Do you think the tax free lump sum will become taxable in the near future?

rpc

gadgetmind wrote: »

Really?

http://citywire.co.uk/new-model-adviser/tax-25-pensions-cash-lump-sum-says-lib-dem-think-tank/a539290

Centre Forum said in a paper: ‘The tax relief permitted on pension lump sums disproportionately benefits the wealthy at taxpayers’ expense. The result is a regressive system where those with the most generous entitlements also receive the highest rate of tax relief.

Disproportionately benefits the wealthy ..... and a great number of public sector workers.

I do not think they will change anything until after the number of public sector workers with a standalone lump sum entitlement is pretty small. That will be a while coming yet.

hugheskevi

Disproportionately benefits the wealthy ..... and a great number of public sector workers.

This is an interesting point.

The Exchequer effectively already taxes lump sum pensions from the new public service pension schemes, where members are offered a lousy 12:1 commutation rate which in many cases means it is better to take the income and pay tax on it (at 20%) rather than choose the tax-free lump sum.

That means there is no real difference in outcome from offering a fair commutation rate but taxing the payment, as compared to offering an unfair but tax free rate - given the employer and the tax authority are the same entity in this case.

dunstonh

Things change and the tax treatment of pensions seems to change every year or so.

1988 after years of consultation. 2001 after years of consultation. 2006 after years of consultation. Gordon Browns change on annual allowance was bad but the Coalition abolished it. The introduction of flexible drawdown and the capping of capped drawdown had little period to act but there was some. However, the annual allowance doesnt require the same level of consultation as its effectively something that can be changed in a budget. Flexible drawdown increased options. Not decreased them. Capped drawdown back to 100% from 120% was the only restriction.

So, clearly changes do not happen every year or so.

The removal of the tax free cash is not a tweak or adjustment. It would be a fundamental change which would require significant lead in time and advance warning.

A conservative think tank suggested that the ISA and pension should be combined into a single lifetime savings account. No signs that is coming.

hyubh

hugheskevi wrote: »

That means there is no real difference in outcome from offering a fair commutation rate but taxing the payment, as compared to offering an unfair but tax free rate - given the employer and the tax authority are the same entity in this case.

Er, there certainly is a difference in the case of the the biggest public sector scheme (i.e., the LGPS).

gadgetmind

dunstonh wrote: »

So, clearly changes do not happen every year or so.

They've been coming thick and fast over the last five years, and I can see little sign of things settling down.

Don't get me wrong, some of the changes have been for the better, but the madness with annual allowances, the 120%->100% of GAD, the 55% inheritance tax charge, etc. certainly aren't.

Trying to plan a pension in this environment is like trying to walk in a straight line during an earthquake.

Andy_L

rpc wrote: »

Disproportionately benefits ..... a great number of public sector workers.

Seeing as how very few public sector workers are higher rate taxpayers how do you work that out?

dunstonh

I think every time you restrict the pension wrapper in some way it is frustrating as hell and damaging to the wrapper as it is meant to be long term (30-40 years) and having a product that gets changed every 6 or 7 years on average is not ideal or desirable. If changes relax rules or improve terms then no issue there.

jamesd

Neither major UK political party favours taxing the lump sum. The closest party to doing it is the Liberal Democrats, who also favour abolishing higher rate income tax relief on pension contributions. The solution is simple: vote for people other than them if this worries you.

For basic rate tax payers, the taxing of the lump sum would eliminate the main tax advantage of using a pension for retirement planning: getting 20% tax relief on the way in and not paying income tax on 25% of the pot on the way out. This provides some protection from the effect of possible future income tax increases.

grey_gym_sock

gadgetmind wrote: »

I suspect that what will probably happen is we'll see a cap that only affects "fat cats" but which is then frozen or lowered such that it affects everyone after just a few decades.

if this did happen, i expect that's how it would happen.

i wouldn't predict it, certainly not in the near future, but if you're a few decades away from retirement, you can't really rule it out.

no way the current government would do it, though. they do have the interests of the wealthy at heart.

atush

The Govt desperately wants people to fund their own retirement- not the govt coffers. So I don't see the LS being taxed any decade soon.

AS if they did, many would no longer save into pensions, esp in the lower ends of pay scales. and these are exactly the sort of people who claim pension credit now.