Looking to Protect My 25% Tax-Free Lump Sum

Cobbler_tone

MetaPhysical said:

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.

Unfortunately that is not really a valid argument or else you could never change anything. People are impacted and have to change their plans all the time. e.g. I know someone who had to stump up a considerable amount of (unbudgeted) money last year due to the immediate change in stamp duty. Their purchase got delayed by a week and wasn't their fault.
The government 'could' change anything, some with notice (e.g. state pension age), some immediately (e.g. stamp duty) and some will impact on specific people and others on the masses. 
TBH this kind of change would only resonate with a minority of people but no idea on the value to the government, I haven't seen the spreadsheet!

ukdw

When/if they do ever implement a change to the PCLS - thinking about whether it would be done overnight vs with a few months/years notice.

If done overnight it might raise a little bit of immediate extra tax, but would most likely lower the amount people withdraw from their pensions and therefore reduce the amount of money flowing around in the economy - therefore having a negative impact on the overall tax take.

Whereas if they instead gave notice it would probably result in an a lot of extra lump sums being withdrawn in the intervening period - which would bring a short term boost to the economy.

Cobbler_tone

Worth noting (according to online reports) that under 1% reach a pension pot of £1m. Under 5% under £500k and the average pot £88k. If it ever does get lowered it’ll be another tax band freeze, i.e. leading to (further) fiscal drag.

cfw1994

Sugar62 said:

Hi everyone,

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.

I’ve got a defined contribution pension through my employer, and I’m able to transfer out up to 95% of it without affecting the employer contributions (currently at 9%).

I’m planning to retire in about 4 years, and I’m thinking of doing the following:

• Transfer 95% into a separate personal pension or drawdown pot

• Crystallise that portion now to take the 25% tax-free lump sum

• Leave the rest in drawdown, untouched for now (no taxable withdrawals)

The idea is to lock in the tax-free lump sum under current rules, while keeping flexibility for income planning later.

I’m trying to make sure I haven’t missed anything—like triggering the Money Purchase Annual Allowance, affecting future contributions, or running into any unexpected tax or regulatory issues.

Would really appreciate any thoughts or experiences from others who’ve looked into something similar. Thanks in advance!

Not sure I saw clear answers to one of your points (apologies, skimmed the thread🫣)

If you only take the TFLS, you will NOT trigger the MPAA - you can continue to contribute to your scheme without fear 👍

Be aware moving your pension could take 3-6 weeks.  If the receiving (new) pension doesn’t have exactly the same funds available that your current one already invests in, then there would be the need to sell those current funds to cash to enable the transfer.  This would mean being “out of the market” (ie, not invested in funds) for some period of time….frankly, I view that as mildly irrelevant - yes, you may miss on some growth, but equally you might miss on things dipping 🤷‍♂️

As others have said, it isn’t generally wise to plan this kind of thing on pure rumours 👀
That said, I have a relative who is doing that now, not because of rumours, but because they have a need for their TFLS, and their current (old!) Aviva scheme will not let them make regular withdrawals in the future.   They are therefore shifting it to an Aviva fund now in order to get at their TFLS.  The amounts are nowhere near the limits, so the rumours swirling are pretty irrelevant to them, but they have a need for the sum.

Good luck!  Sometimes there is no absolute right or wrong answer to these things, just a feeling that an action is good enough 🙏

ClashCityRocker1

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

Since I've been in it the following detrimental changes have been applied to my public services pension:

Increased contribution rate by 3%
ended contracting out (another 1% plus)
Converted from final salary to career average
Normal pension age increased from 60 to state pension age
Adjustments in payment reduced from RPI to CPI

So they have hardly been left alone. Still a good pension, yes, but please don't make these glib Daily Mail jibes about untouchable gold plated pensions.

FIREDreamer

ClashCityRocker1 said:

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

Since I've been in it the following detrimental changes have been applied to my public services pension:

Increased contribution rate by 3%
ended contracting out (another 1% plus)
Converted from final salary to career average
Normal pension age increased from 60 to state pension age
Adjustments in payment reduced from RPI to CPI

So they have hardly been left alone. Still a good pension, yes, but please don't make these glib Daily Mail jibes about untouchable gold plated pensions.

