25% tax free

Spivo46

It will be one year until i fully retire. Is it worth accessing my 25% tax free allowance from my DC Pension and moving it to a Cash ISA? The logic is just protecting some of my investment which will be around £100k. Thoughts please?

Albermarle

First issue is that you can only add maximum £20K pa to an ISA, so the rest would have to be in savings account where you would pay some tax on the interest.
Even in a cash ISA you will be losing value as interest rates are less than inflation.
Usual recommendation is not to take the tax free cash unless you actually need it,and leave it invested within the pension. 

dealyboy

Hi @Spivo46 ...
Are you fully invested? If so you would be selling some of your investment, is this the right time? after perhaps 18 months of poor performance.

It just might be sensible to take £20k PCLS and invest in a stocks & shares ISA, but you would be out of the market for a little while. The only scenario I can think of is in order to reduce the ongoing fees, perhaps £50 pa in the pension to the cost of just a single trade with iWeb, if you are long term, but is it worth the hassle? 

dunstonh

 The logic is just protecting some of my investment which will be around £100k. 

How does it protect it?  It won't have investment risk but it will be subject to shortfall risk and inflation risk.  It will also reduce your drawdown method options when you do want an income.

Unless you are spending that money pretty much immediately, there doesn't seem much point in doing that.

tetrarch

Albermarle said:

First issue is that you can only add maximum £20K pa to an ISA, so the rest would have to be in savings account where you would pay some tax on the interest.
Even in a cash ISA you will be losing value as interest rates are less than inflation.
Usual recommendation is not to take the tax free cash unless you actually need it,and leave it invested within the pension. 

I disagree with this "usual recommendation". I took the maximum TFLS as soon as I was able and reinvested the money into similar investments in ISA's as soon as mine and my Wife's allowances allowed. Thus the only "cost" was the frictional costs of reinvesting.

So now you have to look at the benefits of SIPP vs ISA. My personal belief is that the TFLS will, at some point, be taken away. It is certainy an easy target for a politician seeking "equitable outcomes", so my view is coloured by this (IMO) genuine risk.

For a given portfolio:

SIPP

Benefit: IHT, but only if you die before 75
Risk: Future removal of TFLS

ISA

Benefit : Removal of TFLS Risk
Cost: Loss of IHT

So there is a value judgement but I know where mine lies

Regards

Tet

Dazed_and_C0nfused

tetrarch said:

Albermarle said:

First issue is that you can only add maximum £20K pa to an ISA, so the rest would have to be in savings account where you would pay some tax on the interest.
Even in a cash ISA you will be losing value as interest rates are less than inflation.
Usual recommendation is not to take the tax free cash unless you actually need it,and leave it invested within the pension. 

I disagree with this "usual recommendation". I took the maximum TFLS as soon as I was able and reinvested the money into similar investments in ISA's as soon as mine and my Wife's allowances allowed. Thus the only "cost" was the frictional costs of reinvesting.

So now you have to look at the benefits of SIPP vs ISA. My personal belief is that the TFLS will, at some point, be taken away. It is certainy an easy target for a politician seeking "equitable outcomes", so my view is coloured by this (IMO) genuine risk.

For a given portfolio:

SIPP

Benefit: IHT, but only if you die before 75
Risk: Future removal of TFLS

ISA

Benefit : Removal of TFLS Risk
Cost: Loss of IHT

So there is a value judgement but I know where mine lies

Regards

Tet

Not convinced about that but restrictions such as the one imposed at the last budget could well be a sign of things to come.

CalJo99

Usual recommendation is not to take the tax free cash unless you actually need it,and leave it invested within the pension
**

I'm being a bit cynical here, but isn't the 'usual recommendation' coming from the IFAs and pension companies, who, of course, want you to leave as much in the pension pot as they can convince you to do?

That said, yes, it all depends what you want to do with the PCLS money you cash out.

Me, I put mine into buying a second home, but that was a very personal choice, certainly not right for everyone, and has exposed it to IHT as well in the end.

You do need to provide your IFA with a 'good' reason to take out the starting PCLS (which is usually quite a large sum after all), and give 'evidence' that you can afford to do so etc etc (ie, you don't need the full pension pot to live on, or whatever, when the time comes.)

IFAs these days have to be 'squeaky clean' when it comes to advising you about your money, or risk being accused of mis-selling.

Remember that while you are still working and earning, and before you start on drawing down or whatever from the DC pension, you can pay in more contributions into the DC pot out of earned income. I do this with any earned income that would otherwise get income-taxed at 40%. You can also immediately take the PCLS of that contribution (eg, if you put in £10k gross you can get out £2500 as your PCLS). You may have to give your IFA a 'reason' for doing so (see above!), but I usually say things like 'Oh, I want to do some home improvements with the cash' and they nod it through.

Once you start drawing down on the DC pension pot, though, you can only contribute something like £4k out of earned income pa. (This might have gone up a bit, but not hugely). So you might want to defer drawing down until you really need the money.

tetrarch

One caveat - this advice was only for DC pensions. The only circumstance I can consider thst would entice me to take a TFLS from a DB pension would be in the case of a life-limiting disease

Regards

Tet

CalJo99

I'd probably agree - time to get out as much as possible before the annuity dies with you alas.

dunstonh

I'm being a bit cynical here, but isn't the 'usual recommendation' coming from the IFAs and pension companies, who, of course, want you to leave as much in the pension pot as they can convince you to do?

So, nothing to do with the fact that for most people, leaving it in the pension is the best option?
(e.g. outside of the estate.   Able to use as phased UFPLS to and increase the amount of tax free income available.  Growth on the balance allows for greater tax free cash over the long term)

Generally speaking, you need justification for taking it up front rather than justification for leaving it in the pension (which should be the default unless good reason for doing otherwise).

Pat38493

I highly doubt that the TFLS will be taken away but it will probably be eroded over time.  Taking it away in one go would be very unpopular amongst the demographics who are most likely to vote in elections.

 But in any case, even without the TFLS you are still better off putting the money in a pension a lot of the time as you get the benefit of the growth on the tax relief for as long as it is in the pension, and further benefit if you draw it out at a lower marginal tax rate than paid in.