Pension 25% tax free lump sum

Russ56765

Hi All, 

 I'm just over 55 and retired and have been thinking about the 25% lump sum and given the budget IHT change to pensions I am coming to the conclusion that I would be better taking the whole amount asap (pension is over the lifetime allowance amount) and letting it grow outside the pension wrapper.  And also taking my pension tax efficiently each year with a view to draining it fully leaving as much as i can outside the pension and available for gifting my kids at the appropriate time.   Even taking north of £50k a year is less tax than the 40% IHT so seems more tax efficient.         Am I missing something or does this make sense to you?   

Many thanks

 

dunstonh

   Am I missing something or does this make sense to you?   

It probably makes more sense to take the TFC on a drip until age 75.    Rather than all up front.  Until 75, there is no difference having it in the pension or an ISA or GIA.   Plus, if it goes in a GIA, you have capital gains tax and dividend tax to consider.    Which over the next 20 years could end up more in tax than the IHT you are trying to avoid.    Investment bonds (onshore or offshore) may be suitable in place of the GIA but they still generate taxation at some point.

You are also likely to see a change of Gov who will almost certainly make adjustments to allowances.    At 55 you have time on your hands.  So, no need to rush.

Using the basic rate band to gift from income is an early opinion on what can work.  Going into higher rate band after age 75 could also be an option but not much point before 75 unless you are talking a very significant fund value.

Russ56765

Interesting, thank you.  Is it confirmed that the tax free lump sum will be exempt from IHT,  if not it may be lost on death which would be a reason to take it early.   Was also concerned the next budget may remove it and although we cant work with guessing it seemed worth considering just banking it.  If i put the lump sum decision to one side,   The income tax on the pension is probably not to different from the cgt on growth in a gia, but with a gia i could take a large amount if needed at a flat tax rate where taking a large lump from the pension would take me up into higher or additional rate band.  

Seems a lot of factors to consider including the consultation not being complete on how this all will be implemented.  As you say i do have time and no need to jump to a decision.   

Hope I'm making sense 😁

Thanks again.  

Russ

MallyGirl

Russ56765 said:

Interesting, thank you.  Is it confirmed that the tax free lump sum will be exempt from IHT,  if not it may be lost on death which would be a reason to take it early.  

[No that is certainly not how I understand it]

Was also concerned the next budget may remove it and although we cant work with guessing it seemed worth considering just banking it.  

[that presents the problem of where to put large sums, plus tax on interest or CGT on dividends and investments once it is out of the pension wrapper. In addition, if you leave it in the pension it should grow giving you more tax free in the future]

If i put the lump sum decision to one side,   The income tax on the pension is probably not to different from the cgt on growth in a gia, but with a gia i could take a large amount if needed at a flat tax rate where taking a large lump from the pension would take me up into higher or additional rate band.  

Seems a lot of factors to consider including the consultation not being complete on how this all will be implemented.  As you say i do have time and no need to jump to a decision.   

Hope I'm making sense 😁

Thanks again.  

Russ

text required

Marcon

Russ56765 said:

Interesting, thank you.  Is it confirmed that the tax free lump sum will be exempt from IHT,  if not it may be lost on death which would be a reason to take it early.   Was also concerned the next budget may remove it and although we cant work with guessing it seemed worth considering just banking it.  If i put the lump sum decision to one side,   The income tax on the pension is probably not to different from the cgt on growth in a gia, but with a gia i could take a large amount if needed at a flat tax rate where taking a large lump from the pension would take me up into higher or additional rate band.  

Seems a lot of factors to consider including the consultation not being complete on how this all will be implemented.  As you say i do have time and no need to jump to a decision.   

Hope I'm making sense 😁

Thanks again.  

