Should I take Tax Free Lump Sum in case they change the rules?

David7823

I'm 57, and considering retiring within next year, I have £900k in Pension Funds and no mortgage, or debts. My wife expects to continue working for some more years. I don't need any lump sum for any spending plans, so my natural inclination is to ignore the lump sum and drawdown a monthly income of around £3k gross which should attract minimum tax (£2800/year by my calc)

But is it possible that some future government limits the current 25% tax free withdrawals and I regret not having taken that 25% as a lump sum when I could?

I guess any such change would have to provide notice so that we could withdraw before it came into effect. 

Any thoughts on whether I should consider taking my 25% lump sum in advance, or not?

dunstonh

But is it possible that some future government limits the current 25% tax free withdrawals and I regret not having taken that 25% as a lump sum when I could?

Anything is possible but there has been no hint of either party doing this in the 35 years that personal pensions have existed.  Indeed, both parties have increased the availability of tax free cash.

Any thoughts on whether I should consider taking my 25% lump sum in advance, or not?

Some things are sensibly planned for.  This would not be one of them.

Marcon

David7823 said:

 I don't need any lump sum for any spending plans, so my natural inclination is to ignore the lump sum and drawdown a monthly income of around £3k gross which should attract minimum tax (£2800/year by my calc)

But is it possible that some future government limits the current 25% tax free withdrawals and I regret not having taken that 25% as a lump sum when I could?

If you don't need a lump sum, then why would you regret not having taken one?

Mr.Generous

Take it in case you die. Who knows whats round the corner as we age. People over 50 drop dead every day.

David7823

Mr.Generous said:

Take it in case you die. Who knows whats round the corner as we age. People over 50 drop dead every day.

Well that raises the interesting issue of whether the Tax free element also passes to my beneficiaries, I would hope that it does, but have not checked that!

QrizB

Mr.Generous said:

Take it in case you die. Who knows whats round the corner as we age. People over 50 drop dead every day.

That makes no sense. The OP's heirs will still get the TFLS if he dies before 75.

Marcon

David7823 said:

Mr.Generous said:

Take it in case you die. Who knows whats round the corner as we age. People over 50 drop dead every day.

Well that raises the interesting issue of whether the Tax free element also passes to my beneficiaries, I would hope that it does, but have not checked that!

If you've taken tax free cash but not 'spent' it all before you die, then it forms part of your estate and is potentially subject to IHT.

If you die before age 75, under current legislation anyone inheriting your 'undrawn' pension pot (or part of it) doesn't have to pay tax on it.

Maybe, though, you should be considering your own (and your wife's) position, rather than doing anything aimed at benefiting those to whom you leave bequests in your will?

badmemory

It is unlikely any new legislation would be announced & come into effect the same day, so you should have enough warning to deal with it.

Hoenir

David7823 said:

But is it possible that some future government limits the current 25% tax free withdrawals and I regret not having taken that 25% as a lump sum when I could?

Maximum tax free withdrawal you could make is currently limited to £268,275.  You've some head way available yet. Easiest and least problematic action by any future Government is to simply freeze this allowance. Allowing inflation to create a fiscal drag and progressively draw more people into the net. Rather than cause discord amongst existing retirees. 

hugheskevi

David7823 said:

But is it possible that some future government limits the current 25% tax free withdrawals and I regret not having taken that 25% as a lump sum when I could?

I guess any such change would have to provide notice so that we could withdraw before it came into effect. 

Any thoughts on whether I should consider taking my 25% lump sum in advance, or not?

There would not be a requirement to provide notice - the Govt. can enact legislation however it wishes subject to commanding the confidence of the House and obeying laws such as meeting Equality obligations. An argument could perhaps be made that it was interfering with existing property rights, but being a taxation measure rather than directly appropriating funds it would probably be difficult to argue.

The options are:

• The tax-free limit increases (as under previous Labour govt)
• Limit remains frozen at current level, reducing in real terms through fiscal drag (as under coalition and Conservative govts, when it wasn't being reduced)
• Limit is reduced, but with notice (eg a manifesto commitment) 
• Limit is reduced without notice, but with options to essentially remain under the previous system but not contribute anything further, similar to the protections introduced when the Lifetime Allowance was reduced several times during the 2010s under Coalition and Conservative govts
• The limit is reduced, announced with no notice, and with anti-forestalling provisions taking effect immediately to prevent people immediately commencing their pension under the existing rules (similar to the anti-forestalling pension measures implemented by Labour govt in the 2009 Budget when the Personal Allowance was tapered for those earning over £100,000 - although those were just to prevent increases to pension contributions rather than affecting people adversely based on their existing contributions)

Whilst nothing can be ruled out, you would be catering to a relatively small probabilistic outcome (based on past political outcomes) by moving significant sums from a tax-sheltered environment and subjecting them to income (if saved) or capital gains tax (if invested) as well as potentially IHT. That benefit from a single scenario has to be considered in the context of taking a certain loss in all the other scenarios.

David7823

hugheskevi said:

David7823 said:

But is it possible that some future government limits the current 25% tax free withdrawals and I regret not having taken that 25% as a lump sum when I could?

I guess any such change would have to provide notice so that we could withdraw before it came into effect. 

Any thoughts on whether I should consider taking my 25% lump sum in advance, or not?

There would not be a requirement to provide notice - the Govt. can enact legislation however it wishes subject to commanding the confidence of the House and obeying laws such as meeting Equality obligations. An argument could perhaps be made that it was interfering with existing property rights, but being a taxation measure rather than directly appropriating funds it would probably be difficult to argue.

The options are:

• The tax-free limit increases (as under previous Labour govt)
• Limit remains frozen at current level, reducing in real terms through fiscal drag (as under coalition and Conservative govts, when it wasn't being reduced)
• Limit is reduced, but with notice (eg a manifesto commitment) 
• Limit is reduced without notice, but with options to essentially remain under the previous system but not contribute anything further, similar to the protections introduced when the Lifetime Allowance was reduced several times during the 2010s under Coalition and Conservative govts
• The limit is reduced, announced with no notice, and with anti-forestalling provisions taking effect immediately to prevent people immediately commencing their pension under the existing rules (similar to the anti-forestalling pension measures implemented by Labour govt in the 2009 Budget when the Personal Allowance was tapered for those earning over £100,000 - although those were just to prevent increases to pension contributions rather than affecting people adversely based on their existing contributions)

Whilst nothing can be ruled out, you would be catering to a relatively small probabilistic outcome (based on past political outcomes) by moving significant sums from a tax-sheltered environment and subjecting them to income (if saved) or capital gains tax (if invested) as well as potentially IHT. That benefit from a single scenario has to be considered in the context of taking a certain loss in all the other scenarios.

Thanks for the comprehensive analysis, I suspect the second option is the most likely, fiscal drag eroding the benefit over time.