When is 268k not 268k?

artyboy

Albermarle said:

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

I really needed a good laugh tonight 

HedgehogRulez

I’m afraid the genie’s out of the bottle. He will not be recorked

MK62

MetaPhysical said:

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.

You aren't missing anything.........unless the LSA gets index linked at some point (who knows, but in my view this is very unlikely anytime soon), then it's value will constantly erode.

If Bill can and does take £268k TFLS from his pension now, and it grows at say 5%pa net of taxes, then in eg 10 years, he'll have c£435k.
If he leaves it in his pension, after the same 10 years, that same sum might have grown 6% to £480k, but he can only withdraw £268k tax free, due to his LSA (unless the LSA was also increased by 5% pa).....and if the LSA is reduced at some point in those 10 years, well........and even if not, if Bill tried to withdraw that £480k, he'd never actually see the extra £45k it might have made inside the pension, as income tax will swallow all of that and maybe more (assuming the LSA isn't increased)

If Bill did take the £268k TFLS now though, then fair enough, he has the issue of what to do with it outside the pension........but he has options.

However, all that said, as ever it's rarely black and white......all sorts of things have to be taken into consideration, and several assumptions have to be made (any or all of which could turn out to be wrong)......so you have to make decisions based on what you know now and what you feel is the most likely position going forward.

GenX0212

MK62 said:

MetaPhysical said:

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.

You aren't missing anything.........unless the LSA gets index linked at some point (who knows, but in my view this is very unlikely anytime soon), then it's value will constantly erode.

If Bill can and does take £268k TFLS from his pension now, and it grows at say 5%pa net of taxes, then in eg 10 years, he'll have c£435k.
If he leaves it in his pension, after the same 10 years, that same sum might have grown 6% to £480k, but he can only withdraw £268k tax free, due to his LSA (unless the LSA was also increased by 5% pa).....and if the LSA is reduced at some point in those 10 years, well........and even if not, if Bill tried to withdraw that £480k, he'd never actually see the extra £45k it might have made inside the pension, as income tax will swallow all of that and maybe more (assuming the LSA isn't increased)

If Bill did take the £268k TFLS now though, then fair enough, he has the issue of what to do with it outside the pension........but he has options.

However, all that said, as ever it's rarely black and white......all sorts of things have to be taken into consideration, and several assumptions have to be made (any or all of which could turn out to be wrong)......so you have to make decisions based on what you know now and what you feel is the most likely position going forward.

Oh Lord, do I need to rewrite my plan again?
I'm not sure taking the max tax-free in one go is the right way but rather than a regular income with 25% tax-free should I be taking £40k tax-free each year for the first 5/6 years to put it into ISA's and then pay tax on the remaining crystallised funds for my income?

QrizB

GenX0212 said:

Oh Lord, do I need to rewrite my plan again?

Only if you think you're going to be affected by the £268k cap, including any future increases (stop laughing at the back).

GenX0212 said:
I'm not sure taking the max tax-free in one go is the right way but rather than a regular income with 25% tax-free should I be taking £40k tax-free each year for the first 5/6 years to put it into ISA's and then pay tax on the remaining crystallised funds for my income?

£40k pa to stuff into two ISA allowances is definitely one way to do it. If you think it's going to take 5/6 years, there's a chance you'll get enough growth that it reaches £268k in that time.

GenX0212

QrizB said:

GenX0212 said:

Oh Lord, do I need to rewrite my plan again?

Only if you think you're going to be affected by the £268k cap, including any future increases (stop laughing at the back).

GenX0212 said:
I'm not sure taking the max tax-free in one go is the right way but rather than a regular income with 25% tax-free should I be taking £40k tax-free each year for the first 5/6 years to put it into ISA's and then pay tax on the remaining crystallised funds for my income?

£40k pa to stuff into two ISA allowances is definitely one way to do it. If you think it's going to take 5/6 years, there's a chance you'll get enough growth that it reaches £268k in that time.

Yeah, currently just over £700k but expect to be closer to £800k by the time I retire next year. Will also have a £32k lump sum from DB which counts towards the LSA. Growth last year was £60k above the contributions I added so could easily reach the cap in a couple of years.

