The inevitable pre-budget speculation on pensions

Andy_L

Silvertabby said:

Just my gut feeling, but I don't think they'll limit the tax free lump sum any further (now £268K, down from £450K at its peak).  Doing so would p. off the very people they can't afford to p. off - the very senior civil servants.   

with the awful 1:12 commutation rate in the CS pension I doubt limiting it would upset the SCS

Albermarle

aroominyork said:

In the run-up to last year’s budget there was forum chat about whether the expected rise in CGT would happen overnight. The majority thought it would probably kick in the following tax year. Anyone who sold assets just before the budget on the basis they could B&B them back if the rise was delayed, is free to have a little gloat here.

Now we have the same dilemma ahead of 26 November about the tax-free lump sum – which is not B&B-able. Given the ease of arranging to take your full TFLS the day after the budget, isn’t it likely that any change would be immediate, eg capping the TFLS at say £100k, with no penalty for higher amounts taken before budget day?

Is it also likely that tax-free withdrawals by your heirs if you die under 75 will be in the Chancellor’s sights, as she wants to stop pensions being used as an inheritance planning tool? It is sometimes written that heirs would be taxed twice if they paid income tax on withdrawals from inherited pensions after the estate has already been subject to IHT. I don’t agree. Ignoring the heir’s 25% TFLS, the amount they draw down is 60% of the legator’s net contribution, so it is a straight IHT deduction. If there is no IHT, the heir’s withdrawal after tax is the same as the legator’s net contribution. This example assume 20% tax at both ends.

Finally, if any finance journalists are reading this, can I plead with them to try not to use the term ‘grieving families’ in every paragraph they write on the subject.

Just to go back to the OP. Unfortunately it will not copy over the little spreadsheet they included in their post.

I just wanted to make the point that even if the estate ( including the unused DC pension pots after 2027) was liable for IHT, it is unlikely to be levied at 40% on the whole pot.

For example if it was the second death of a married couple and the estate consisted of a £300 K unused pension pot, a £400K family home and £400K other assets.
Family home is left to the children, so overall £1M in nil rate band available .
Overall estate is worth £1.1M, so 40% tax due on £100K .
If this was split proportionately between the pension and other assets, the pension would have to pay approx £18 K , an effective IHT rate of approx only 6% .
I think in the legislation the Executor would have some discretion where to pay the tax from, but to make it somple I just stuck to a proportional payment.
Even if the estate was in the £2million pound area, in theory any unused pension pot that was part of that would only effectively pay 20% IHT if was done proportionately.

Johnnyboy11

But a second death after age 75 would leave beneficiaries facing Income Tax on the pension element of their  inheritance. In a worst case scenario, the beneficiary could be an Additional Rate taxpayer and receive the inheritance in a single lump sum.

Silvertabby

Andy_L said:

Silvertabby said:

Just my gut feeling, but I don't think they'll limit the tax free lump sum any further (now £268K, down from £450K at its peak).  Doing so would p. off the very people they can't afford to p. off - the very senior civil servants.   

at the awful 1:12 commutation rate in the CS pension I doubt limiting it would upset the SCS

You'd be surprised.  That p. poor commutation rate applies to all of the public sector, not just the CS.  Over 90% of LGPS pensioners commute the maximum tax free lump sum, and I don't think that other schemes are far behind.   

HedgehogRulez

If the 25% TFLS was reduced id be rioting on the streets. It's a key element of my retirement strategy to utilise. Already narked by it being limited to £268k in recent years.

Ladders being pulled up by the oldies again! They've benefited from it, so why cant their children?

Cobbler_tone

HedgehogRulez said:

If the 25% TFLS was reduced id be rioting on the streets. It's a key element of my retirement strategy to utilise. Already narked by it being limited to £268k in recent years.

Ladders being pulled up by the oldies again! They've benefited from it, so why cant their children?

I personally don’t think you’d have too much company. I wouldn’t get too riled before something theoretically happens (that probably won’t) anyway and wouldn’t suggest adding a criminal record to your ‘woes’. I’m sure you could navigate around it or pay a bit more tax. e.g. You don’t see rioting in the streets over hikes to SPA, which is a far more significant impact on many who rely on it.

No one has had a stab at what it would actually generate for the government. It may not be a big number. Not the billions they go for anyway. They will balance noise vs reward in every decision.

leosayer

GunJack said:

ClashCityRocker1 said:

I think there is a case for reworking the whole income tax/NI system - probably taxing wealthy pensioners a bit more. But it would be a brave chancellor who did so, especially after saying they wouldn't.

But then what's a "wealthy pensioner"??

Anyone wealthier than me.

