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

RogerPensionGuy

This thread is very much in my head currently. 

I'm interested in how they treat that 268K max tax free figure over time, I'm guessing it will just remain at 268K for a long long time for so many reasons. 

I'm more paranoid about them reintroducing the LTA charge over any figure they pick out of a box, that LTA figure has just been kicked about so much, it made it impossible to plan prudently reference pensions in general. 

I was well in to the ballpark of paying the LTA charge of 25% at some point and was going to drain pensions sooner and faster to potentially mitigate that hard LTA line and the whopping charge. 

Reference the LTA, I have researched how the LTA was treated every time they negatively changed it making it smaller and they always allowed various protections, but these protections sometimes required no more pension inputs to maintain the older rules etc.

I've now just stopped paid employment and feel confident that if they play negatively with the LTA at all it may not affect me, but very unfair for longer term planning. 

Someone posted on here that some governments set a minimum 10 year window if reducing pension rules.

So hard to plan with this LTA football they play.

Grumpy_chap

David7823 said:

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

None of us can second-guess future taxation and pension rules.  Your concern as mentioned is a valid one.

If you do nothing and the 25% tax free lump sum remains in your pension, that value will be invested still and, hopefully, at least keep up with inflation.

If you draw the 25% tax free, the other extreme to remaining invested would be held as cash savings under which case the value will decline in real terms.

What will you do with the lump sum if you draw it down? 
How will you invest this (outside the pension wrapper) to maintain value?
Or will you buy a sports car?

Another consideration is how strong your pension fund is at present.  Many equity funds have declined in value in the past coupe of years because of global events.  If the funds remain invested, there is the potential that the recovery is good.  If the funds are withdrawn, that crystallises the lower value for that element (subject to how the funds are managed subsequently).

It is also worth considering the overall income level and tax-free annual allowances if the lump sum is not drawn.  The tax-free part can be drawn as you go each year, so a higher annual income is exempt (on top of standard allowances) and less is subject to higher rate band.

Back to the second-guessing future pension rules, I don't expect any future Government to do anything that results in a mass-reduction in the collective nation's ability to fund retirement living without needing additional calls on the state.  A change to the rules on the TFLS may well result in that as people with pension funds really too small to be cut in this way will follow the press and take their funds regardless as a knee-jerk reaction.

ader42

I’m sure I read somewhere (likely Your Money?) that in April the plan is for the £268k TaxFreeCash limit to stay and for that also to be the maximum limit for tax-free inherited pensions. 

Anyone inheriting a pension from someone who died before age 75 will only pass £268k tax-free and the rest will be taxable when taken by the inheritee.

Of course, there is likely to be transitional arrangements and if Labour get in then they could change it again.

If OPs wife doesn’t have as good a pension provision I would, in his shoes, maximise her pension every year she works from now on. Even if this means paying some 20% income tax on higher pension withdrawals. Gifting it to the wife so she can put it in her pension (sbject to earnings) and get the 25% Tax Relief, as this is a zero-net sum (costs them nothing) but spreads the ability to get more income out at later dates with less tax to pay (two sets of allowances and thresholds). 

Albermarle

ader42 said:

I’m sure I read somewhere (likely Your Money?) that in April the plan is for the £268k TaxFreeCash limit to stay and for that also to be the maximum limit for tax-free inherited pensions. 

Anyone inheriting a pension from someone who died before age 75 will only pass £268k tax-free and the rest will be taxable when taken by the inheritee.

Of course, there is likely to be transitional arrangements and if Labour get in then they could change it again.

If OPs wife doesn’t have as good a pension provision I would, in his shoes, maximise her pension every year she works from now on. Even if this means paying some 20% income tax on higher pension withdrawals. Gifting it to the wife so she can put it in her pension (sbject to earnings) and get the 25% Tax Relief, as this is a zero-net sum (costs them nothing) but spreads the ability to get more income out at later dates with less tax to pay (two sets of allowances and thresholds). 

