Tax-free lump sum

Aretnap

penners324 said:

If it is announced they'll be plenty of time between the announcement and when it comes into force 

Without expressing an opinion on the likelihood of it happening, if it did happen it's the sort of tax change that would have to take effect immediately. Precisely to avoid the scenario of everybody in the country over the age of 55 worth a large pension withdrawing the full tax free allowance before the change came into force and avoiding the tax that has just been imposed. 

It's quite common for tax rises to take effect at very short notice if they are the dirt that can be easily avoided by rearranging your finances. Increases to capital gains tax trend to come into force immediately for much the same reason.

DRS1

If your lump sum is capped at £450k presumably you have a total pension pot over £1.8 mill?  So why aren't you worried about the LTA being brought back?  Maybe it is time to buy an annuity?

valiant24

phlebas192 said:

valiant24 said:

dunstonh said:

I have protected status within my SIPP so can take out £450k tax-free.  I almost did it last year - well actually I did but then paid it back within 30 days - and am wondering now if I should just bite the bullet and do it now in case the tax-free lump sum is removed in the autumn budget.

Why would you do that? (logical reasons, not the illogical one you have given)

At present, I can take out £450,000 from my SIPP tax free.   I don't, because I don't need the money at present, so I leave it in the SIPP and it carries on growing (hopefully!) tax-free.

If the rules are changed and the tax free sum is removed, I would have missed out on a benefit of £450k x my tax rate when withdrawn.  Impossible to know the exact amount but likely around £150k.

if I withdraw it and the rule isn't changed I have forgone tax-free growth between now and the time when I need the money, which I judge likely to be less than £150k.

Isn't this obvious?  I fear I must be missing something ...

How much have you got in the SIPP and what tax rate are you likely to pay when you finally withdraw it bearing in mind that it soon won't have any IHT advantage? Don't answer that here unless you want to, but I'm asking it to make you think. If you can take £450k out tax free then presumably the sum is pretty large. I don't know how your protection works but if the TFLS is still the standard 25%, just with a larger max amount then that would imply a fund in excess of £1.8m or £1.35m after the TFLS. Taking 4% of that lower sum a year would be an income of £54kpa so that "tax-free growth" is actually going to be taxed at 40% by the time you have it in your bank account and can spend it. Is it actually worth building it up to ever higher amounts within the SIPP? 

FWIW, in your situation, I probably would take the full TFLS immediately. None of us knows what the future might bring and a bird in the hand seems to apply. Yes, you will end up being taxed on however you invest it outside the SIPP but paying tax on investments is a sign of success, not something to be avoided at all costs!

Yes, nice Food for Thought, thanks.

The SIPP is currently at £2m.  I've already taken £52k for the past 3 years, so I have £450k less (3 x 25% x £52k) = £411k left to take tax-free.
My wife and I are both ISA millionaires so potentially we'd never have needed to draw on the SIPP .... used to be the plan.   But with SIPPs now subject to IHT maybe we'll need to do some re-thinking.

valiant24

DRS1 said:

If your lump sum is capped at £450k presumably you have a total pension pot over £1.8 mill?  So why aren't you worried about the LTA being brought back?  Maybe it is time to buy an annuity?

I am worried about it.
I suspect it won't happen, because it will be difficult to reintroduce without affecting senior public sector officials, and the public sector and economically inactive are the voter base for the governing party.
I've thought about annuity though.   There's counter-party risk of course, and generally I think i can do a better and more flexible job with a gilt ladder ...

DRS1

Wouldn't those same public sector officials (and doctors) be worried about the TFLS as well?

While I may be saying don't worry about it I confess that by the time this years budget rolls round my final pension will have been converted into a bit of TFLS and an annuity.

The TFLS might end up in a gilt of some sort (possibly ILG).

EthicsGradient

With that amount of money, and pension pots at death about to be subject to IHT, maybe it's time to withdraw the TFLS and give it to someone who can make use of it now? It sounds like you have plenty to see you through without it. That way, the tax liability for future investment can be spread among several people and their allowances - or it's used for eg house purchases.

valiant24

dunstonh said:

I've thought about annuity though.   There's counter-party risk of course, and generally I think i can do a better and more flexible job with a gilt ladder ...

What counterparty risk?  (annuities get 100% FSCS protection with no upper limit).

Is that so?   Didn't know that.

dunstonh

valiant24 said:

dunstonh said:

I've thought about annuity though.   There's counter-party risk of course, and generally I think i can do a better and more flexible job with a gilt ladder ...

What counterparty risk?  (annuities get 100% FSCS protection with no upper limit).

Is that so?   Didn't know that.

Yes it is.  Annuities fall under the FSCS insurance scheme protection (as do some pensions e.g. those that use insured funds or are an insured contract such as stakeholder pensions or personal pensions.  A few SIPPs do as well if you only use insured funds within them)

badger09

dunstonh said:

I've thought about annuity though.   There's counter-party risk of course, and generally I think i can do a better and more flexible job with a gilt ladder ...

What counterparty risk?  (annuities get 100% FSCS protection with no upper limit).
Annuities are also not included in the estate, and many consider that the way forward once widow/widowed or single beyond age 75.  Put a 30-year guarantee on it at 75, gift what you don't need to your beneficiaries and when you die, the beneficiaries continue to receive it with no IHT.

I didn’t know this 

@dunstonh
Could you possibly point me in the direction of a reliable source of info on this? 

Google comes up with hundreds of links, but many are just sales pitches. I’m happy to pay for advice, but want to understand the basics first. 

Apologies to OP for slight diversion 

valiant24

badger09 said:

dunstonh said:

I've thought about annuity though.   There's counter-party risk of course, and generally I think i can do a better and more flexible job with a gilt ladder ...

What counterparty risk?  (annuities get 100% FSCS protection with no upper limit).
Annuities are also not included in the estate, and many consider that the way forward once widow/widowed or single beyond age 75.  Put a 30-year guarantee on it at 75, gift what you don't need to your beneficiaries and when you die, the beneficiaries continue to receive it with no IHT.

I didn’t know this 

@dunstonh
Could you possibly point me in the direction of a reliable source of info on this? 

Google comes up with hundreds of links, but many are just sales pitches. I’m happy to pay for advice, but want to understand the basics first. 

Apologies to OP for slight diversion 

No apology required: it was news to me too and I am also very interested in learning more!