Looking to Protect My 25% Tax-Free Lump Sum

Johnnyboy11

Albermarle said:

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 smalle

An extra bonus of this approach is that you would avoid the Child Benefit Charge.

jimjames

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

Probably one of the few cases when the option to take the tax free cash would be a viable one as it then maintains the full ISA allowance you have built up

MetaPhysical

Sugar62 said:

 The lump sum was always intended to pay off the mortgage on retirement in 3-4 years.  I don’t plan to do anything until I hear the budget outcome but was getting my action plan ready in case the tax-free sum is reduced to clear the mortgage earlier.

This is why, IMO, the government won't touch it.  MANY people are relying on the TFLS to pay off mortgages, pay off debts or service contractual obligations they entered into in good faith. I can see that when the TFLS was in the millions the government had a good case in reducing it.  However, now that it sits at a much more modest 268k (and would already be at 326k had it kept pace with inflation) many people could argue the government has forced them into breaking their legally binding financial commitments and obligations without prior notice.

Furthermore, this would cause public sector uproar.  Does the government really want to pick a completely avoidable fight with consultants, doctors, senior civil servants, senior teachers and nurses?  Ok, they could perhaps have a public sector carve out, which would be perverse in the extreme and be open to further "two tier Keir" accusations.

Maybe they could cut the maximum allowable TFC but still allow the £268K to be "consumed" via UFPLS over a number of years.

IMO they won't do it.  The consequences are too severe.  Instead it will be left to fiscal drag to erode its value.

artyboy

MetaPhysical said:

Sugar62 said:

 The lump sum was always intended to pay off the mortgage on retirement in 3-4 years.  I don’t plan to do anything until I hear the budget outcome but was getting my action plan ready in case the tax-free sum is reduced to clear the mortgage earlier.

This is why, IMO, the government won't touch it.  MANY people are relying on the TFLS to pay off mortgages, pay off debts or service contractual obligations they entered into in good faith. I can see that when the TFLS was in the millions the government had a good case in reducing it.  However, now that it sits at a much more modest 268k (and would already be at 326k had it kept pace with inflation) many people could argue the government has forced them into breaking their legally binding financial commitments and obligations without prior notice.

Furthermore, this would cause public sector uproar.  Does the government really want to pick a completely avoidable fight with consultants, doctors, senior civil servants, senior teachers and nurses?  Ok, they could perhaps have a public sector carve out, which would be perverse in the extreme and be open to further "two tier Keir" accusations.

Maybe they could cut the maximum allowable TFC but still allow the £268K to be "consumed" via UFPLS over a number of years.

IMO they won't do it.  The consequences are too severe.  Instead it will be left to fiscal drag to erode its value.

Yep, this is the primary reason  that I think that any government would be suicidal** to actively reduce it as opposed to just keep letting fiscal drag do its thing. TFLS seems to be the modern version of the old endowment mortgage lump sum in terms of people finally owning their little castle...


**of course, this government already has a bit of a track record of acting suicidally, as do the last couple. So who knows...

michaels

Albermarle said:

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. 

Thing is the biggest winners from converting 40% to 20% are those who are already earning above average (guessing but 50k+ probably means the top 2 deciles?) so it seems somewhat unfair that this group benefits more from saving into a pension that those who are 20% in, 20% out (likely given that the state pension now makes up the whole personal allowance) - for this group the main benefit is the TFLS so cutting it would seem to be regressive?

Cobbler_tone

michaels said:

Albermarle said:

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. 

Thing is the biggest winners from converting 40% to 20% are those who are already earning above average (guessing but 50k+ probably means the top 2 deciles?) so it seems somewhat unfair that this group benefits more from saving into a pension that those who are 20% in, 20% out (likely given that the state pension now makes up the whole personal allowance) - for this group the main benefit is the TFLS so cutting it would seem to be regressive?

At least 15% of workers earn over £50k a year.

I will benefit from 40% in, 20% out but only for my last 3 or 4 years as wasn't in a position to be able to afford to sacrifice right down. It certainly didn't save me from all but forfeiting the child benefit at the time. I'm trying to make up for it now with 54% sacrifice.

af1963

... those who are 20% in, 20% out (likely given that the state pension now makes up the whole personal allowance) - for this group the main benefit is the TFLS so cutting it would seem to be regressive?

Setting a limit at £100k would be above what most people will receive anyway.

It wouldn't affect anyone whose TFLS was already below the new limit at all. For those with larger lump sum entitlements, it would cost basic taxpayers 20% of the excess of their current TFC over the new limit, assuming they eventually withdrew and spent it as taxed income rather than TFC.  And would cost higher rate taxpayers 40% of the excess.

That's not to say it's either a good idea, or likely to happen. But whatever the merits of doing it, it wouldn't be a regressive change.

Cobbler_tone

af1963 said:

... those who are 20% in, 20% out (likely given that the state pension now makes up the whole personal allowance) - for this group the main benefit is the TFLS so cutting it would seem to be regressive?

Setting a limit at £100k would be above what most people will receive anyway.

I agree, in that I don't think there would be the massive outrage some proclaim if it were to happen. All of these changes are entirely relative to those it impacts. The same with stamp duty getting hiked, NI being hiked etc.
I am sure that some would need to re-think their retirement strategy.

Put it this way...it would be way down the list of 'outrage' compared to something like touching the Triple Lock, or wholesale increases to council tax. 

Anyway, totally hypothetical and haven't read anywhere that it is actually on the radar to happen.

MetaPhysical

michaels said:

Albermarle said:

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. 

Thing is the biggest winners from converting 40% to 20% are those who are already earning above average (guessing but 50k+ probably means the top 2 deciles?) so it seems somewhat unfair that this group benefits more from saving into a pension that those who are 20% in, 20% out (likely given that the state pension now makes up the whole personal allowance) - for this group the main benefit is the TFLS so cutting it would seem to be regressive?

I somewhat agree with you in principle.  However, people have saved in accordance to the prevailing tax circumstances.  Had these circumstances been different then many would have perhaps done something different with their money.  For the government to potentially now say they are going to cane you because you benefitted from X,Y or Z tax rules at that time is very unfair and amounts to retrospective taxation.

michaels

af1963 said:

... those who are 20% in, 20% out (likely given that the state pension now makes up the whole personal allowance) - for this group the main benefit is the TFLS so cutting it would seem to be regressive?

Setting a limit at £100k would be above what most people will receive anyway.

It wouldn't affect anyone whose TFLS was already below the new limit at all. For those with larger lump sum entitlements, it would cost basic taxpayers 20% of the excess of their current TFC over the new limit, assuming they eventually withdrew and spent it as taxed income rather than TFC.  And would cost higher rate taxpayers 40% of the excess.

That's not to say it's either a good idea, or likely to happen. But whatever the merits of doing it, it wouldn't be a regressive change.

That would put me into 20% in, 40% out territory.  I would rather not.  Perhaps I should be taking the max out before the budget and taking the tax on GIA hit?!