Looking to Protect My 25% Tax-Free Lump Sum

DRS1

Notfarfromtheborder said:

Without wanting to hijack, if one was able  to take TFLS and put into Isa (I am), would the general advice still to leave 25% TFLS in the pension or withdraw before any potential budget changes?

I have flexible isa's with enough headroom to swallow 25% TFLS

This would safeguard any potential changes to TFLS amounts whilst maintaining in a tax free environment, are there any downsides? I'm struggling to see them.

I read this as saying the TFLS is more then £20k and you plan to put say £20k of TFLS into the ISA then withdraw it and put another £20k of TFLS in to the ISA.  But then the £20k you have withdrawn will be outside the ISA and you won't be able to put it back.

Maybe I missed something?

Notfarfromtheborder

DRS1 said:

Notfarfromtheborder said:

Without wanting to hijack, if one was able  to take TFLS and put into Isa (I am), would the general advice still to leave 25% TFLS in the pension or withdraw before any potential budget changes?

I have flexible isa's with enough headroom to swallow 25% TFLS

This would safeguard any potential changes to TFLS amounts whilst maintaining in a tax free environment, are there any downsides? I'm struggling to see them.

I read this as saying the TFLS is more then £20k and you plan to put say £20k of TFLS into the ISA then withdraw it and put another £20k of TFLS in to the ISA.  But then the £20k you have withdrawn will be outside the ISA and you won't be able to put it back.

Maybe I missed something?

TFLS is circa £165K. My wife and i recently had over £200K in flexible isa's that we withdrew to upsize house. As these were flexible we can 'refill' them if deposit is in the same tax year as the withdrawal

bolwin1

Bostonerimus1 said:

Do not make decisions based on rumours and conspiracy theories. It amazes me that people are so easily influenced by what they read in newspapers and particularly online. Anyway the 25% tax free lump sum always struck me as strange as why should you get a tax break on the way into an pension and also on the way out? That's "double non-taxation". From an objective stand point all tax deferred contributions and growth should be taxed when taken out of a pension and the transfer of wealth when a DC pension passes to beneficiaries should come under the IHT regime. The allowances and level of those taxes are a more valid point of debate IMO.

Scrapping the 25% tax free allowance would make saving for a pension for basic rate taxpayers almost pointless, given the 20% tax threshold would almost all be taken up by the state pension. Saving 20% on the way in and paying 20% on the way out isn't particularly enticing, especially considering the reduced flexibility with a pension. People would use ISAs instead & would be much more likely to use them prior to pension age, leaving them much poorer in retirement. There are valid arguments for reducing the tax free lump sum, but scrapping it completely would be a very damaging thing to millions of lower paid workers.  

Johnnyboy11

Albermarle said:

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. 

However, for someone who dies after age 75, the contents of a SIPP would be subject to both IHT and then Income Tax by the recipients. This wouldn’t be the case if the SIPP had been moved to say an ISA or GIA, ideally without having incurred higher rate Income Tax in the process. I would be surprised if the Age 75 rule isn’t also under review.

QrizB

Notfarfromtheborder said:

DRS1 said:

Notfarfromtheborder said:

Without wanting to hijack, if one was able  to take TFLS and put into Isa (I am), would the general advice still to leave 25% TFLS in the pension or withdraw before any potential budget changes?

I have flexible isa's with enough headroom to swallow 25% TFLS

This would safeguard any potential changes to TFLS amounts whilst maintaining in a tax free environment, are there any downsides? I'm struggling to see them.

I read this as saying the TFLS is more then £20k and you plan to put say £20k of TFLS into the ISA then withdraw it and put another £20k of TFLS in to the ISA.  But then the £20k you have withdrawn will be outside the ISA and you won't be able to put it back.

Maybe I missed something?

TFLS is circa £165K. My wife and i recently had over £200K in flexible isa's that we withdrew to upsize house. As these were flexible we can 'refill' them if deposit is in the same tax year as the withdrawal

That sounds viable to me.

Albermarle

Johnnyboy11 said:

Albermarle said:

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. 

However, for someone who dies after age 75, the contents of a SIPP would be subject to both IHT and then Income Tax by the recipients. This wouldn’t be the case if the SIPP had been moved to say an ISA or GIA, ideally without having incurred higher rate Income Tax in the process. I would be surprised if the Age 75 rule isn’t also under review.

For the first part, income tax is paid when you take the money out of the crystallised pension yourself, so if you die before 75, you have paid tax unnecessarily, unless the legislation changes.
I think at the end of the day it is a bit 50:50 what to do and down to personal preference/situation.

DRS1

Notfarfromtheborder said:

DRS1 said:

Notfarfromtheborder said:

Without wanting to hijack, if one was able  to take TFLS and put into Isa (I am), would the general advice still to leave 25% TFLS in the pension or withdraw before any potential budget changes?