The accrual rate has significantly increased though?

Cobbler_tone

The golden DB pension in the private sector is all but dead. The lucky ones are either drawing it or accrued something decent for the future. The really lucky ones may still have an active scheme.

Andy_L

FIREDreamer said:

ClashCityRocker1 said:

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

Since I've been in it the following detrimental changes have been applied to my public services pension:

Increased contribution rate by 3%
ended contracting out (another 1% plus)
Converted from final salary to career average
Normal pension age increased from 60 to state pension age
Adjustments in payment reduced from RPI to CPI

So they have hardly been left alone. Still a good pension, yes, but please don't make these glib Daily Mail jibes about untouchable gold plated pensions.

The accrual rate has significantly increased though?

AIUI the FS/CARE change was fairly cost neutral, it simply shared out the bounty more equitably - ie everyone gets the same sort of value out of it rather than favoring those who have a long career & move up the ranks.

It was the increase to contributions & pension age that made the savings

Silvertabby

Andy_L said:

FIREDreamer said:

ClashCityRocker1 said:

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

Since I've been in it the following detrimental changes have been applied to my public services pension:

Increased contribution rate by 3%
ended contracting out (another 1% plus)
Converted from final salary to career average
Normal pension age increased from 60 to state pension age
Adjustments in payment reduced from RPI to CPI

So they have hardly been left alone. Still a good pension, yes, but please don't make these glib Daily Mail jibes about untouchable gold plated pensions.

The accrual rate has significantly increased though?

AIUI the FS/CARE change was fairly cost neutral, it simply shared out the bounty more equitably - ie everyone gets the same sort of value out of it rather than favoring those who have a long career & move up the ranks.

It was the increase to contributions & pension age that made the savings

When the LGPS CARE details were announced my then colleagues and I couldn't believe how generous they were.

Of course, someone who joined as an apprentice and worked their way up, over a full career, to a Chf Exec post would be better off on the final salary scheme - but how many people do that?

The majority just accrue one promotion over their time, and the better accrual rate of 1/49 (1/60 under FS) plus the annual CPI revaluation of all CARE benefits, mean that many will be better off under the new scheme.  Even when taking both schemes early retirement reductions into account.  And the end of contracting out means that future retirees will receive the full single tier State pension on top of their LGPS benefits.  If I only had a £ for every post, on these and other boards, from ex public sector employees bitterly complaining about being 'robbed' because they weren't getting the full nSP......

Another thing with CARE, at least the LGPS version, is that while non contractural overtime/extras weren't pensionable under FS, they are under CARE.  This will make a huge difference to many lower paid manual workers.

hugheskevi

Andy_L said:

FIREDreamer said:

ClashCityRocker1 said:

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

Since I've been in it the following detrimental changes have been applied to my public services pension:

Increased contribution rate by 3%
ended contracting out (another 1% plus)
Converted from final salary to career average
Normal pension age increased from 60 to state pension age
Adjustments in payment reduced from RPI to CPI

So they have hardly been left alone. Still a good pension, yes, but please don't make these glib Daily Mail jibes about untouchable gold plated pensions.

The accrual rate has significantly increased though?

AIUI the FS/CARE change was fairly cost neutral, it simply shared out the bounty more equitably - ie everyone gets the same sort of value out of it rather than favoring those who have a long career & move up the ranks.

It was the increase to contributions & pension age that made the savings

The big savings came from RPI-CPI change (2011 onwards) and increase to member contributons (2012-14). The change to career average, including higher pension age, was only a slight additional saving.

In Civil Service and LGPS, who selected the lowest option of simple CPI for in-service revaluation, there was also a redistribution from younger members to older members within the overall broadly cost-neutral scheme changes, as the low in-service revaluation affected the young far more than it does older members who are the main beneficiaries from a high accrual rate and a low revaluation rate due to proximity to Normal Pension age. That does balance itself out for lifetime employees though, and as higher in-service revaluation rates are lost upon leaving service early, it can be argued that is all cost-neutral to the individual over time too. So there was a nice gain for those who benefitted from final salary pensions throughout most of their career, then from career average with high accrual over the last decade or so.