25% tax free

Albermarle

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. Part of the issue, is that many take the tax fee cash and just leave it in the bank. Clearly if you reinvest it, this is better. Can be a bit tricky salting away a large TFLS into ISA's, so then you get the problem of potential CGT and dividend tax.

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. This is highly unlikely as it is very popular, and many workers see it as a kind of retirement present, especially lower paid ones with not much money. Currently it is restricted and maybe that figure will not increase for some years.

For a given portfolio:

SIPP

Benefit: IHT, but only if you die before 75 . The current exemption of pension pots from IHT calculations has no age limit. Only issue is that if you die after 75, any beneficiary of the pension will have to pay normal income tax on any withdrawals. If you die before 75 there is the added benefit that any beneficiary will not pay any tax on withdrawals at all .
Risk: Future removal of TFLS Very unlikely
Risk : Future removal/reduction of IHT exemption

ISA

Benefit : Removal of TFLS Risk
Cost: Loss of IHT

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

Regards

Tet

See comments in bold.

CalJo99

So, nothing to do with the fact that for most people, leaving it in the pension is the best option?
**

Yes, leaving it in might very well be the best option, but it is a foolish person who does not evaluate the source of any advice they receive, lest the advice not be in their best interests, but that of the source of the advice! 

And it does depend on individual circumstances (as I said, I wanted to own a second home - it meant a lot to me, and the pension I took the cash from is not my only pension), and individual 'mind set' to an extent.

That mind set is something IFAs do pay attention to - clients have to fill out their own personal 'risk preference' chart, as to whether they don't mind high-risk/high-return, or veer in the opposite direction, etc etc.

Me, I like to keep some of my DC pension pot as cash for 'emergencies', rather than invest it all. I don't like unfunded emergencies, and feel happier losing a bit of investment interest for the reassurance of knowing I have some 'spare cash' tucked away in my DC 'mattress'!!! 

But that is personal. Wise or unwise? Well depends what the future brings, doesn't it?!!!!!

Albermarle

Yes, leaving it in might very well be the best option, but it is a foolish person who does not evaluate the source of any advice they receive, lest the advice not be in their best interests, but that of the source of the advice!

These are wise words, but it does raise the conundrum where you pay an IFA for their professional advice, but then mistrust the motivation behind the advice and do not follow it. 

In that case probably not worth going down the paid advice route at all, as it would be waste of money.

Spivo46

Thank you everyone for the answers and following debate. In summary, it appears to be a personal decision with pro's and con's. I agree with CalJoe99 and the money there is surely to be enjoyed, perhaps ticking the boxes and fulfilling the bucket list mission. For some people this could be the first time they have money in the bank which is surely more comforting and pleasing than watching a spreadsheet containing cyber numbers go up and down. I appreciate that IFA's may have a slightly skewed view point. 

dunstonh

 I appreciate that IFA's may have a slightly skewed view point. 

Why?

You tell the IFA your objectives and the IFA lets you know if they are reasonably affordable or not.    The IFA is there to do their best to help you achieve those objectives and make sure you are not making a mess of it.  The IFA will warn, with increasing severity if you are going too far but that is all.   

eastcorkram

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 was thinking, that I might take 25% tax free from a SIPP. I've no direct need for it, as in paying debt or whatever, but I thought I could use it to just fund myself for a year, and therefore retire one year sooner than I otherwise could. At which stage other pensions would start .
Not sure if this is a sensible use of it or not, but I guess that's just a personal decision.

Dazed_and_C0nfused

eastcorkram 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 was thinking, that I might take 25% tax free from a SIPP. I've no direct need for it, as in paying debt or whatever, but I thought I could use it to just fund myself for a year, and therefore retire one year sooner than I otherwise could. At which stage other pensions would start .
Not sure if this is a sensible use of it or not, but I guess that's just a personal decision.

I suspect it's what plenty of people do to a greater or less degree.

It might be to bridge the gap between retiring a year or two before a DB schemes NPA and that income starting without any actuarial reduction.

It's possible crystallising £20k and taking a mix of taxable and tax free income may be more common than just £20k TFLS and no taxable income if that can utilise otherwise unused Personal Allowance.

Spivo46

dunstonh said:

 I appreciate that IFA's may have a slightly skewed view point. 

Why?

You tell the IFA your objectives and the IFA lets you know if they are reasonably affordable or not.    The IFA is there to do their best to help you achieve those objectives and make sure you are not making a mess of it.  The IFA will warn, with increasing severity if you are going too far but that is all.   

Why? - Because IFA have a bias towards safety and assuming you will live forever. I am ok with that, its part of what there job is. For example if you tell the IFA you want a flash car most will see that as unaffordable. Some people have i view that you should enjoy life while you can

dunstonh

Why? - Because IFA have a bias towards safety and assuming you will live forever. 

Not in my experience.  Typically you use just past the ONS life expectancy figures

For example if you tell the IFA you want a flash car most will see that as unaffordable.

Wrong.  Only if it is unaffordable would the IFA have issues with it.

Albermarle

eastcorkram 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 was thinking, that I might take 25% tax free from a SIPP. I've no direct need for it, as in paying debt or whatever, but I thought I could use it to just fund myself for a year, and therefore retire one year sooner than I otherwise could. At which stage other pensions would start .
Not sure if this is a sensible use of it or not, but I guess that's just a personal decision.

The point is really that if you have a definite use for the money, such as paying off a debt, buying a new car, retiring early, then can be a good idea to take the TFC ( or some of it). It is generally not such a good idea  to take it just  because you can, and it is usually best just left in the pension in that case ( although clearly not everyone agrees)
As D&C says if you did retire early, and had a year with no taxable income, then it would make sense to not just take TFC, but also taxable income up to £12,570, so as not to waste your personal allowance.