Tax Free Lump Sum and 2025 Budget

MK62

roadweary said:

MetaPhysical said:

MK62 said:

roadweary said:

MK62 said:

roadweary said:

I’m 55. About 800k in my pension. 

Plan was to work full time to 60, 4 days a week for another couple of years - then take 40-50k a year tax free till state pension contributes. 

I don’t have any ‘tax/growth sensible’ vehicles available should I take my 200k now. 

I’m risk averse and about as conflicted as I could be as to whether I withdraw some or all of the 200k now. 

You would seem to be an ideal candidate for an index linked gilt ladder..........

Hi, thank you so much for the suggestion.  I searched and found this on the forum.  https://youtu.be/UqrO9Wi6rSY  In so much as I understand from that, I like the idea and the fact that you can buy something, know the price on maturity and have a good idea of the income generated.

A whole bunch of questions, sorry.

I didn't see any explanation of tax liability.  So, tax on the 6-monthly interest of a UK bond?  And if the bond were bought (using their examples) at £70 but it will mature at £100, what are the tax liabilities on that?

If you pay Capital Gains on it, isn't that potentially just as expensive (or more) as leaving it in the pension and then getting charged income tax as you draw down on the funds if the tax free allowance has gone?

And the 6-monthly interest....is that shielded from tax as long as you re-invest back into the fund...or do you get charged CGT/income tax on that interest?

Then the big one is....what are the costs (apart from time) of doing this for yourself?  Do you have to pay to buy / sell / report on what you've done?

Next, the time part.....is this something where I can practically say, I'm going to invest 50k on bond A that matures in 7 years' time, 50k in bond B that matures in 8 years' time, 50k for Bond C - 9 years, 50k bond D 10 years?  That's probably manageable.  It seems like it might not grow as much as the pension fund....but then it seems guaranteed that it can't lose - or am I missing something there?

And is this all self-done, or can you pay just small fees for a trusted party to do this for you?  But what is small and who do you trust 

Sorry for all the questions, but this sounds very interesting....and if I did decide to do it, I'd be investing 200k before the budget, so I need to get pretty savvy pretty quickly!

There is no CGT on gilts........the coupons are subject to income tax as interest unless held in a tax exempt account such as an ISA. The coupons on IL gilts are typically quite low though (eg 0.125%), though there are a few higher coupon examples.
Assuming you held these in a general investment account, you may need to pay income tax on the coupons, unless you have spare personal allowance or personal savings allowance to offset against.......lategenexr's gilt ladder tool will show you an estimate of the likely max amount you might have to pay.

As to getting them, all you need do is open a GIA at your platform of choice and then call them to place your orders (IL gilts can't usually be dealt online, but most platforms will, AFAIK, charge you the online dealing fee, rather than the telephone dealing fee (but make sure beforehand)). Obviously the costs will vary depending on the ladder you want to build, but a 12 year ladder bought today, paying out for the final 4 years of it's life, might cost less than £50 to set up. Again, play around with lategenexr's gilt ladder tool.....it's fairly straightforward......you just need to tell it how long the ladder will last, how much you want it to payout (in today's money), when you want the payments to start, your marginal tax rate and the likely interest on cash deposits in the account (this is an unknown really, so I use 2%)......oh, and don't forget to click on "index linked". The tool will also show you the cash flow model of the ladder. Finally, while the tool is very handy, you don't have to follow it exactly......you can create your own after you see how it's done....though obviously that's more work for you (being handy with a spreadsheet is probably a prerequisite though)

Good advice.

A note on that [excellent] tool.  Note that the gilts selected in the table on the right change depending if you are going to pay tax on them with the tax slider on the left.  If the gilts are in a SIPP/ISA (so set the tax slider to 0%) then you want higher coupon gilts because they will be tax free held in the SIPP/ISA.   However, if the gilts are going to be held in a GIA - where coupons will be taxed - then you want low coupon gilts which will trade for less than the £100 price and you make your return on the Capital Gain - which is CGT free on gilts.  It's really important to get your head around this if you are interested in investing in gilts.

