Lib Dums propose capping PCLS at £40k

ffacoffipawb

The Lib Dems propose capping PCLS af £40k ...

https://www.professionaladviser.com/professional-adviser/news/3063023/lib-dems-seek-gbp40k-cap-on-tax-free-pension-lump-sums

Thoughts on likelihood and legality of such draconian retrospective taxation?

Every time LTA has been reduced it has been possible to sort of protect what you have, including PCLS, which has been fair. Sort of.

No mention of protection in these proposals though.

Someone with a £1m fund loses £210k of tax free cash under these proposals. Bit unfair when you expect 25% tax free and not 4%.

Makes pension planning even more if a joke / lottery.

MK62

The Liberal Democrat party has passed a motion pledging to cap tax-free lump sums under pension freedom at £40,000 if elected into government

So I wouldn't really worry about it that much......

Dox

ffacoffipawb wrote: »

Thoughts on likelihood

Zero. Usual nonsense.

dunstonh

LibDems can say what they like as they will not get into power by themselves. When they do have to get in bed with one of the other parties, they find out that the real world is very different to LibDem make believe.

Dazed_and_confused

However they were instrumental in the significant increases in the Personal Allowance seen since the coalition government came about in 2010.

Probably unlikely to happen again and they may have higher priorities than the PCLS even if they were to get a foot in the door again but you just never know.

Paul_Herring

Thoughts on likelihood and legality of such draconian retrospective taxation?

About as likely as Labour writing off student debt, or the Conservatives getting us out of Europe in a timely and orderly fashion, which were two other promises by politicians.

i.e. not at all.

The Lib Dems estimate that capping the tax-free lump sum would leave 75% of drawdowns unaffected.

Have they been asking Diane Abbot to work the numbers?

The party also proposes to scrap National Insurance payments on pension contributions, "substantially boosting incentives to save among lower earners".

They've re-invented salary sacrifice. Well done them.

hugheskevi

It is useful to reflect on the various limits the Govt imposes to protect pension tax relief:

1. Age of access (55, announced but not enacted to increase to State Pension age minus 10 years, limited protections put in place when previously increased)
2. Tax relief on contributions limited to annual earnings, with £3,600 exception which is frozen in cash terms.
3. Standard Annual Allowance (£40,000, frozen in cash terms, no protection with previous changes aside from ability to use unused Annual Allowance from last 3 years)
4. Tapered Annual Allowance - lower for higher earners, thresholds frozen in cash terms
5. Money Purchase Annual Allowance - frozen in cash terms, no protection offered when lowered, aside from a brief delay in implementation
6. Lifetime Allowance (£1.03m, indexed by CPI, quite comprehensive protections offered at previous changes)
7. Limit on tax free lump sum, unchanged for some time, aside from lower limits for those with the biggest pensions due to lower Lifetime Allowance and limit of lump sums to 25% of available Lifetime Allowance. Protection offered at previous changes.
8. 'Soft' restriction on withdrawing all of pension in one go, due to hitting higher and additional income tax rates.
9. Some various rules applying to DB schemes which are largely legacy, for example, around Trivial Commutation and Guaranteed Minimum Pension age.

There is a reasonable history of protections being offered to accrued pensions when policy changes occur. The best example being Lifetime Allowance.

However, changes to the age at which a pension can be accessed had incomplete protection, but they date back to 2006.

More recent changes to the Money Purchase Annual Allowance could affect people who had reasonably made irreversible decisions in good faith, and who would face tax charges on future contributions, but no protection was given to them. It could be argued the charges could be avoided by not making the contributions, but in many cases these will be employer contributions and a case of either take it or leave it.

On balance, I think protection would be offered for accrued pension if this change were to happen, similar to 2006 protections when the pension tax system was simplified and those with entitlement to lump sums in excess of 25% received protection.

I think the main risk to this would be if the measure was announced but only to be implemented many years into the future - I'd think 10+ years - so there would be an argument there is plenty of time for individuals to change their plans. So for example, all those aged 48+ could take lump sums if they wished before the change. It would be likely that analysis of size of accrued pension would be required to set the appropriate age, to demonstrate that only a small number of individuals would not have the opportunity to take a lump sum to which they would currently be entitled (ie ignoring any investment growth or future contributions) in excess of £40,000.

Paul_Herring

It would be likely that analysis of size of accrued pension would be required to set the appropriate age, to demonstrate that only a small number of individuals would not have the opportunity to take a lump sum to which they would currently be entitled (ie ignoring any investment growth or future contributions) in excess of £40,000.

They're already quoting only a quarter of pension funds (which I suppose equates to people now, since auto-enrolment started) would be affected by such a policy (see my previous post.)

hugheskevi

They're already quoting only a quarter of pension funds (which I suppose equates to people now, since auto-enrolment started) would be affected by such a policy (see my previous post.)

I cannot find a report or source detailing exactly how the statistic is calculated, but it sounds like a nonsense figure given I doubt a loop-hole would be left allowing individuals to undertake lots of partial transfers to create multiple pension pots, all entitled to £40K lump sum.

In practice, the limit would have to be applied across all pension wealth, and would presumably be applied in a similar manner to the Lifetime Allowance. Hence looking at existing pots or drawdowns isn't helpful.

Paul_Herring

I cannot find a report or source detailing exactly how the statistic is calculated,

It probably involved either,
- as I previously suggested, encouraging Diane to moonlight as their financial adviser for the afternoon, or
- repeated visits to http://www.random.org until they got a number they liked.

drumtochty

The average pension pot depending what publication you read is around £50,000. Therefore the matching 25% tax free amount would be £12,500. It sounds logical to me that their figure of capping the tax free amout to £40,000 would only affect 25% pension pots is a logical assumption.


Why has it take the original poster over three months to advise this info, it was in the press in mid September 2018.