Looking to Protect My 25% Tax-Free Lump Sum

QrizB

Sugar62 said:

As I understand it, the 25% TFLS dies with me.

As I understand it, this is only if you're over 75 when you die.

If you die before you're 75, your entire pension pot is tax-free to your beneficiaries.

(Better-informed people, please correct me if I'm wrong.)

Sugar62 said:

Another thought. If I take all of the 25% TFLS, clear my mortgage and gift remainder to my children.

Would you be taking this now, or later?

Clearing your mortgage today (OK, some time next month) with your TFLS would free up the cost of your mortgage payments and let you boost your pension contributions; those contributions will be uncrystallised and will qualify for their own TFLS in due course.

Watch out for the recycling rules.

https://techzone.aberdeenadviser.com/public/pensions/tech-guide-recycle-tax-free-cash

Peter_F

Whilst I appreciate and agree with the general thread of the replies namely not to make any rash decisions based on media speculation in my view there are some people who would be wise to consider taking their tax free lump sum before the budget. They are people who have a substantial entitlement ( probably more than £150,000) and could be at risk of losing some of it if changes are implemented. Those people who were planning to take the lump sum in the next 2 to 3 years in any event and those who are relying on their lump sum to repay an interest only mortgage or other debt.

You have to weigh up the pros and cons of taking it. Just because it might have been the wrong thing to do for the last 20 years doesn't mean that it will always be the case. If losing a large tax free lump sum would be "devastating" to your personal circumstances then the least worst option might be to take the cash.

Personally I think that it is unlikely changes will be made at this budget but I have arranged to take my lump sum as I fall into one of the 3 circumstances described above.

ukdw

I tend to look at these type of decisions in terms of potentials gains and losses vs likelihoods.

Most likely outcome: No change of PCLS this time

Impact if for example £200k PCLS taken unnecessarily now, rather than in 4 years time when needed to pay off mortgage.

Growth taxable - so if we assume 30% growth (£60k) and 25% CGT/Div tax - about £15k extra tax to pay (vs not taking PCLS).

Unlikely but possible outcome: PCLS level changed to £100k in Nov or later.

Impact if PCLS not taken before change- so in 4 years time  if £260k needed for mortgage - other £100k+£60k growth subject to income tax - at 40%-60% - so over £ 65k tax due. 

Albermarle

ukdw said:

I tend to look at these type of decisions in terms of potentials gains and losses vs likelihoods.

Most likely outcome: No change of PCLS this time

Impact if for example £200k PCLS taken unnecessarily now, rather than in 4 years time when needed to pay off mortgage.

Growth taxable - so if we assume 30% growth (£60k) and 25% CGT/Div tax - about £15k extra tax to pay (vs not taking PCLS).

Unlikely but possible outcome: PCLS level changed to £100k in Nov or later.

Impact if PCLS not taken before change- so in 4 years time  if £260k needed for mortgage - other £100k+£60k growth subject to income tax - at 40%-60% - so over £ 65k tax due. 

Regarding the option in bold. It is not just a matter of paying tax ( CGT/dividends) but all the hassle that comes with an unwrapped investment account. That is monitoring and recording all sales and purchases and dividend payments. Then reporting it to HMRC.
Whilst it is in the pension there is zero hassle.

Sugar62

QrizB - 
Historically, drawdown pensions were outside your estate for IHT purposes. However, from April 2027, HMRC plans to include:

• Unused drawdown funds and

• Uncrystallised pots within the estate for IHT assessment

This means, it could be subject to 40% IHT on the excess above the nil-rate band.

SVaz

Any amount you can get out of a Sipp tax free and into an ISA makes sense, whether it’s the 25% tfls or the taxable 75% - if you have personal allowance available then why wouldn’t you do it?  You can buy exactly the same investments and it will never be taxable - well, unless they decide to change that,  nothing would surprise me tbh. 
My Wife is emptying her entire Sipp into ISAs
 ( cash at first then S+S) over the next 7 years,
 ( when she reaches State pension age) completely free of tax.  

SVaz

IHT WILL be payable on some pension inheritances come 2027,  so in effect there will be 60% or even 80% to pay for some people when you factor in both IHT and income tax.  

An Adult child might only see 20% of that pension inheritance if they are a HR tax payer and the entire pension is above the IHT limit and there has only been one Parent’s NRB + RNRB.

QrizB

Sugar62 said:

QrizB - 
Historically, drawdown pensions were outside your estate for IHT purposes. However, from April 2027, HMRC plans to include:

• Unused drawdown funds and

• Uncrystallised pots within the estate for IHT assessment

This means, it could be subject to 40% IHT on the excess above the nil-rate band.

That's the answer to a different question to the one you asked, though.
Are you expecting your estate to be liable to IHT? And even if you are, pensions won't be included for another 18 months - that's two budgets away.

Johnnyboy11

A couple of points, maybe a bit niche. Firstly, if you are affected by the announced IHT changes, you might want to develop a strategy to get your SIPP emptied without paying any higher rate Income Tax. This might be tricky for some, particularly if they have other sources of income like a DC pension or State Pension. Secondly, money held inside a SIPP is currently ringfenced from bankruptcy.

Albermarle

Johnnyboy11 said:

A couple of points, maybe a bit niche. Firstly, if you are affected by the announced IHT changes, you might want to develop a strategy to get your SIPP emptied without paying any higher rate Income Tax. This might be tricky for some, particularly if they have other sources of income like a DC pension or State Pension. Secondly, money held inside a SIPP is currently ringfenced from bankruptcy.

Although to be clear, if the money taken out of the pension remains in the estate, then its IHT status will not change at all. So no gain or loss regarding IHT liability by moving it ( after 2027). The only way to avoid IHT if you are likely to be liable, is to spend it or give it away, regardless of where those funds are sourced from.