I'm still trying to get my head around the whole thing.  I created a csv suggesting I wanted to achieve 40k a year 2032-2036 inclusive.....set the tax slider to 40% and guessed at 2% on the cash interest rate and got the following.

Is the result below saying that I would invest 187.5k today to achieve 200k as drawn out annually in the five years beginning 2032?  And that's 200k in today's money or what 200k is estimated to be worth at the point of withdrawal?

No need to create a csv file unless you want varying income each year, or a fixed increase, such as 4%, and are using conventional gilts.

For an index linked £40k pa starting in 2032, simply put 40000 into the withdrawal amount box......5 years into the "Number of Years box"........set the start date at 6/4/32 (or whatever date you want your first payment), tick the Index Linked box, set the marginal tax rate at 20%, and the interest at 2% (guess).
The tool will tell you what to buy today, and how much that will cost today. The payout will be index linked from today, so the payout in TY32-33 will be £40000 plus whatever inflation occurs between now and 2032.
This is what that gives me........

Instrument	TIDM	Clean Price	Dirty Price	GRY	Quantity	Cost
0.125% IL 2031-08-10	TR31	95.65	132.60	0.91%	113.63	15,067.25
1.250% IL 2032-11-22	T32	100.87	189.98	1.13%	207.81	39,479.22
0.750% IL 2033-11-22	T33	95.98	105.25	1.29%	123.17	12,963.73
0.750% IL 2034-03-22	TRTQ	95.01	166.57	1.39%	185.55	30,906.83
2.000% IL 2035-01-26	T2IL	240.28	241.31	1.55%	114.75	27,690.21
1.125% IL 2035-09-22	TR35	96.08	100.11	1.57%	450.43	45,090.92
0.125% IL 2036-11-22	TG36	84.80	132.78	1.64%	86.44	11,477.00
Cash						0.00
Total						182,675.16

The cashflow tab will show you the coupons going into the cash account, the tax payable each TY, the redemptions of each gilt, and after 2032, the monthly withdrawals (or annual if you prefer it that way).

roadweary

For an index linked £40k pa starting in 2032, simply put 40000 into the withdrawal amount box......5 years into the "Number of Years box"........set the start date at 6/4/32 (or whatever date you want your first payment), tick the Index Linked box, set the marginal tax rate at 20%, and the interest at 2% (guess).
The tool will tell you what to buy today, and how much that will cost today. The payout will be index linked from today, so the payout in TY32-33 will be £40000 plus whatever inflation occurs between now and 2032.
This is what that gives me........

Instrument	TIDM	Clean Price	Dirty Price	GRY	Quantity	Cost
0.125% IL 2031-08-10	TR31	95.65	132.60	0.91%	113.63	15,067.25
1.250% IL 2032-11-22	T32	100.87	189.98	1.13%	207.81	39,479.22
0.750% IL 2033-11-22	T33	95.98	105.25	1.29%	123.17	12,963.73
0.750% IL 2034-03-22	TRTQ	95.01	166.57	1.39%	185.55	30,906.83
2.000% IL 2035-01-26	T2IL	240.28	241.31	1.55%	114.75	27,690.21
1.125% IL 2035-09-22	TR35	96.08	100.11	1.57%	450.43	45,090.92
0.125% IL 2036-11-22	TG36	84.80	132.78	1.64%	86.44	11,477.00
Cash						0.00
Total						182,675.16

The cashflow tab will show you the coupons going into the cash account, the tax payable each TY, the redemptions of each gilt, and after 2032, the monthly withdrawals (or annual if you prefer it that way).

If I am taxed at 40% today on my income, doesn't my marginal tax need to be set at 40%?

I'm really showing my lack of knowledge here.....what percentage does the 2% represent?

And if that is different to inflation (which I assume is higher), how is inflation built into the model?

QrizB

roadweary said:

If I am taxed at 40% today on my income, doesn't my marginal tax need to be set at 40%?