MK62

GenX0212 said:

MK62 said:

MetaPhysical said:

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.

You aren't missing anything.........unless the LSA gets index linked at some point (who knows, but in my view this is very unlikely anytime soon), then it's value will constantly erode.

If Bill can and does take £268k TFLS from his pension now, and it grows at say 5%pa net of taxes, then in eg 10 years, he'll have c£435k.
If he leaves it in his pension, after the same 10 years, that same sum might have grown 6% to £480k, but he can only withdraw £268k tax free, due to his LSA (unless the LSA was also increased by 5% pa).....and if the LSA is reduced at some point in those 10 years, well........and even if not, if Bill tried to withdraw that £480k, he'd never actually see the extra £45k it might have made inside the pension, as income tax will swallow all of that and maybe more (assuming the LSA isn't increased)

If Bill did take the £268k TFLS now though, then fair enough, he has the issue of what to do with it outside the pension........but he has options.

However, all that said, as ever it's rarely black and white......all sorts of things have to be taken into consideration, and several assumptions have to be made (any or all of which could turn out to be wrong)......so you have to make decisions based on what you know now and what you feel is the most likely position going forward.

Oh Lord, do I need to rewrite my plan again?
I'm not sure taking the max tax-free in one go is the right way but rather than a regular income with 25% tax-free should I be taking £40k tax-free each year for the first 5/6 years to put it into ISA's and then pay tax on the remaining crystallised funds for my income?

Well, that depends on your how you view the risk of the LSA reducing really........as your potential TFLS is not yet at the LSA limit, then the above scenario doesn't exactly fit you.....unless, perhaps, the LSA does reduce, but neither I, nor anyone else on here can tell you when or even if that will happen, or to what level it might be reduced to, or if any "protections", will be offered it it does reduce.
My personal view is a reduction in LSA is currently unlikely, but any increase is even more unlikely.....I think most likely, at least for the near term, is it will be left alone for fiscal drag to do it's work and erode it's real value.......but bear in mind that's a personal opinion and could be wrong.

I've been taking £40kTFLS out in April for the past few years (and dropping that into ISAs), and currently plan to do so again next tax year......though I'm as yet undecided whether to bring the withdrawal forward to pre budget.......I'm in the cohort between the "rumoured" LSA reduction to £100k and the current LSA of 268k ( though as stated above, I personally doubt any reduction will happen in November)

ali_bear

I think a reduction in annual ISA allowance is more likely than any change in the TFLS limit. 

The challenge for Govt is to bring in sufficient tax revenue to cover national debt repayments and government spending. This is an immediate need - making small changes in various corners of the tax system won't solve anything but would be politically costly. And the tax system will continue to incentivise pensions savings. 

MK62

ali_bear said:

I think a reduction in annual ISA allowance is more likely than any change in the TFLS limit. 

The challenge for Govt is to bring in sufficient tax revenue to cover national debt repayments and government spending. This is an immediate need - making small changes in various corners of the tax system won't solve anything but would be politically costly. And the tax system will continue to incentivise pensions savings. 

Quite possible........but not necessarily a showstopper (at least for me). While a GIA is undoubtedly more of a pain, you have a £3000 CGT allowance .....plus a dividend allowance of £500 too.
Of course, this is assuming that the CGT and dividend allowances aren't scrapped or reduced as well.......again possible, but who knows.

In the end we'll probably all change behaviour in reaction to changes in the tax system.......and in the end we may have to pay more tax, which, in the final analysis, is actually the governments aim even if they won't admit to it.

ukdw

MetaPhysical said:

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.

I like the thinking, even better if you could time the PCLS withdrawal when markets are down a bit then you could maximise the number of units you get out within the £268k limit, which could then be repurchased outside and hopefully grow fairly quickly back up above their previous higher levels.

  I guess if dividend and CGT rates end up being equalised to income tax the benefits might start to get neutral - but I guess at least the dividend tax would be payable annually, rather than in one chunk of income tax when you eventually want to withdraw above the £268k from the pension.