CorseyEdge

Cobbler_tone said:

Has anyone actually read how much a reduction of the TFLS to say £100k would be worth to the government? It’ll be on a spreadsheet somewhere and understandably gets disproportionate airtime on a pension forum. It wouldn’t cause a ripple for most.

I read this 'insights' piece from a pension consultancy (LCP) at the weekend. The article discusses the various challenges facing HMT associated with raising revenue from Pensions. It included a reference to the Institute for Fiscal Studies that estimated a revenue raising, cashable saving, of up to £5bn a year on abolishing the Tax Free treatment of lump sums. They went on to suggest that a "more likely" reform would be to lower the cap, however revenue generated would be a lot less (obvs).

Article is here - https://insights.lcp.com/rs/032-PAO-331/images/LCP-How-to-avoid-an-Omnishambles-Budget-2025.pdf

CorseyEdge

Cobbler_tone said:

No one has had a stab at what it would actually generate for the government. It may not be a big number. Not the billions they go for anyway. They will balance noise vs reward in every decision.

Another recent Pension Expert publication article referenced an Institute for Fiscal Studies figure of around £2bn a year for limiting the tax free cap to £100k (makes sense if the overall cost of TFLS is £5bn/year) - I'd suggest that is quite a material saving - whether they wish to take on the public sector or those with £400k+ pension pots is another thing.

EDIT: I found the original 2024 IFS reference for those savings here - https://ifs.org.uk/articles/raising-revenue-reforms-pensions-taxation

aroominyork

Albermarle said:

aroominyork said:

In the run-up to last year’s budget there was forum chat about whether the expected rise in CGT would happen overnight. The majority thought it would probably kick in the following tax year. Anyone who sold assets just before the budget on the basis they could B&B them back if the rise was delayed, is free to have a little gloat here.

Now we have the same dilemma ahead of 26 November about the tax-free lump sum – which is not B&B-able. Given the ease of arranging to take your full TFLS the day after the budget, isn’t it likely that any change would be immediate, eg capping the TFLS at say £100k, with no penalty for higher amounts taken before budget day?

Is it also likely that tax-free withdrawals by your heirs if you die under 75 will be in the Chancellor’s sights, as she wants to stop pensions being used as an inheritance planning tool? It is sometimes written that heirs would be taxed twice if they paid income tax on withdrawals from inherited pensions after the estate has already been subject to IHT. I don’t agree. Ignoring the heir’s 25% TFLS, the amount they draw down is 60% of the legator’s net contribution, so it is a straight IHT deduction. If there is no IHT, the heir’s withdrawal after tax is the same as the legator’s net contribution. This example assume 20% tax at both ends.

Finally, if any finance journalists are reading this, can I plead with them to try not to use the term ‘grieving families’ in every paragraph they write on the subject.

Just to go back to the OP. Unfortunately it will not copy over the little spreadsheet they included in their post.

I just wanted to make the point that even if the estate ( including the unused DC pension pots after 2027) was liable for IHT, it is unlikely to be levied at 40% on the whole pot.

For example if it was the second death of a married couple and the estate consisted of a £300 K unused pension pot, a £400K family home and £400K other assets.
Family home is left to the children, so overall £1M in nil rate band available .
Overall estate is worth £1.1M, so 40% tax due on £100K .
If this was split proportionately between the pension and other assets, the pension would have to pay approx £18 K , an effective IHT rate of approx only 6% .
I think in the legislation the Executor would have some discretion where to pay the tax from, but to make it somple I just stuck to a proportional payment.
Even if the estate was in the £2million pound area, in theory any unused pension pot that was part of that would only effectively pay 20% IHT if was done proportionately.

I am seeing “Content not viewable in your region” both on your post and my original one. I live on the south coast and haven’t seen the French storming our shores so I expect it is an MSE glitch.

My figures were:

IHT paid: £80k net pension contribution by legator… £100k grossed up… £60k after IHT… £48k when taxed on drawdown.

No IHT paid: £80k net pension contribution by legator… £100k grossed up… £100k after IHT… £80k when taxed on drawdown.

Thus, the net amount received by the beneficiary is the same as the net amount paid in by the legator, reduced only by 40% IHT when applied.

As you rightly say, Albermarle, in many cases the estate excluding the pension would not be over £1m so the SIPP would not be fully taxed at 40%. You raise an interesting question of which assets would be taxed if the SIPP remained ringfenced and I wonder whether the Executor would be required to consult the beneficiaries. Young beneficiaries might want less cash now rather than more money tied up in a pension; older ones might feel differently. If the beneficiaries are from different generations… light the blue touchpaper and stand back.