Looking to Protect My 25% Tax-Free Lump Sum

Albermarle

Silvertabby said:

Strictly speaking, the maximum tax free cash limit has already been reduced, without too much drama.

It was set at 25% of the Life Time Allowance in 2006, being £1.5m, before increasing to £1.8m and then reducing to the current (notional, for tax free allowance purposes) little over £1m.

Any further reductions will get some very senior civil servants twitching.  Which is why my gut feeling is that it won't happen.  But, who knows.

Also, reducing the maximum tax free cash may mean extra revenue for the treasury in the short term, but would have the long term effect of increasing the overall costs of the non funded public sector schemes.  

Also inflation in recent years has significantly reduced the maximum tax free sum in real terms, from £268K to about £215K 

dunstonh

I’m hoping to get some views on a pension strategy I’m considering, especially with rumours swirling about possible changes to the 25% tax-free lump sum in the next Budget.

There have been 37 years of rumours on tax-free cash.  What did you do in each of the previous years?

RogerPensionGuy

Anythink is possible. 

As far as I know when governments have applied negative changes to the LTA/TFLS they have also made various protections, unfortunately very messy in my opinion have just introduced more hassle and steers many people from getting more involved in pensions, these changes are very negative. 

Currently there is so little confidence in governments keeping pension stability, it does indeed enduce more people to make various changes to their lives and gets some people out of the job employed zone and fully retire from working earlier than was likely. 

Maybe a government should introduce some hard rules that negative changes to pensions need a minimum 15 or 20 years to introduce. 

Now we have rumours going mad a few months before budgets and government won't cherry pick items they won't change as people will then think anything not confirmed as no change could very possibly change and thus more confusion and driving people to make possibly inappropriate decisions and changes that can can't be unchanged, it's a total mess. 

Link below for general information people may like from a historic point of reflection. 

***

https://www.gov.uk/guidance/losing-your-lifetime-allowance-protection#protected-allowances

JoeCrystal

RogerPensionGuy said:

Anythink is possible. 

As far as I know when governments have applied negative changes to the LTA/TFLS they have also made various protections, unfortunately very messy in my opinion have just introduced more hassle and steers many people from getting more involved in pensions, these changes are very negative. 

Currently there is so little confidence in governments keeping pension stability, it does indeed enduce more people to make various changes to their lives and gets some people out of the job employed zone and fully retire from working earlier than was likely. 

Maybe a government should introduce some hard rules that negative changes to pensions need a minimum 15 or 20 years to introduce. 

Now we have rumours going mad a few months before budgets and government won't cherry pick items they won't change as people will then think anything not confirmed as no change could very possibly change and thus more confusion and driving people to make possibly inappropriate decisions and changes that can can't be unchanged, it's a total mess. 

Link below for general information people may like from a historic point of reflection. 

***

https://www.gov.uk/guidance/losing-your-lifetime-allowance-protection#protected-allowances

Well, I am only interested in one thing: what the Budget and the supporting documents say. It is not the government's fault if the people made unwise decisions; it is their responsibility to take full ownership of it. Having said that, did I read that a massive lump sum was taken and a lot of complaints were made about the fact that the providers and HMRC made it clear that they cannot just "put it back"? Before the last Budget or the end of the previous tax year? 

SVaz

‘Low risk’ funds does not equate to Safe - look what happened with the bonds fiasco,  lots of people incorrectly assumed that their lifestyled funds were sufficient to protect them,  not realising that they only protected those planning on buying annuities.   Those going into drawdown suffered 25% losses on the bond portion of their pensions. 

De risking when planning to use drawdown means either building a cash / cash-like pot containing 3-5 years worth of income or perhaps creating a Gilt ladder. 

A plan to use the whole 25% tfls in one go means needing a cash or short term money market fund pot - either by directing contributions that way, if there’s enough time to build the amount you need,  or by selling some investments when values are high. 

Albermarle

JoeCrystal said:

RogerPensionGuy said:

Anythink is possible. 

As far as I know when governments have applied negative changes to the LTA/TFLS they have also made various protections, unfortunately very messy in my opinion have just introduced more hassle and steers many people from getting more involved in pensions, these changes are very negative. 

Currently there is so little confidence in governments keeping pension stability, it does indeed enduce more people to make various changes to their lives and gets some people out of the job employed zone and fully retire from working earlier than was likely. 

Maybe a government should introduce some hard rules that negative changes to pensions need a minimum 15 or 20 years to introduce. 

