Reply to: Better to overpay pension when working through an umbrella?

[eek]

Got to say that for a mortgage reapplication your best bet would be x months at max salary just to make it obvious for birds of of little brain.

[youngguy]

Not surprising because technically you can only change pension contribution when “a life changing event” occurs when you look at HMRC’s actual rules.

now I know for contractors it’s a simple case of (at worst) switching umbrella were you to need to make such a change but very few people are going to know that

Yes very true....and if I thought it was difficult explaining to a standard lender what it meant to have a ltd as a contractor, I should not have been surprised at even more befuzzlement at trying to explain how an umbrella who is legally my employer and provides a wage slip, isn't really my employer!

Oh the irony of ir35 and disguised employment and the answer to that being a brolly

[eek]

Another thought in relation to putting a huge amount into your pension when via a brolly (I appreciate this may not apply to many of the magnates here!)

I've had a few raised eyebrows when needing to show my salary (eg new mortgage, car payments). Because the pension is taken gross, it reduces my 'take home salary' considerably on paper and me explaining I can access up to another £40/£60k a yr by amending my pension contributions on a months notice usually garners confusion from the financial institution I am speaking to.

Not surprising because technically you can only change pension contribution when “a life changing event” occurs when you look at HMRC’s actual rules.

now I know for contractors it’s a simple case of (at worst) switching umbrella were you to need to make such a change but very few people are going to know that

[youngguy]

Another thought in relation to putting a huge amount into your pension when via a brolly (I appreciate this may not apply to many of the magnates here!)

I've had a few raised eyebrows when needing to show my salary (eg new mortgage, car payments). Because the pension is taken gross, it reduces my 'take home salary' considerably on paper and me explaining I can access up to another £40/£60k a yr by amending my pension contributions on a months notice usually garners confusion from the financial institution I am speaking to.

[Olly]

ok....decision made - I won't exceed my annual allowance more than I already have. Too big a risk of withdrawing into the 40% bracket.

Now the next question is should I pay the tax charge on 20k excess contribution from my pension (if Hargreaves Lansdown support that from a SIPP) or from other dosh?

[Protagoras]

The chance of needing/wanting to draw down pension into the 40% bracket is fairly high which in turn makes overpaying a very bad move.
My gut's telling me don't do it. Stop trying to "play" the system - you'll get burnt as usual.

Even supposing that pension value and the 40% tax threshold grow at the same rate, income taken from a £1m plus pension pot added to state pension can easily hit the 40% bracket for a 30 year retirement.

it's to buy a kick-ass house at some stage.

Of course you'll need lots of dosh to pay the heating bill for the big house

[Olly]

I still can't decide/have found more time to crunch further numbers.
My 'war chest' is not a concern - I don't spend much - I've probably got 15 years' worth of runway outside of my pension but I'm not building it up for that purpose - it's to buy a kick-ass house at some stage.
The chance of needing/wanting to draw down pension into the 40% bracket is fairly high which in turn makes overpaying a very bad move.
My gut's telling me don't do it. Stop trying to "play" the system - you'll get burnt as usual.

[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).

[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.

[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

[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.

[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.

[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.

[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.

[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.