Tax Free Cash at LTA - take or not?

zagfles

Triumph13 said:

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growth on the proportion of your pension you could have pulled out as TFC is effectively taxable eventually when withdrawn from the pension - unless you die before 75 with that loophole unplugged.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.

Assuming the max PCLS is frozen long term, as seems likely, then you'll pay income tax on the growth of the potential PCLS if it remains in the pension, when you withdraw it. So even if you invest it in a GIA, the tax is likely to be less than the income tax you'll pay on growth outside the pension, CGT and dividend tax are lower than income tax. Of course inheritance implications need to be considered too. 

kempiejon

So when I get at my pension - under the current rules - at 55 I'll be able to extract 25% tax free and each year take out up to the personal allowance tax free until state pension age at 67.
That'll get a fair amount of money out of my pension without a tax liability so if I'm diligent I will have twice avoided paying tax.

I did consider taking personal allowance plus the 25% each year from 55 but in my spreadsheet by state pension age there'll be more left in the SIPP that way that I have to pay tax on as I extract it.

af1963

Doing some very rough ( and rounded for simplicity) numbers  ...

If you have a pension worth the same as LTA at around £1m, with £250K allowance for tax free lump sum, and you expect the investments in the pension to grow by 7% a year while the tax free lump sum remains frozen, then in 10 years it'll be £2 million.  Of that, £250K will be available tax free and £1.75M taxable.

If you take out £250K tax free near the start and invest it in the same way in (multiple people's / multiple years' ) ISAs, the total amount invested stays the same.  But the £250K *and all its growth* are tax free for a total of around £500K, while the taxable amount drops to £1.5M.

On the other hand, the £500K in the ISAs may be liable for IHT while the pension (currently) wouldn't be.

gm0

IHT rules are what they are today. But an obvious target for reform. We will see

ISA recycling via TFC has a place if your current IHT plans and family and charitable gifting are sorted to order of magnitude.  And you can do charitable gifting at legacy stage when care home fees have not manifested.

Reason:  Same investments.  Different tax wrapper.  Regulatory hedge.  Government have to attack two things at once to get at that money vs it being in the pension only.  Investments same. Returns same.  Access not different in practice.

ader42

af1963 said:

If you take out £250K tax free near the start and invest it in the same way in (multiple people's / multiple years' ) ISAs, the total amount invested stays the same.  But the £250K *and all its growth* are tax free for a total of around £500K, while the taxable amount drops to £1.5M.

On the other hand, the £500K in the ISAs may be liable for IHT while the pension (currently) wouldn't be.

Yep, so in that scenario (and with no gifting to childrens ISAs) it could be a choice of possibly 40% IHT on the extra £250k, or 20% IncomeTax on the £250k let’s say taken over the course of 10 years (£50k pension income taken per annum instead of £25k pension income per annum). 

This illustrates why in my opinion if pensions are moved inside IHT people will simply remove funds from their pensions.

Even removing the death before age 75 tax exemption would sway many to do this imho. If I was in ill health and in my late 60s I would certainly be removing upto the 40% Income Tax threshold from my pension - and maybe keep gold coins under the mattress…    

jaypers

I think as with pretty much everything surrounding pensions, everyone is completely unique and has a different set of circumstances. For me I decided to take the 25% in full as my pension pot is pretty good anyway. Having the cash available gives me so much freedom do do pretty much what we want and I actually feel really nice having savings and investments to play with too. 

LHW99

And there is the consideration of whether the crystal ball suggests changing pension rules or (and?) ISA rules is more likely.