25%tax free ???

Beh

Hi .just reading the Sunday times and th article on front page is suggesting the chancellor may STOP the 25% tax free we are currently able to do. Concerned as I have 2 pensions that this will impact !!!??? Any clues a to where chancellor may take this?? May be there will be sufficient notice to get the funds out before it kicks in. A bit scary as its only been possible for 1 year.

greenglide

It might, it might not.

It will be a real departure if there is not transitional protection so that people get the 25% on the amount accrued.

And this is just speculation.

dunstonh

In 1988 the 25% tax free cash was brought in to the new personal pensions that came out that year. Every year since 1988 the media has run the prediction that the tax free cash will be going. Nearly 30 years later and its still here.

Sooner or later they may well be right. However, the current media coverage is based on the opinion of a think tank. Not on the known position of the decision makers.

In 2006, tax free cash was extended (plans that never used to have 25% now got it). In 2015, tax free cash was extended further (on death before 75). So, recent trends have been improving the amount of tax free cash that has been available.

The biggest cost to the treasury is pension tax relief. That is going to be hit in the budget. The 25% tax free cash is not a big hit to the treasury. Indeed, there have been other suggestions that ALL of the money in the pension would be made available tax free, just like an ISA.

A bit scary as its only been possible for 1 year.

Tax free cash has been available for over 50 years. Even before 1988 where the 25% came in, it was available on retirement annuity contracts and defined benefit schemes. Albeit calculated differently.

Last year, one paper wrote scaremongering headlines about 15 things you will see in the budget. None of the 15 things they said would be in the budget were there. It is like this every year. They guess. Some they get right. most they get wrong. Sometimes they get it all wrong.

westv

If the 25% lump sum was affected why would anybody trust them not to fiddle in the future with the alternative 25% tax free per withdrawal?

jamesd

No doubt at all that telling people they would get it for 30 years then taking it away for previously made contributions before most had the chance to take it would undermine trust in the pensions systems. It's the primary net tax relief for basic rate tax payers.

But it appears that the stories are really discussing the option of replacing new pension contributions with a pension ISA that has no 25% tax free lump sum from the outset because the money going in would already have been taxed and the money coming out would be tax free. Well, until a future government decided otherwise.

Triumph13

Although there have always been scare stories about the end of the lump sum, the real game changer has been GO's pension freedoms. This has just opened it up to so much abuse for anyone over 55 recycling savings that I would be frankly gobsmacked if this time we didn't see either the end of the PCLS for new money or some massively draconian new recycling rules. You just can't keep a scheme which allows every worker over age 55 with £10k of savings to grab £500 from HMRC every year.

Snakey

It is funny the difference in hypothetical trust there, between pension ISAs and normal ISAs.

I have never heard anybody advise people not to put money into normal ISAs (saved out of taxed income) on the grounds that a future government might make it taxable on the way out as well, and yet it's the first thing a lot of people say when there's a mention of a pension ISA.

I suppose one difference is that the condoc framed it all in the context of E-E-T vs T-E-E, and that almost primes people to mutter cynically about how they wouldn't be surprised to see it become T-T-T. ISAs are T-E-E and always have been, even bog-standard bank interest could be presented as being T-T-E, but nobody looks at it like that.

The other difference, of course, is the potential uplift that the government would have to give in order to make anybody bother. It would be more politically palatable to say "33% (or whatever) of your original investment was taxpayers' money, so it's only fair that we should tax that part" than it would be to say "yeah, you know what, we're just gonna nick your money because it's not fair that you can afford to save while poor people can't". However, in the world of auto-enrolment "more palatable" is relative, not absolute - most of the country will soon have skin in this particular game, not just "the rich", and any government suggesting a tax grab that removes significant assets from the majority would be out on their ear.

Snakey

As for the latest gossip about the potential removal of the PCLS, as James says this is only in the sense that it would be a consequence of moving to an ISA style arrangement for pensions and I'm not sure how likely that is to happen.

If pension ISAs did happen, "old-style" funds (i.e. existing ones) would presumably need to be kept separate for administrative reasons - it would be nigh-on impossible to calculate and claw back tax relief already given - and would probably keep their PCLS. At the very least, the PCLS entitlement would be frozen at current values, similar to what happens whenever they drop the LTA.

dunstonh

Historically, when a tax wrapper has been closed, those already in the wrapper maintained their tax status. You just couldnt add to them any more. Then over time (sometimes many decades) they would make changes to equalise them.

A good example with pensions were retirement annuity contracts. These ended in 1988 and were replaced with personal pensions. Those that had RACs could keep them but no "new" money could be added (although existing contributions could continue but not be topped up - fear that stopping contributions and telling people to get new plans would see many not bother).

The tax rules around RACs continued to remain the same from 1988 to 2006 when they were brought in line with personal pensions as the differences were only minor by that time.

zagfles

Snakey wrote: »

As for the latest gossip about the potential removal of the PCLS, as James says this is only in the sense that it would be a consequence of moving to an ISA style arrangement for pensions and I'm not sure how likely that is to happen.

If pension ISAs did happen, "old-style" funds (i.e. existing ones) would presumably need to be kept separate for administrative reasons - it would be nigh-on impossible to calculate and claw back tax relief already given - and would probably keep their PCLS. At the very least, the PCLS entitlement would be frozen at current values, similar to what happens whenever they drop the LTA.

If they did move to pension-ISAs then surely the PCLS would need to be replaced by something else eg a govt top up, otherwise what would be the incentive to tie money up till 55 or older? I don't think tax free growth would be enough of an incentive - and of course you can get that in an ISA. The £15k ISA limit is more than most people save in a pension.

So not sure what Steve Webb is on about. Yes you wouldn't get the PCLS with TEE but there would be some other tax break/incentive to replace it.

But I can see them sticking with EET and replacing the PCLS with a boost for basic rate taxpayers. That would make more sense and would be far less of a nightmare to admister/transition from.

Snakey

Agreed you'd need to incentivise savings, and that a top-up on the way in would do the job a treat - perhaps even more so than the promise of tax-free amounts on the way out (too far in the future for a lot of people to count chickens).

The more I think about it, the more I think I would probably sign up to one - because my money would have been taxed whether I like it or not, and so the question then would be, where to put it if you're already maxing your ISA? Psychologically, 30% tax relief translates to "an immediate 50% bonus on everything you pay in!!!!" and is pretty attractive when compared to, I dunno, a Santander 123 account or something. Especially for those of us for whom 55 no longer seems so terribly far away.

I think your last paragraph sounds like just as much of a nightmare to administer. Who gets the boost? Basic-rate taxpayers when - in the current year? Or keep records for 50 years and see what relief they got on the way in and do a formula? Yikes. Also, the trust issue kicks in. Would I really get it, or will you pull the rug when I'm just a few years away?

I think what I'd do, if I were the Chancellor, is pretend to be considering all this stuff really, really hard... and then limit tax relief for higher rate payers to the first £20k of contributions only. Instead of outrage, there'd be sighs of relief that it wasn't much worse.

Doesn't solve the problem of incentivising basic rate payers, but you could probably do that fairly cheaply with some flash gimmick aimed at very low levels - increase your contribution by an extra £20 a week and at the end of the year we'll give you a £200 tax rebate paid directly into your bank account, something like that.