Legal Tax Mitigation - advice

[Eirikur]

You need to avoid breaching the lifetime allowance, currently £1m + a bit, because once you do you will pay tax of 55% on anything over that. And you pay tax on your withdrawals as though they were income ( over the personal allowance ).

In short, pension tax is complicated, and certainly not the free ride that some people assume. I see it as tax-deferred rather than tax mitigated.

£1m might seem a very big number, very far away, but a few years of 40k contributions and, hopefully, reasonable growth will start sending you towards that number.

And of course, you have to hope that HMRC don't change the rules during your 30-year working life, which they have already done by slashing the lifetime allowance.

I wish I had this "problem"

[_V_]

£40k invested every year at an average return (from stock growth, dividends and bond income) of 5% hits £1m after 15 years.

So pretty much going to hurt a lot of pension millionaire IT contractors.

[Ploptimus]

Let the tax tail wag the investment dog: VCT, EIS, SEIS...

I am effectively doing this. My rough plan is as follows:

• Years 1-5 invest 10k into EIS/SEIS each year
• Years 1-5 reduce tax bill by 3k+
• After year 5, reinvest profitable previous investments (top-up if required) to continue reducing tax bill by 3k/year

Obviously early stage companies fail more often (there is also extra tax relief if they do go busto). DYOR and diversify in these investments as much as you can.

[tomtomagain]

I wish I had this "problem"

Well if you stop enjoying yourself, socialising, holidaying and buying the latest gadgets then you too can spend your evenings fretting about your hypothetical tax position by the time you hit 55.

As stated by _V_ it's surprisingly easy to get close within a decade or two of saving. Over a 35 year working career easier still.

It's just something to be aware of. Not something to rule your life.

On a wider point, although minimising your tax is a sensible strategy, through a mix of ISA's, Pensions etc. But obsessively trying to get your tax rate to as low as possible can lead one down some dangerous paths ..... as the people on the "HMRC Scheme Enquiries" sub-forum will tell you.

[mattster]

In short, pension tax is complicated, and certainly not the free ride that some people assume. I see it as tax-deferred rather than tax mitigated.

Deferred, yes, but also mitigated. 25% (of up to lifetime allowance) tax free, for starters, on retirement, and it should be possible to get the rest out at a lower tax rate than you would have paid at the time had you not put it in the pension, so there are definitely significant tax savings to be made. Also some inheritance tax benefits to some pension types if that is important to you.