I have flexible isa's with enough headroom to swallow 25% TFLS

This would safeguard any potential changes to TFLS amounts whilst maintaining in a tax free environment, are there any downsides? I'm struggling to see them.

I read this as saying the TFLS is more then £20k and you plan to put say £20k of TFLS into the ISA then withdraw it and put another £20k of TFLS in to the ISA.  But then the £20k you have withdrawn will be outside the ISA and you won't be able to put it back.

Maybe I missed something?

TFLS is circa £165K. My wife and i recently had over £200K in flexible isa's that we withdrew to upsize house. As these were flexible we can 'refill' them if deposit is in the same tax year as the withdrawal

Go for it.  I can't imagine many people being in that position.

Bostonerimus1

bolwin1 said:

Bostonerimus1 said:

Do not make decisions based on rumours and conspiracy theories. It amazes me that people are so easily influenced by what they read in newspapers and particularly online. Anyway the 25% tax free lump sum always struck me as strange as why should you get a tax break on the way into an pension and also on the way out? That's "double non-taxation". From an objective stand point all tax deferred contributions and growth should be taxed when taken out of a pension and the transfer of wealth when a DC pension passes to beneficiaries should come under the IHT regime. The allowances and level of those taxes are a more valid point of debate IMO.

Scrapping the 25% tax free allowance would make saving for a pension for basic rate taxpayers almost pointless, given the 20% tax threshold would almost all be taken up by the state pension. Saving 20% on the way in and paying 20% on the way out isn't particularly enticing, especially considering the reduced flexibility with a pension. People would use ISAs instead & would be much more likely to use them prior to pension age, leaving them much poorer in retirement. There are valid arguments for reducing the tax free lump sum, but scrapping it completely would be a very damaging thing to millions of lower paid workers.  

The lower tax bill now and all the tax free growth are still nice to have, but I agree that the large tax bands that start at 20% and jump to 40% are not conducive to planning to have a lower income in retirement and maybe pay a lower marginal tax rate in retirement. That would work best for high earners who intend to live frugally in retirement. Tax deferred pension tax free lump sums aren't that common and are a great current benefit...I believe Ireland gives a tax free pension allowance of 200k euros which is another approach.

RogerPensionGuy

The link below shows how when previously various governments negatively reduced tinkered with DC, PCLS, LTA, TFLS, 25% Tax Free Cash & the like they put  in place various protections that were helpful for some people, but not for all. 

It's all a bit confusing in my opinion and just helps to switch off people to sensible pension planning, but should they yet again negativity treat DC pensions, they may likely just make more variations of protections for people with DC/SIPP pensions. 

***
https://www.gov.uk/guidance/taking-higher-tax-free-lump-sums-with-lifetime-allowance-protection
***

(Obviously no need to adjust any government generous DB gold-plated pensions, these can be left alone getting increases via the tax payers)

Albermarle

Bostonerimus1 said:

bolwin1 said:

Bostonerimus1 said:

Do not make decisions based on rumours and conspiracy theories. It amazes me that people are so easily influenced by what they read in newspapers and particularly online. Anyway the 25% tax free lump sum always struck me as strange as why should you get a tax break on the way into an pension and also on the way out? That's "double non-taxation". From an objective stand point all tax deferred contributions and growth should be taxed when taken out of a pension and the transfer of wealth when a DC pension passes to beneficiaries should come under the IHT regime. The allowances and level of those taxes are a more valid point of debate IMO.

Scrapping the 25% tax free allowance would make saving for a pension for basic rate taxpayers almost pointless, given the 20% tax threshold would almost all be taken up by the state pension. Saving 20% on the way in and paying 20% on the way out isn't particularly enticing, especially considering the reduced flexibility with a pension. People would use ISAs instead & would be much more likely to use them prior to pension age, leaving them much poorer in retirement. There are valid arguments for reducing the tax free lump sum, but scrapping it completely would be a very damaging thing to millions of lower paid workers.  

The lower tax bill now and all the tax free growth are still nice to have, but I agree that the large tax bands that start at 20% and jump to 40% are not conducive to planning to have a lower income in retirement and maybe pay a lower marginal tax rate in retirement. That would work best for high earners who intend to live frugally in retirement. Tax deferred pension tax free lump sums aren't that common and are a great current benefit...I believe Ireland gives a tax free pension allowance of 200k euros which is another approach.

I think there are quite a lot of regular forum contributors, who when in employment had a good salary, but did not spend it all, and filled up their pensions whilst getting 40% tax relief.
Now retired they live on a decent income ( not frugally)  but are only 20% taxpayers, so have gained massively from pension tax relief. 
When retired you can supplement taxable income, with tax free cash from a pension, money from ISAs ( cash and investments) to make sure you keep under the 40% tax threshold. 
(Frozen thresholds do not help though)
I think approx 20% of UK employees now pay some higher rate tax, but the % of retirees paying it is much smaller.