RE: Quick CGT question18 Mar 2021 10:11
@Speedy
Well that answer presents a whole new set of questions. for two reasons;
1 - It's very rare that I see somebody earning under £100k in working life, that then lives on as much £62k in retirement. Those numbers are relevant because;
a) £62k is the roughly level of income you can take in retirement and remain a basic rate tax payer (assuming you take your pensions as UFPLS, which means 25% of your withdrawals would be tax free hence staying under £50k with a state pension too)
b) If this person does start touching the £100k earnings mark then (LTA breach excepted) putting it in a pension is a bit of a no brainer. The tax implications between £100k and £125k of earnings are grim as you lose your personal allowance thus paying an effective rate of a whopping 60% or so. So paying into a pension to keep them under that is almost always the answer (LTA excepted).
c) For a sustainable pension, assuming your 5% growth rate and the inflation target of 2%... the max withdrawals are around 3% without capital erosion. Which means you'll need a £1.6m pension to provide that £50k of withdrawals. So you'll have to breach the LTA to achieve your own goal with only a pension. Capital erosion being acceptable, obviously that figure comes down a lot.
2 - Don't forget that tax efficiency is far easier to achieve in retirement, than working life. Somebody on a salary of £75k now can probably achieve the same level of net income on £60k gross in retirement. People often think "I don't want to drop my standard of living in retirement", but that doesn't mean you need the same income, as your outgoings are also much reduced.
As you've realised, there's an endless list and (admittedly with complete bias on my part) this exactly the sort of thing you should talk to a financial planner about. A modern one. Not one of those SJP types.
The short answer is that without any other variables at all, ignoring the LTA, and assuming the Chancellor doesn't mess around with either pensions or ISAs over the next 30 years (unlikely)... then a higher rate tax payer is likely to be better off in a pension rather than a ISA. The minute they breach the LTA though, it goes the other way. So what you actually need to do is project typical career earnings and industry averages for them. Then assume relevant pension contributions over their career. Then model that in and see how much "space" you have in the LTA by the end of it (assuming it starts to increase with inflation again in 2027). Then it just comes down to something as unscientific as "do you think it'll grow fast enough to breach LTA?" If yes, put it in an ISA, if no, do a pension. But you should monitor annually to try and line it up.
The dream for a higher rate tax payer is to land your pension right on the LTA line at retirement, with everything else in the ISA. How you go about achieving that will come down to investment strategy.
Hopefully that's of some use, even if it doesn't give a defi
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