Tax Free Cash at LTA - take or not?

Superdude0499

It seems most commentators advocate not taking the full 25% allowance once you reach the decision to access your DC pension. However, if you’re in the fortunate position of reaching the old LTA you have already reached the point where all the TFC you can ever have is available to you. If you have enough need and tax sheltered locations to squirrel the c270k away is it not worth doing so? As an example….

Reach LTA at 58, take full 25% leaving remaining crystallised pension untouched, continue working/contributing to 60.

Use 4 x 20k ISA allowances (Me, wife, 2 adult children), over two Tax years (in reality only 1year April to April) - 160k sheltered in space of year invested as per pension (or not). 

Leaves 110k unsheltered to be spent on pre-retirement big ticket items (home improvements, new car etc). Remaining could be shoved into premium bonds and filtered into subsequent years ISA allowances. 

Other than leaving in for inheritance purposes it seems futile to leave in pension wrapper when it can grow outside with easier access. 

Thoughts anyone?

Triumph13

Why would you go to all that trouble?  What advantage do you think you are gaining by withdrawing anything you can't immediately shelter in your ISAs or plan to spend?

squirrelpie

Superdude0499 said:

it seems futile to leave in pension wrapper when it can grow outside with easier access.

Why's it more difficult to access in the pension? It's always been easy for me.

dunstonh

Other than leaving in for inheritance purposes it seems futile to leave in pension wrapper when it can grow outside with easier access. 

Why do you think that it isn't easy to access?
its not bank account easy but nobody should be taking money out of a pension to languish in a bank account without some justification.  

MrPercent

I'm considering this -

Pros: 

• TFC grows outside, and if sheltered (ISA) then the growth is tax free - The **most** you can get from the pension is the max TFC
• Hedges against a government raiding the TFC amount

Cons:

• Pension now in scope for IHT (I believe!) 
• Breaks the seal for accessing pension money - so may be tempted to fritter it away on nonsense.
  

Not pulled the trigger yet but coming close as the incomming government may want to find a way to tax people without taxing them....

ColdIron

MrPercent said:

• Pension now in scope for IHT (I believe!)
  

Not yet it's not. I imagine people (many who have been in the public sector) who have transferred a DB pension to DC will be more than a little miffed

Triumph13

It's an interesting point.  If the TFC limit remains fixed, then any future investment growth on the proportion of your pension you could have pulled out as TFC is effectively taxable eventually when withdrawn from the pension - unless you die before 75 with that loophole unplugged.  If we ignore IHT considerations (another loophole likely to be plugged) then it certainly looks sensible to take enough TFC to fill your S&S ISAs.  OTOH, it probably makes no sense to put it in a general investment account, as that also makes your future gains taxable (subject to any differences in tax rates for capital gains vs income).

A more nuanced choice is your premium bond idea, where you are trading taxable investment income for tax free 'interest' that will most likely be less than inflation.  It might be close if inflation is high and you are a 40% tax payer in retirement, but the odds are you'd be better off leaving it invested so it might as well stay in the pension until it can be moved straight to ISAs.

kempiejon

Superdude0499 said:

Leaves 110k unsheltered to be spent on pre-retirement big ticket items (home improvements, new car etc). Remaining could be shoved into premium bonds and filtered into subsequent years ISA allowances. 

Other than leaving in for inheritance purposes it seems futile to leave in pension wrapper when it can grow outside with easier access. 

Thoughts anyone?

Of the £110k, with what's left after a spot of shopping, while you wait for a new tax year you will have some capital gains and dividend income allowances to rinse. And to protect from tax and squeeze a few more quid, low coupon gilts trading below par are exempt from capital gains and the income is too wee to hardly bother the interest allowance. I slung a few £k last year and will be adding more.

RogerPensionGuy

Currently the max TFLS is 268K.

If that 268K goes down in the future, the industry expects various more pension protections to be put in place yet again.

Lowering that 268K will just cause more pension issues, uncertainty and switch more people off pensions, make pensions even less easy to understand, it would be a disaster.

But, looking at inflation and the LTA that probably should be 2.5M and TFLS of 625K in 2024, just maybe we will see that 268K increase.

So in easy terms, maybe taking 134K or 50% in the short term may allow more than 134K to be taken as TFLS later.

Since 2006, the LTA has been treated like football and just impossible to plan effectively with confidence. 

I hope in the future they don't make anymore negative changes to pull all confidence from pensions, maybe making a few sensible thought out positive changes could be a good thing, but they should stop pension football using that old rugby ball used the last 18 years. 

Superdude0499

Thanks for the comments. With regards ease of access, perhaps that’s just an assumption on my part, that it is a smoother operation extracting monies from ISA rather than pension, albeit the same process (selling units for cash).

On reflection maybe it would make more sense to only crystallise enough to fill 2 ISA’s (kids can wait) each year perhaps from age 57 onwards capturing growth tax free. In the meantime, whilst still working, salary sacrifice the current ISA contribution into pension (10k/year - higher rate tax payer).

dunstonh

Thanks for the comments. With regards ease of access, perhaps that’s just an assumption on my part, that it is a smoother operation extracting monies from ISA rather than pension, albeit the same process (selling units for cash).

It is smoother but timescales are similar on the 25% element and about 1-2 days behind that for the taxable element as it has to go through payroll.  With some providers, if I was to key the tax free cash withdrawal now, it would be in their bank account in about 20 minutes time.