rather than avoiding it. She has said she has more than enough and feels she should contribute more as she can afford to. I respect her for that and hope I would do the same in her shoes.

I would ask your question on the Money Saving Expeert pension forum. They have a lot of very knowledgeable posters.
my understanding is that once you are in upper rate tax in pension and have no tax free allowance it wouldn’t be beneficial and it may lead to an IHT issue later down the line now pensions will be included

That’s kinda what I thought that at a certain a post paying tax is unavoidable. You said that £1m in the pension isn’t as much income as you’d want so would you not keep paying in despite having to pay some tax?

Just start putting money into a fund. You’ve already paid the tax so can use it for whatever you want and draw out whenever you want. Pension funds are usually very stable and secure so you could afford to potentially go for something a little bit more volatile, but someone’s earlier suggestion of VCT‘s is very volatile IMO.

You don’t have to put it anywhere. Just keep it in cash or in the business. You have plenty so no need everything to be tax avoiding.

Nothing to do with lawyers.

Unless you are an investment business this will not work. Any tax accountant will tell you that trading assets are those wholly and exclusively needed to carry out the trade of the business. The definition is very clear. Profits (held in cash or converted into other assets) are by definition not a trading asset.

One thing you can consider is retaining the money in the company and investing. Dividend income is largely exempt from corporation tax, so if your portfolio is geared for dividend income you can then reinvest the income on a gross basis, meaning it builds quicker.

Of course you will ultimately have a growing pot of money you would need to pay tax on when you later withdraw it, but when you do, if you don’t need the income, you could gift this to your kids as gifts from surplus income which are immediately IHT exempt (as opposed to the usual seven years).

Have you forecast what your pension is likely to be in 30 years (even with withdrawals)? Once you hit the £1m mark the compounding is crazy. I wouldn’t put any more in.

At 51, I’m guessing you can access your pension at 57. Another 6 years of growth at 6% will get you to 1.75m. If you took out 4k a month for the next 25 years you’d end up with £5m left (assuming the same 6%). In some ways the tax now is much less relevant when you’re potentially looking at giving the government over a million in inheritance tax when you die (unless you take more out of your pension in which case you’d be paying them 40% anyway).

And further to the point above, I’m not sure if people fully realise that the new proposed inheritance tax arrangements for pensions. Eg if you die over 75, the government would take the 40% inheritance tax from the pot and then beneficiaries would pay their marginal rate on withdrawals.

It’s quite punitive as currently proposed so every incentive to get money out even if you’re paying the 40% or even 45% on withdrawal. Eg for £100 in the pot, inheritance tax would take that to £60. A basic rate beneficiary would get £48 a higher rate £36.

I ran lots of scenarios through ChatGPT regarding whether to pay surplus income into dh’s pension, but (following proposed IHT changes) it seems the recommended solution is to focus on moving funds to kids in as tax-efficient a way as possible, while ensuring there is still approx £800k available (some of this could be in main residence) to cover up to 2x residential care fees for me and dh, if needed later on (there is dementia on one side of family, and significant mobility issues on the other side). Chatgpt thought our problem wasn’t potential lack of funds in retirement, it was managing IHT. Alongside that, it said other priorities should be my pension (very small currently), and maximising savings in ISAs.

We are very aware that (some of) our dc may struggle to afford decent housing in future (we are in London, a small 2 bed flat near us is £350k-£500k, small 3 bed home starts at approx £500k) - and dc may not be able to achieve a good salary, so for me, it is also something I want to do.

In terms of tax efficiency, ChatGPT suggested starting now (we are 55 & nearly 60), using tax-free gifting allowances (£3k each), and regular gifting from income (we are anyway currently paying for dc1 at uni (fees / accommodation / living expenses), dc2 will go to uni in Sept, and dc3 will follow maybe 5 years later. We will only manage other regular gifting when all uni costs are out of the way.

Chatgpt suggested at some point (maybe 5-7 years) downsizing to a house worth approx £800k, and making substantial gifts at that time to dc to contribute to house purchases. I think this would tie in with buying somewhere more manageable, with greater accessibility and more ground floor space (to ‘lifetime homes’ type standard).

ChatGPT also had views on when my dh should ideally retire - he had planned to keep on working way past retirement age, but it may be better that he retires at 67 - as the issue for us will be drawing down enough pension to avoid it being left in pot at death, or effectively taxed twice (although details feel a bit hazy!). Any amounts drawn down beyond tax-free sum will be taxed at higher rate, due to the defined benefit portion of his pension. So it is working out how to optimise draw down.

I know ChatGPT does get things wrong, but this exercise has sufficiently challenged my previous assumptions to suggest that it would be prudent for us to see an IHT professional for some planning advice, in next couple of years.

That sounds a good summary @PensionTaxxaTnoisneP. The only thing I would say is that we are viewing our ‘best’ retirement years as under 70, poss to 75. That’s when we’ll do more travelling etc so we won’t be working until 67, we are 60 and pretty much retired or will be in the next year or so. I agree re passing on to children, rather they have it than the tax man!

I just reread to see your husband's poison. He is an additional rate tax payer and pension also likely to be a million. And you are only just 50! Well done to you both.

But basically you are protecting to be in the position that the government is going to take a huge amount via inheritance tax. I think your strategy of putting 60k per year into your pension recently was wasn't great at your age and existing pot. It would have been better to only have put the income over 100k into your pension.

Really it is all about avoiding inheritance tax from here on due your family.

Reduce hours, gift as much as you can to children, they gifts to kids policy, maybe a trust. Enjoy holidays and things whilst your health is good.

Really you are in a dream position!