Russ

The consultation has only just started! There seem to be an awful lot of knee jerk reactions, when the reality is that the proposed changes aren't planned to come into operation until 2027 at the earliest. The one thing you can guarantee is that they won't be exactly what was suggested initially, although how, and how much, they will change is currently anyone's guess.

penners324

Russ56765 said:

Hi All, 

 I'm just over 55 and retired and have been thinking about the 25% lump sum and given the budget IHT change to pensions I am coming to the conclusion that I would be better taking the whole amount asap (pension is over the lifetime allowance amount) and letting it grow outside the pension wrapper.  And also taking my pension tax efficiently each year with a view to draining it fully leaving as much as i can outside the pension and available for gifting my kids at the appropriate time.   Even taking north of £50k a year is less tax than the 40% IHT so seems more tax efficient.         Am I missing something or does this make sense to you?   

Many thanks

 

Are you spending it? If not all money inside and outside your pension will be subject to IHT if the government get their way in 2027

Russ56765

My intention would be to gift what i don't need at the appropriate time.   Im starting to think there is an argument to reduce the pension as much as possible and let the money grow in mine and my wifes gia  accounts and pay cgt on taking the growth annually.   If i leave it in the pension. The more it grows the  greater tax cost to access/empty it for gifting.  

Russ56765

penners324 said:

Russ56765 said:

Hi All, 

 I'm just over 55 and retired and have been thinking about the 25% lump sum and given the budget IHT change to pensions I am coming to the conclusion that I would be better taking the whole amount asap (pension is over the lifetime allowance amount) and letting it grow outside the pension wrapper.  And also taking my pension tax efficiently each year with a view to draining it fully leaving as much as i can outside the pension and available for gifting my kids at the appropriate time.   Even taking north of £50k a year is less tax than the 40% IHT so seems more tax efficient.         Am I missing something or does this make sense to you?   

Many thanks

 

Are you spending it? If not all money inside and outside your pension will be subject to IHT if the government get their way in 2027

My intention would be to gift what i don't need at the appropriate time.   Im starting to think there is an argument to reduce the pension as much as possible and let the money grow in mine and my wifes gia  accounts and pay cgt on taking the growth annually.   If i leave it in the pension. The more it grows the  greater tax cost to access/empty it for gifting.  

EdSwippet

Russ56765 said:

penners324 said:

Are you spending it? If not all money inside and outside your pension will be subject to IHT if the government get their way in 2027

My intention would be to gift what i don't need at the appropriate time.   Im starting to think there is an argument to reduce the pension as much as possible and let the money grow in mine and my wifes gia  accounts and pay cgt on taking the growth annually.   If i leave it in the pension. The more it grows the  greater tax cost to access/empty it for gifting.  

I think some of the comments above ignore the part in your original post, where you said your "pension is over the lifetime allowance amount". Assuming you mean that you now hold more than four times the current lump sum allowance, £268,275, then there may be a case for taking the full 25% tax free lump sum now (PCLS), rather than waiting or in pieces over time.

The argument I think you're making runs as follows. Suppose you are a basic rate taxpayer. If you leave this 25% in the pension, you will end up paying 20% in income tax on its growth between now and when you withdraw it. On the other hand, if you withdraw it now and reinvest it in the exact same things, you will pay 8.75% annually on dividends, and 10% 18% on capital gains. Both of these are below 20% income tax. So your argument is a valid one.

The big question, of course, is what will happen with IHT. Currently, all of your pension (that is, including the PCLS not yet taken) is protected from that, which is at least an offsetting compensation for the higher tax you might pay on withdrawals later. However, IF you lose that benefit after 2027, the higher tax may then represent pure deadweight loss.

So, complex, and depends hugely on future tax rates, IHT changes, and general whim of any given chancellor. It is highly unsatisfactory that people who have saved for retirement across entire careers of maybe forty years or more face this type of instability in pensions rules. A sensible government would set long term rules and stick to them. We don't have sensible governments.

[Edited to fix CGT rate; hat tip to MallyGirl]

BikingBud

Not a political comment but an observation, one party's sensible is another party's no-go area.

Whereas for the man on the Clapham omnibus neither of those are sensible!

I think the phrase that has been used is "pension football"

ali_bear

One party's idea of "fair and equitable" ...