Now we have rumours going mad a few months before budgets and government won't cherry pick items they won't change as people will then think anything not confirmed as no change could very possibly change and thus more confusion and driving people to make possibly inappropriate decisions and changes that can can't be unchanged, it's a total mess. 

Link below for general information people may like from a historic point of reflection. 

***

https://www.gov.uk/guidance/losing-your-lifetime-allowance-protection#protected-allowances

Well, I am only interested in one thing: what the Budget and the supporting documents say. It is not the government's fault if the people made unwise decisions; it is their responsibility to take full ownership of it. Having said that, did I read that a massive lump sum was taken and a lot of complaints were made about the fact that the providers and HMRC made it clear that they cannot just "put it back"? Before the last Budget or the end of the previous tax year? 

I understood that some people were able to put it back, under the general rules about 30 day cooling off periods with their providers, but not 100% sure to be honest.

JoeCrystal

Albermarle said:

I understood that some people were able to put it back, under the general rules about 30 day cooling off periods with their providers, but not 100% sure to be honest.

Here is the newsletter I remembered reading: https://www.gov.uk/government/publications/pensions-schemes-newsletter-165-december-2024 but here is the snip of it:

Tax treatment of tax-free lump sums paid back into a registered pension scheme

We are aware that some schemes are being asked by members how they can return payments of pension commencement lump sums (PCLS) or uncrystallised funds pension lump sums (UFPLS) that they took because of speculation about changes that might occur affecting their pensions in the 2024 Autumn Budget.

Some pension contracts and policies allow for a cooling-off period. Under Financial Conduct Authority (FCA) rules, cooling off rights apply to the purchase of a new product only, for example the purchase of an annuity. The payment of a PCLS or UFPLS is not a new product, which means that cooling off periods do not apply to those payments.

If the conditions for making a payment of a PCLS or UFPLS are not met, for example if a member is not entitled to a relevant pension such as a pension, a lifetime annuity or putting funds into drawdown, within 6 months of the PCLS being paid, it is an unauthorised payment and the unauthorised payments charges will apply. Read the Pensions Tax Manual: PTM063210 and Pensions Tax Manual: PTM063300 for further details.

The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored. The lump sum must be tested against their lump sum allowance at the time the lump sum was paid from their pension scheme.

Unauthorised payments charges may apply if contributions to pension schemes are made out of tax-free lump sums and the conditions for the recycling rule are met.

Albermarle

JoeCrystal said:

Albermarle said:

I understood that some people were able to put it back, under the general rules about 30 day cooling off periods with their providers, but not 100% sure to be honest.

Here is the newsletter I remembered reading: https://www.gov.uk/government/publications/pensions-schemes-newsletter-165-december-2024 but here is the snip of it:

Tax treatment of tax-free lump sums paid back into a registered pension scheme

We are aware that some schemes are being asked by members how they can return payments of pension commencement lump sums (PCLS) or uncrystallised funds pension lump sums (UFPLS) that they took because of speculation about changes that might occur affecting their pensions in the 2024 Autumn Budget.

Some pension contracts and policies allow for a cooling-off period. Under Financial Conduct Authority (FCA) rules, cooling off rights apply to the purchase of a new product only, for example the purchase of an annuity. The payment of a PCLS or UFPLS is not a new product, which means that cooling off periods do not apply to those payments.

If the conditions for making a payment of a PCLS or UFPLS are not met, for example if a member is not entitled to a relevant pension such as a pension, a lifetime annuity or putting funds into drawdown, within 6 months of the PCLS being paid, it is an unauthorised payment and the unauthorised payments charges will apply. Read the Pensions Tax Manual: PTM063210 and Pensions Tax Manual: PTM063300 for further details.

The payment of a tax-free lump sum cannot be undone and the member’s lump sum allowance will not be restored. The lump sum must be tested against their lump sum allowance at the time the lump sum was paid from their pension scheme.

Unauthorised payments charges may apply if contributions to pension schemes are made out of tax-free lump sums and the conditions for the recycling rule are met.

Sounds pretty clear, thanks for that.

Ciprico

I was in similar position/age, and had about 25% of sipp in gilts as I wanted to derisk before retirement...(Avoiding Sequencial risk etc).

It wasn't a big decision to take the 25% in gilts out of sipp and put in low coupon gilts in iweb general acct. 

Was also helped in making that decision as I was approaching the old LTA limited, so any subsequent growth in sipp wouldn't be particularly tax efficient....

So I did as you are contemplating for practical reasons, not for the rumours..... but the end result os the same....

Sugar62

Thank you SVaz and Ciprico, gilts looks like a feasible option and definitely worth exploring further too.