There has been some general discussion going back over a year about the generous tax regime surrounding  the inheritance of pensions. So in theory even the whole IHT exemption issue could come under threat ( dropping of LTA will have pushed this up the agenda I guess ) although more likely there will just be some tweaking around the edges.
Death and taxes and pensions | Institute for Fiscal Studies (ifs.org.uk)

RogerPensionGuy

Below is a link with lots of information, it's a bit clunky, but think it appears to show when negative pension changes have been applied the last period due to that government playing football and kicking tins up & down the road, relatively sensible various protections were always put in place. 

Most commentators say any future negative changes to pensions would most likely be similar and they would not retrospectively disadvantage people fingers crossed.

If they ever negatively retrospectively played with pensions, even more people would tend to steer away from them.

.
https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance

MetaPhysical

I am equally concerned about the horrific prospect of them removing this generous tax break.  It would be grotesquely unfair if they did and would be a massive skew on the incentive to save.  However, many things are unfair about the tax system that never seem to be resolved.

zagfles

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.

Personally I think by far the most likely scenario is that the tax-free limit remains frozen. It's already considered very generous, and the LTA abolision and so the break of the link with 25% of the LTA means there's less likely to be pressure to index/increase it. I suspect it'll remain frozen indefinitely, maybe for decades. Obviously just speculation and opinion but I can't see any govt increasing it after the LTA has gone.

If this happens, then once a pension pot reaches the current LTA, which for the OP may not take long, then effectively you'll be paying income tax on the growth of the TFLS entitlement. Because any growth in that part will now go into the taxable portion of the pot as the tax free portion is frozen.

Therefore when comparing taxation of that part inside and outside the pension, you need to compare income tax with unwrapped taxation ie dividend/CGT/potential IHT. Ignoring IHT, generally you'd pay less tax on unwrapped growth than income tax, particulary if you feed gradually into ISAs.

RogerPensionGuy

I agree with zagfles that the wonderful rounded figure of 268K TFLS will stay for many years. 

Hopefully they will leave the pensions tin can alone for many years so people can plan, if they start kicking that tin can again negatively and even more hard to understand, they will indeed be getting many many people just leaving long-term pension saving and planning well alone and just storing up more issues for an aging population. 

Maybe they will follow some nordic countries in setting that any possible negative changes will need a minimum of 10 years notice and if negative changes are made, sensible and reasonable protections will be guaranteed. 

Albermarle

MetaPhysical said:

I am equally concerned about the horrific prospect of them removing this generous tax break.  It would be grotesquely unfair if they did and would be a massive skew on the incentive to save.  However, many things are unfair about the tax system that never seem to be resolved.

There are two separate issues being discussed in this thread,
 and probably getting a bit mixed up from the original question.

First question is - Will the ability for the large majority of people to take 25% tax free from a pension be abolished? The answer is almost certainly not, as the 25% tax free ( along with tax relief on contributions) is effectively what makes pensions tax friendly, and therefore an incentive to have one. Many workers see the 25% tax free as a retirement bonus, and it would be highly unpopular to remove it.

Second question is - Will the small % of people with large pension pots remain limited to taking a maximum of £268,000 tax free for the foreseeable future. - The answer to this is probably yes.

MetaPhysical

I am going to go against the grain here and I think that a government could and possibly will reduce that £268k tax free cash sum and they may even have the nerve to do it retrospectively from the date of an election victory.  People able to take out such vast sums free of tax are a very soft and easy target for the government to rake in money from.  No one will shed a tear for these people and, indeed, could even be popular with the general electorate to rake in those "scoundrels with all that money".  I know I may get downvoted for this but I think this is very possible.  A government with a huge majority and four to five years out from an election can essentially do what it wants and I foresee that with a labour administration.
  
I also think the LTA will be brought back but maybe at a more realistic £2million.

I am thinking I am going to take the TFLS from my pension in case there is a change and it gets subjected to tapering in some way.