Better to overpay pension when working through an umbrella?

[Olly]

The table below takes a hypothetical (but realistic) month for me and models paying £5k or £10k into a pension.
The marginal tax saving by overpaying (doubling) the £60K annual pension allowance is 14.26% (based on current NI rates).

In addition, any year-on-year growth of a pension is paid and compounds tax-free until drawdown. That's maybe worth a % or 2?

I intend to withdraw my pension up to the 40% band each year. 25% tax-free is only up to 25% of the Life Time Allowance, which I will exceed, so my marginal rate on pension drawdown isn't 11.25%. It's a bit hard to guess what it might be,13% maybe. I will run some scenarios and get back to you on that.

Now, correct me if I'm wrong, but from a tax-saving point of view, exceeding the annual allowance puts me better off somewhere in the region of 1.5 - 5% maybe?
It also puts me very much worse off if I go into the 40% bracket.

Would you "over" pay?

[northernladuk]

Might be worth asking this in the umbrella section of the forum next time. Not sure if the Mods can move it so might have to stay here.

Have you used your max allowance for previous years if you were already in the same scheme?

[JustKeepSwimming]

The lifetime allowance was abolished in April?

Personally, no I wouldn't go above the annual allowance. 60k a year is more than ample for my pension pot. I would rather have liquid cash to invest as I please today rather than have it locked up and subject to whim of politicians in the future.

[Protagoras]

The lifetime allowance was abolished in April?

Personally, no I wouldn't go above the annual allowance. 60k a year is more than ample for my pension pot. I would rather have liquid cash to invest as I please today rather than have it locked up and subject to whim of politicians in the future.

+1. While the overall tax burden is slightly less with the £10k/month pension contribution, the difference involved is relatively small and there's political risk. So I think that it makes sense to have a balance between money locked away and funds available already taxed. This also depends on age, since over 55, 25% of the pension fund is (currently) available immediately anyway.

What might a future government do, that may impact pensions? Big pension pots could be an attractive target for future taxation - most people don't have a big pot so there's not too much problem 'taxing the rich'. Means testing of state pension is another one that gets mentioned from time to time. I'd rather expect a future government to re-apply lifetime allowances.

[Keanu2020]

What might a future government do, that may impact pensions? Big pension pots could be an attractive target for future taxation - most people don't have a big pot so there's not too much problem 'taxing the rich'. Means testing of state pension is another one that gets mentioned from time to time. I'd rather expect a future government to re-apply lifetime allowances.

The political risk is the main thing for me as well. I’m in same place as OP (post was interesting idea) and historically under paid into my pension (I have maxed out last few years though). But I worry about political risk, too much in and pretty sure won’t get state pension (future means testing) or the pot will get raided as future gov's will be desperate. Like other posters i'm looking at investing in other things rather than pile all into pension. Clearly there is a sweet spot though to put some in, just not sure what that number is.

[JustKeepSwimming]

The political risk is the main thing for me as well. I’m in same place as OP (post was interesting idea) and historically under paid into my pension (I have maxed out last few years though). But I worry about political risk, too much in and pretty sure won’t get state pension (future means testing) or the pot will get raided as future gov's will be desperate. Like other posters i'm looking at investing in other things rather than pile all into pension. Clearly there is a sweet spot though to put some in, just not sure what that number is.

I don't think it will get raided. Likewise if lifetime allowance comes back I think there will be some grandfathering if you're over the new limit (I believe this was done before). Although this can get messy if you're below the limit when introduced, but have many years or compounding that will take you well past it.

25% tax free is up for grabs. Age you can withdraw is up for grabs. Taxes on withdraw (Income/NI) is up for grabs. Honestly if you're even remotely thinking about overpaying then chances are if means testing comes in you're well over the threshold.

I think for most people anything in higher tax bracket up to the £60k limit is the sweet spot. If you somehow get employer matched above that then it's still worth it. If you're genuinely loaded then it's probably still worth it.

[WTFH]

As a slight warning to those trying to stash everything away - make sure you have a warchest of preferably 6 months in a personal, easy access place. i.e. not locked in a 90 day account or 5 year bond, or whatever, but something that if you suddenly don't have your £20k a month coming in, that you can still pay your mortgage, household bills, etc.
There's no value in locking away for a future if you don't have enough for food on the table now.

And make sure that you've left enough in your company account to pay what's due from it - VAT, Corp Tax, accountant fees.


I realise others will disagree with me and tell you to live to the max, because you'll always have work until you choose not to, but that's not always the reality, and not everyone on the internet tells you the truth about their income/expenses/etc.

[northernladuk]

As a slight warning to those trying to stash everything away - make sure you have a warchest of A MINIMUM OF 6 months in a personal, easy access place. i.e. not locked in a 90 day account or 5 year bond, or whatever, but something that if you suddenly don't have your £20k a month coming in, that you can still pay your mortgage, household bills, etc.
There's no value in locking away for a future if you don't have enough for food on the table now.

And make sure that you've left enough in your company account to pay what's due from it - VAT, Corp Tax, accountant fees.

FTFY

I realise others will disagree with me and tell you to live to the max, because you'll always have work until you choose not to, but that's not always the reality, and not everyone on the internet tells you the truth about their income/expenses/etc.

I don't think anyone should disagree with this. We've evidence on the forum right now and had plenty of the same posts in the past. IMO it's the most important thing due to the way we work and the current economic climate

[Keanu2020]

As a slight warning to those trying to stash everything away - make sure you have a warchest of preferably 6 months in a personal, easy access place. i.e. not locked in a 90 day account or 5 year bond, or whatever, but something that if you suddenly don't have your £20k a month coming in, that you can still pay your mortgage, household bills, etc.
There's no value in locking away for a future if you don't have enough for food on the table now.

And make sure that you've left enough in your company account to pay what's due from it - VAT, Corp Tax, accountant fees.


I realise others will disagree with me and tell you to live to the max, because you'll always have work until you choose not to, but that's not always the reality, and not everyone on the internet tells you the truth about their income/expenses/etc.

On the same page. If anything, I’m guilty of carrying too much and not putting enough away (hence low pensions amounts historically). I agree 100% about a war chest and it should be a no brainer.

[Olly]

The lifetime allowance was abolished in April?

No. Some of the impacts of LTA were set to zero but it is still used to define the maximum amount you can withdraw tax-free (i.e. 25% of LTA).