When is 268k not 268k?

MetaPhysical

This will it/won't it around reduction of TFC is doing the rounds at the moment as we all know.  I've a thought on the TFC which I'd like to sanity check.

So keeping numbers simple.  With the [current] limit of 268k then if you made a 40K UFPLS withdrawal you'd chalk off 10k of your TFC off of your 268 limit.  The 10K for the first withdrawal has more "value" than the one 5 years later and certainly more than the last one 26.8 years later because inflation is going to erode the real purchasing value of each 10k tax free with each UFPLS as time goes by

So if you have the ability to take 268K of the TFC *now* (because you have a pot that is big enough) and can use the money or invest it 40K per year into two ISAs (yours and your spouse's), then you're better off having the full amount now.  Try to get as much into the, ideally two, ISAs and keep the rest in a "high" interest account until the next year, or even in a GIA invested in gilts so you don't pay CGT.

What am I missing? Tax free growth on the remains of the 268K left in the pension?  Sure, but if indeed there is a risk that this allowance could be lowered then if this did happen that would drastically wipe out any of those potential gains (with a 20% tax rate) as opposed to taking the maximum amount now.

Albermarle

The £268k may actually get increased one day . Who knows?

ClashCityRocker1

If you take out £268K from your pension and stick £20/40K in an ISA that leaves interest on over £200K subject to tax does it not?

QrizB

I think you've just (re)discovered discounted cashflow.

https://en.wikipedia.org/wiki/Discounted_cash_flow

leosayer

There are some scenarios where you may regret taking your full £268k now which I listed below. But in general I agree. 
In fact I have been preparing flexible ISAs in antipation of doing this very thing using the method described in the link below:
https://monevator.com/should-you-borrow-to-fill-your-isa-each-year/

However it looks like my tax free cash will be going on house renovations instead:

1. Your pension investments may drop in the future, in which case £268k is a larger proportion of your pension value.

2. A future government could put indexation on the LSA (don't laugh)

3. To 'avoid' CGT and income tax in a GIA, you invest in assets with lower expected returns

4. You invest your GIA in assets that give you massive gains making you subject to CGT

5. You die before April 2027 when your £268k is included in your estate for IHT 

Cobbler_tone

TFLS withdrawals have gone through the roof in the past 12 months. Numerous articles currently citing the continued trend of doing so and 'inside knowledge'. I'm not sure too much can be taken from that as you are never comparing apples to apples with a changing demographic. I bet plenty of people are taking it early who are no where near the current limit. Sadly, this site will be fuelling the 'panic'....the more something gets talked about etc.

It is going to be one of those self fulfilling prophecies at some point. 

phlebas192

ClashCityRocker1 said:

If you take out £268K from your pension and stick £20/40K in an ISA that leaves interest on over £200K subject to tax does it not?

It does, but if you leave it in the SIPP then any growth won't increase the TFLS amount and will be taxable when withdrawn - so at 20% or probably at 40% given the size of the drawdown pot. Outside of the SIPP, interest will be taxed at the same rates but dividends will be taxed at 8.75% (basic rate) / 33.75% (higher rate) and capital gains at 18% / 24%, both of which are lower than the income tax equivalents.

Of course, all this might change with any budget!

FWIW, my wife took her full £268k as soon as possible. With £100k put into PBs,  £80k into ISAs within the following few months and myself having some starter rate for savings headroom very little of what it has earned has been taxed.

leosayer

Indeed and I am part of those statistics having taken full PCLS my SIPP a few weeks ago, even though my reason was as described by the OP and because I actually need the funds for house renovations.

I agree that LSA reduction could become a self-fulfilling prophecy - like means testing of the state pension. I cringe every time I hear this stated as if it's a fact.

kempiejon

I know a few people who planned to take the cash at the earliest chance. I started with that plan - to use the capital to pay down the mortgage or go towards an upsize. For those at the £268k limit with a chicken licken view of the future I can see it's a worthy calculation. Those likely to hit 40% tax in retirement might miss a trick. I'm a long way from the ceiling and I reckon leaving the tax free element intact for longest could extract the largest amount of tax free income over a long retirement.
Or the rules change, so I can make another plan. 

Mark_d

MetaPhysical said:

So if you have the ability to take 268K of the TFC *now* (because you have a pot that is big enough) and can use the money or invest it 40K per year into two ISAs (yours and your spouse's), then you're better off having the full amount now.  Try to get as much into the, ideally two, ISAs and keep the rest in a "high" interest account until the next year, or even in a GIA invested in gilts so you don't pay CGT.

What am I missing? Tax free growth on the remains of the 268K left in the pension?  Sure, but if indeed there is a risk that this allowance could be lowered then if this did happen that would drastically wipe out any of those potential gains (with a 20% tax rate) as opposed to taking the maximum amount now.

Try simulating it in a spreadsheet.  In one scenario you take the 268k TFC and invest it in ISAs/savings accounts.  In the other you use UFPLA and get 25% tax free each withdrawal (Is this limited to a lifetime total of 268k?)

I suspect the growth on your 268k TFC will be less than you expect.

QrizB

Mark_d said:

In the other you use UFPLA and get 25% tax free each withdrawal (Is this limited to a lifetime total of 268k?)

Yes, it is. At least at present.

Mark_d said:

Try simulating it in a spreadsheet ... I suspect the growth on your 268k TFC will be less than you expect.

You don't need much of a spreadsheet unless you want numbers. It's self-evident.

Imagine you've got a £1,072,000 pension pot. Imagine it grows at 2% a year, in an investment you can hold in a pension, a SSISA or a GIA.

• Case 1. Leave it invested and take £40k pa of UFPLS. £10k of that will be tax-free After 26 years you've taken £260k of TFLS. In year 27 you have still got ~£480k in your pot, but can only take £8k of TFLS.
• Case 2. Take the TFLS and invest it outside the pension. Leave the crystallised funds invested. Take £10k pa from the tax-free part and £30k pa from the pension. Even if you pay 20% tax on all the growth in the TFLS, after 26 years you'll still have ~£95k of tax-free cash outside your pension.

This does of course assume that the £268k cap remains indefinitely.