Downside of taking the 25% lump sum from a pension early?

LHW99

For others, it will make little difference, but they feel betrayed after Labour had vehemently denied, pre-election, that the payment would be means-tested.

Well, I suppose removing it, and making it just another add-on to Pension Credit might not be "means testing" in the strict definition

Albermarle

xylophone said:

Even though they said they are not?

Well............

https://www.thisismoney.co.uk/money/comment/article-13706981/Reeves-regret-winter-fuel-payment-raid-pensioners-says-JEFF-PRESTRIDGE.html

I spent five hours on the phone to readers who will lose the benefit. For some, its loss will put more pressure on already fragile finances. For others, it will make little difference, but they feel betrayed after Labour had vehemently denied, pre-election, that the payment would be means-tested. 

The issue is not so much if politicians will break promises, as they all will at some point.

However the WFP going to Millions of people who do not need it was always a debatable issue, and removing it makes some sense overall, although the 'cliff edge' issue needs resolving somehow.
Removing the 25% tax free would be universally unpopular with anyone with a pension, and would deincentivise pension saving, something all governments have been keen to encourage, including this one. So it would be illogical to withdraw it.

Qyburn

Dazed_and_C0nfused said:

One downside of taking the 25% now is that whatever the remaining 75% subsequently grows to them 100% of that is taxable when you take it out of the pension.

Say your total defined contribution pension are currently worth £200k.  You take £50k TFLS leaving £150k in the pension.

If that £150k has become say £200k a few years later the whole £200k is taxable when taken out of the pension.  

But if the 25% isn't taken, then using your figures the untouched pot would grow to £266k, of which the same £200k is taxable.

westv

Qyburn said:

Dazed_and_C0nfused said:

One downside of taking the 25% now is that whatever the remaining 75% subsequently grows to them 100% of that is taxable when you take it out of the pension.

Say your total defined contribution pension are currently worth £200k.  You take £50k TFLS leaving £150k in the pension.

If that £150k has become say £200k a few years later the whole £200k is taxable when taken out of the pension.  

But if the 25% isn't taken, then using your figures the untouched pot would grow to £266k, of which the same £200k is taxable.

Yes but you have £66k cash free rather than £50k

Scrounger

RiskyScientist said:

Hello - I am 65 years old and have several direct contribution type pensions.
I am still working, though only for another 2-4 years.
Assuming I am allowed to take the 25% tax free lump sum now instead of later, what is the downside of doing this?
I am concerned that the current government might remove the 25% tax free lump sum rule.
Thanks!

What you could do is draw down up to £30k per year from your dc pension(s) using flexi-access drawdown, take out only the 25% tax free lump sum (up to £7.5k) and pay it back into your pension.  That gets you another 25% tax relief (on tax relief) and MPAA is not triggered.

This is known as 'pension recycling' and is a despised by the treasury because it is so generous.

I used to do this myself before I retired. 


Scrounger

Qyburn

westv said:

Qyburn said:

Dazed_and_C0nfused said:

One downside of taking the 25% now is that whatever the remaining 75% subsequently grows to them 100% of that is taxable when you take it out of the pension.

Say your total defined contribution pension are currently worth £200k.  You take £50k TFLS leaving £150k in the pension.

If that £150k has become say £200k a few years later the whole £200k is taxable when taken out of the pension.  

But if the 25% isn't taken, then using your figures the untouched pot would grow to £266k, of which the same £200k is taxable.

Yes but you have £66k cash free rather than £50k

Yes. The difference is what happens to the 25%. If you're taking it to protect against government policy then presumably you'd invest it in the same way as the pension, so it will become £66k either way. If it's taken because it's needed then its potential value ten years down the line is only of academic interest.

Roger175

Qyburn said:

Yes. The difference is what happens to the 25%. If you're taking it to protect against government policy then presumably you'd invest it in the same way as the pension, so it will become £66k either way. If it's taken because it's needed then its potential value ten years down the line is only of academic interest.

But, if you withdraw £50k tax free lump sum, where do you invest it? You can only put £20k PA into S&S Isa, so you'd need a GIA which has it's own tax issues. Far better left in the SIPP unless needed for a specific purpose.

Bostonerimus1

Early withdrawal of the TFLS will reduce your pension pot leaving less to grow tax free to support your retirement. So it's silly to take the TFLS with the idea to invest it and if you are going to spend it then I think that's rather silly too because of the point I made in the first sentence. If you are going to pay off high interest debt then I think taking the TFLS can be justified.

In general I don't think the TFLS is a good idea as it goes against the ethos of the pension as a way to fund what could be a lengthy retirement. Ideally I would get rid of the TFLS and just make 25% of all withdrawals tax free.

michaels

If you are part of a couple you can potentially put up to 40k pa of a tfls into ISAs which would then have all the growth tax free and may be more tax efficient if the pension provision is skewed towards one person.

Of course the govt could equally play with ISA rules as pension ones!

Dazed_and_C0nfused

michaels said:

If you are part of a couple you can potentially put up to 40k pa of a tfls into ISAs which would then have all the growth tax free and may be more tax efficient if the pension provision is skewed towards one person.

Of course the govt could equally play with ISA rules as pension ones!

And the other party could just spend their £20k on whatever they fancied 😧