Pension 25% tax free lump sum

MallyGirl

EdSwippet said:

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% on capital gains. Both of these are well below 20% income tax. So your argument is a valid one.

CGT went up in the budget from 10% to 18%

Russ56765

EdSwippet said:

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]

Thank you for that, very helpful indeed,   yes i am over the PCLS max amount from the original LTA figure and good point re being still  iht exempt until 2027 still.    My wife is 7 yrs younger than me so assuming i go first she wont inherit my PCLS but she wont pay income tax on my pension if i die before 75.      So taking the full PCLS certainly by 75 seems very sensible.    Regarding the remainder of my pension fund, I think i would want to draw an amount each year that puts me on a trajectory to empty it by the time i'm 75 as there is no tax benefit keeping it there.   I could then gift  from spare funds outside the pension (if my wife doesn't need them) and potentially achieve a similar outcome as having the pension outside the estate.  Well that's the current thinking.  

These changes are large and complex as you say and throws long made plans up in the air which is frustrating.  But it also leaves a sense of worry that things can be thrown even further up in the air in the next few years with more significant changes like PCLS being taken away.       Feels like i need to wait to see how things pan out in the consultation but also feels like I will need to come off the fence at some point soon and make a decision and crack on for better or worse :-) 
   

Russ56765

EdSwippet said:

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]

" IF you lose that benefit after 2027"        Sorry meant to comment on this point, does anyone think it a real possibility that pensions coming into IHT wont happen.     Seems a very remote chance to me but i guess anything's possible. 

newatc

I can't believe that pensions will not be included in IHT, it seems to me the consultation is more about the procedures. Once they have been included, they are likely to stay there. 

Albermarle

Russ56765 said:

EdSwippet said:

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]

" IF you lose that benefit after 2027"        Sorry meant to comment on this point, does anyone think it a real possibility that pensions coming into IHT wont happen.     Seems a very remote chance to me but i guess anything's possible. 

I suppose there is a possibility that it will be diluted in some way during the consultation and legislative process.. Although a move to shut this loophole was not unexpected, it was thought it would be more some kind of levy for pensions above a certain level. Or pension pots would have their own additional nil rate band, or something like that. So the move was more 'brutal' then generally expected.
However there does not seem much hoo hah about it, apart from partisan fuming in the right wing press. Unlike the publicity the farmers are generating,

  But it also leaves a sense of worry that things can be thrown even further up in the air in the next few years with more significant changes like PCLS being taken away.    

Although there was speculation about this before the budget, it seems very unlikely to happen, as it would take away one of the reasons to save in a pension for retirement, which the Govt encourages. They just do not want you to use a pension pot as a way of avoiding IHT.

af1963

newatc said:

I can't believe that pensions will not be included in IHT, it seems to me the consultation is more about the procedures. Once they have been included, they are likely to stay there. 

That's my feeling too. Once this change is introduced, later chancellors of any political colour won't prioritise allocating money to reverse it.  A whole generation of Conservative politicians complained regularly about "Gordon Brown scrapped dividend relief for pensions", but they never proposed restoring it in their 14 years in power.  This will be similar.

I can see a chance that - at some point - a future government changes the lump sum allowance. But for that too, if they want to reduce its value, the easy option is just to leave it frozen and let inflation erode it. No unpopular announcements needed.

(It could also be increased, giving an effective tax cut, but such a giveaway would be targeted at a smallish number of people with unusually large pensions, and not very effective as a mass popularity-boosting measure.)

dunstonh

That's my feeling too. Once this change is introduced, later chancellors of any political colour won't prioritise allocating money to reverse it.  A whole generation of Conservative politicians complained regularly about "Gordon Brown scrapped dividend relief for pensions", but they never proposed restoring it in their 14 years in power.  This will be similar.

On the other hand, this is a brand new tax which effectively lowers the IHT limits for everyone.    So, it's not a case of upping or lowering an existing tax where different coloured Governments tinker with the amounts.   This is a wholesale change by a very left wing Government.  Conservatives are anti-IHT but have found it politically difficult to increase the limit.   Now that they are out of power, they can include it in their next manifesto and appeal to pensioners who feel quite negatively about Labour currently.    Taking pensions out of the estate calculations may not happen under a future Government but it is not unreasonable to believe that the IHT limits will increase.

But as said earlier in the thread, there isn't any difference in ISAs and pensions under age 75 in respect of your estate on death.  So, you have plenty of time unless you are actively looking to get funds out of your estate to the next generation (or the one after).

Russ56765

Really appreciate all the input, it has been really helpful trying the wrestle with the changes and re-evaluating plans held for many years.  It will be very interesting to see how these changes are actually implemented in the end, hopefully without any more unhelpful surprises!    I'm also hopeful that with the 2027 being the start date, she won't meddle in this area further, for at least three years anyway.   

Once again thankyou very much.
Russ

wjr4

Please remember that pensions are not vehicles to reduce your IHT, if you have an IHT liability, you can complete estate planning in other ways, which can take into account any IHT due (eg Whole of Life plans). 

MarkCarnage

Pensions were never meant to be IHT avoidance vehicles. I don't have an issue with the principle of it, but I do have an issue with the level that IHT is levied at which makes it a bit of a cliff edge. I'd much rather see an initial rate of 10% and a lower exemption level or same exemption level but including house, with increases in rate only at a much higher level. I think that if the rate was much lower there would be less noise about it. Also, many people moan about it who will in reality not come into the scope of it. 
What I do have an issue with is no indexation on CGT gains particularly with reduction of the allowance to a pathetic £3k.