25% tax free cash (TFC) from pension not guaranteed?

Paul_Herring

Well, no - as we know, governments like to fiddle with policies, but this is the first time I've come across articles that have actually articulated the fact that the TFC is not guaranteed, and the option to collect it may be removed.

http://www.whatinvestment.co.uk/story.asp?storycode=15722&sectioncode=78

WhatInvestment wrote:

Despite the Chancellor's apparent backing for the tax free option, Morrison says there is a fear the government may however decide to remove the tax-free option, as it was described as an anomaly during the debate on the Finance Act 2006.

http://www.fairinvestment.co.uk/pensions-news-Winterarthur-warns-of-lump-sum-pitfalls-17808451.html

FairInvestment wrote:

Since the pension reforms earlier this year, UK pension schemes have started to publicise the fact that 25 per cent lump sum payments are on offer to many savers, as the fear is that legislation could abolish this as an option in the near future.

http://www.ifaonline.co.uk/public/showPage.html?page=348280

IFAOnline wrote:

He says since A-Day, in the second quarter of 2006, there has been a 64% increase in the number of people moving into an unsecured pension (Usp) or drawdown, with many using the flexibility of the new A-Day rules to get their tax-free cash, or pension commencement lump sum (Pcls), but leave the remainder of their fund intact by taking no income.

Morrison says there is a growing fear the government may decide to remove tax-free cash, as during the debate on the Finance Act 2006, the ability to take tax-free cash was described as an anomaly.

Granted most of these articles assume that everyone withdrawing the 25% TFC will not be using it to provide a supplimental income...

LOST

There is a rumour that the government is now referring it as the PCLS (Pension Commencement Lump Sum) rather than TFC (Tax-free Cash) as they are looking to abolish the tax-free element gradually once we all get used to the new A-day rules.

dunstonh

Yes, these rumours have been doing the rounds for the last couple of years and increased in frequency with the renaming of tax free cash to pension commencement lump sum. In addition the draft information on the NPSS makes no mention of a lump sum benefit.

EdInvestor

The Government has only just changed the rules to enable people to take the 25% tax free cash without actually taking a pension - and it has just spread this TFC availability to protected rights pensions and AVCs where it wasn't previously allowed..

It's rather hard to see why they would have done that if they were planning to end the idea of TFC. :huh: Stopping the 25% TFC would mean there was zero incentive to save in pensions for basic rate taxpayers, as there would be no tax relief at all.

What the Givernment *might* be worried about is a surge of higher rate taxpayers throwing money into pensions and getting tax relief upfront - which would hit Gordon's revenue sums,possibly quite badly.

They might do this because they like the look of the new rules ( no compulsory annuities any more, TFC at 50 without taking the pension, possibility of leaving remains of fund to heirs, etc)

So it could be there are some rumours being put about to scare these well off people from putting lots of extra cash into pensions. :cool:

At the same time,if you're over 50 and eligible for some pension tax free cash,why not take it out,just in case?

You can reinvest it in your S&S ISA, and leave the rest of your pension fund to grow in a low cost Sipp.

That way, you won't lose out whichever way the shoe drops.

Loughton_Monkey

Removal of the 25% tax free lump sum basically 'kills' the concept of a personal pension for a basic rate tax payer. The tax relief (at 20%) basically becomes irrelevant. It is simply a 'shadow' 20% investment on the back of your own investment, and then withdrawn on the back of your annuity. It serves no purpose.

Under these circumstances, everyone would just use S&S ISA's - which would perform exactly the same job as pensions, and provide more flexible cash. Doesn't matter too much about the ISA limit either, since anyone can invest extra, outside the ISA, and a relatively simple bit of 'fund switching' along the way to manage avoidance of more than £10,100 realised gains along the way will bring the same result.

I can't believe the Government would do this - thus preserving pensions as a 'tax hideaway' useful only to Higher Rate Taxpayers.

noh

Loughton Monkey.

Do you realise the thread is over 4 years old and has been resurrected by the spam post prior to your post?

Edit:- Spam has now been removed.

dunstonh

Its interesting to note that already this year we have had two people post about rumours of the tax free cash going. Things dont change much do they.