25% tax free sum at 55 from drawdown

Pat38493

Also you should be aware that in addition to the limits mentioned above on what you can pay in each year, you are also limited by the amount of relevant income (which means income from working) in that year I.e. you cannot put in more than you earned in that tax year.

Ella_fella

DebtSurfer said:

Pipthecat said:

1 -- If I DID NOT take that 25% tax-free lump sum,

2 -- If I DID take that 25% tax-free lump sum earlier,

In my case (1) I'd withdraw £26000 from my pension pot and get £24700 net.
In my case (2) I'd withdraw £26000 from my pension pot but get £23400 net -- additional losses £1300.

Obvious point, but option 2 assumes you took and spent the 25% i.e. you did not save it to supplement your income  

Yeah.
Which is just makes things worse for one's later life.
Money spent now and not available later is one part of affliction, but even those money they will withdraw later, will have lesser contribution on their real income.

23400/24700 is a loss of only about 5% of net income, but here's the rub. The bills take fixed sum of income, not fixed part of income. Thus the disposable income left will deteriorate more in percent sense...

Let's assume the mortgage is paid, the car is paid off and still going strong.

Monthly income from taking £26k from pension pot a year, is £2060 and £1950 correspondingly in our two cases.
Monthly utility bills are £550 (energy, water, council tax, internet/mobile, we kicked the TV licence b/c who the hake watches BBC?!)
Another £400 for family groceries.
£150 for two cars diesel.
Annual bills for car insurance, car MOT, car tax, car service, two cars. Another £1800 or £150 per month.

So even without unexpected bills now, the fixed expenses are £1250 per month, leaving:
Disposable income of £810 in first case and £700 in second case. The Delta is already nearly minus 15%.

And since we took 25% of lump sum then... it won't last as long. E.g. instead of 24 years, only 18 years. Of 15% lesser income.

That's the real cost of indulging and taking that lump sum.

Granted, there are cases where it may be beneficial. Heavy debts which are not growing, for example. Interest will drink the blood out of those who continue to have debts. Lump sum can pay it off and start from the clean plate, saving countless thousands in the interest over years. Not to mention instant boost to mental health due to not having debts anymore...

Does all of the above factor in the "free" 20% uplift on a lump sum being paid into a SIPP before you're 55 then subsequently effectively taking this lump sum back at 55 plus the 20% then use this money to invest somewhere else rather than spend?

DavidT67

tetrarch said:

The only massive assumption here is that the TFLS stays forever. There is no guarantee that a future Labour (or cash-strapped Tory) Government will reduce, or eliminate it.

I took every penny of my TFLS as soon as I could after I retired (early), but I reinvested it as soon as I could inside my and my Wife's ISA allowances to make it truly tax free in the future.

Regards

Tet

Alternatively, you've taken that sum of money from outside your estate for IHT, to inside your estate...

You are also assuming that ISAs are for some reason going to be more immune from Govt. changes than Pensions.

tetrarch

DavidT67 said:

tetrarch said:

The only massive assumption here is that the TFLS stays forever. There is no guarantee that a future Labour (or cash-strapped Tory) Government will reduce, or eliminate it.

I took every penny of my TFLS as soon as I could after I retired (early), but I reinvested it as soon as I could inside my and my Wife's ISA allowances to make it truly tax free in the future.

Regards

Tet

Alternatively, you've taken in from outside your estate for IHT, to inside your estate...

You are also assuming that ISAs are for some reason going to be more immune from Govt. changes than Pensions.

You are correct in both here.

My concerns about TFLS is that, politically, it's abolition could be very easily sold as a "tax the rich" measure. In my personal opinion, there is zero threat to the ISA regime, certainly retroactively. The most likely threat would be a reduction, either mechanically or by fiscal drag in the annual limits as they could be perceived as favouring the better-off.

As to my own situation, my fears about the TFLS and managing my LA outweighed my estate planning and ISA fears. Also, moving assets to my Wife potentially helps should one of us substatially pre-decease the other

It is always going to be a value judgement, but my cynical side is always wary of politicians and their ability to #### things up, either by policy or accident.

Regards

Tet

Albermarle

tetrarch said:

DavidT67 said:

tetrarch said:

The only massive assumption here is that the TFLS stays forever. There is no guarantee that a future Labour (or cash-strapped Tory) Government will reduce, or eliminate it.

I took every penny of my TFLS as soon as I could after I retired (early), but I reinvested it as soon as I could inside my and my Wife's ISA allowances to make it truly tax free in the future.

Regards

Tet

Alternatively, you've taken in from outside your estate for IHT, to inside your estate...

You are also assuming that ISAs are for some reason going to be more immune from Govt. changes than Pensions.

You are correct in both here.

My concerns about TFLS is that, politically, it's abolition could be very easily sold as a "tax the rich" measure. In my personal opinion, there is zero threat to the ISA regime, certainly retroactively. The most likely threat would be a reduction, either mechanically or by fiscal drag in the annual limits as they could be perceived as favouring the better-off.

As to my own situation, my fears about the TFLS and managing my LA outweighed my estate planning and ISA fears. Also, moving assets to my Wife potentially helps should one of us substatially pre-decease the other

It is always going to be a value judgement, but my cynical side is always wary of politicians and their ability to #### things up, either by policy or accident.

Regards

Tet

Stopping the tax free cash would affect everybody with a pension, small and large. Many lower paid workers see it as a retirement bonus to be spent on a holiday, new car etc . It would be massively unpopular so it will never happen.
However restricting it at the 'top end ' already does happen, due to LTA and will still be the case when the LTA stops.

Albermarle

You may take the 25% tax free.

The remaining 75% will be taxable whenever you take it.

Just to be pedantic, taking income from the 75% is classed as taxable income, but whether it is actually taxed or not, depends on your personal circumstances. On the other hand if you had enough income, it might get taxed at 40%.