Yes, assuming a GIA not a SIPP or ISA. It's whatever tax rate you expect to pay on gilt coupons when they're paid.

roadweary said:

I'm really showing my lack of knowledge here.....what percentage does the 2% represent?

It's the interest rate you expect to earn on those same gilt coupons while you're waiting util it's time to spend them.

roadweary said:

And if that is different to inflation (which I assume is higher), how is inflation built into the model?

Your index-linked gilts are index-linked. If you've asked for a £40k pa payout, that's £40k in today's money. The actual sum you receive will depend on inflation but the buying power is constant.

roadweary

Thanks.  If I were confident the cash free amount weren't going to change, I'd definitely leave it in my pension.

I think the pension will probably increase at a greater rate than these index-linked gilts over the fullness of time and that I could avoid drawing down funds for a period should they dive for a while.

So, definitely seriously considering the gilts.

I guess the other consideration is that I'll have crystallised all the funds in my pension if I take out the 25% tax free amount.  My pension is already a draw-down one....it's just the way the company set it up.  So the remaining 75% of my funds would just sit in the pension waiting.

I think I read somewhere else that some annuity providers won't take crystallised funds?  An annuity wasn't part of my plans anyway, but are there any other downsides to consider about crystallising the funds?

RogerPensionGuy

roadweary said:

Thanks.  If I were confident the cash free amount weren't going to change, I'd definitely leave it in my pension.

I think the pension will probably increase at a greater rate than these index-linked gilts over the fullness of time and that I could avoid drawing down funds for a period should they dive for a while.

So, definitely seriously considering the gilts.

I guess the other consideration is that I'll have crystallised all the funds in my pension if I take out the 25% tax free amount.  My pension is already a draw-down one....it's just the way the company set it up.  So the remaining 75% of my funds would just sit in the pension waiting.

I think I read somewhere else that some annuity providers won't take crystallised funds?  An annuity wasn't part of my plans anyway, but are there any other downsides to consider about crystallising the funds?

Reference last paragraph roadweary. 

I have just removed my last remaining TFLS % availability sweeping out that old 268 figure, altho I don't think it will be reduced ever, but decideded personally to wolf it out. 

The SIPP provider that just removed said TFLS advised X 3 of the withdrawal will form a bucket of crystallised funds inside the SIPP and do I want all the uncrystallised funds also put in the crystallised pot to make it simple as I've fully exhausted max 268 and that's that.

I said no thanks to sweeping uncrystallised funds in to the crystallised pot because if 268 did increase(very unlikely) I would like the opportunity of wolfing out more TFLS, person agreed a good ploy just in case.

I'm also on the fence just now about buying an annuity and the information from SIPP & IFA people is any annuity would first consume crystallised pot and then remove required balance to complete annuity purchase and the remaining uncrystallised funds will just remain in the SIPP until I do something else. 

ukdw

RogerPensionGuy said:

roadweary said:

Thanks.  If I were confident the cash free amount weren't going to change, I'd definitely leave it in my pension.

I think the pension will probably increase at a greater rate than these index-linked gilts over the fullness of time and that I could avoid drawing down funds for a period should they dive for a while.

So, definitely seriously considering the gilts.

I guess the other consideration is that I'll have crystallised all the funds in my pension if I take out the 25% tax free amount.  My pension is already a draw-down one....it's just the way the company set it up.  So the remaining 75% of my funds would just sit in the pension waiting.

I think I read somewhere else that some annuity providers won't take crystallised funds?  An annuity wasn't part of my plans anyway, but are there any other downsides to consider about crystallising the funds?

Reference last paragraph roadweary. 

I have just removed my last remaining TFLS % availability sweeping out that old 268 figure, altho I don't think it will be reduced ever, but decideded personally to wolf it out. 

The SIPP provider that just removed said TFLS advised X 3 of the withdrawal will form a bucket of crystallised funds inside the SIPP and do I want all the uncrystallised funds also put in the crystallised pot to make it simple as I've fully exhausted max 268 and that's that.

I said no thanks to sweeping uncrystallised funds in to the crystallised pot because if 268 did increase(very unlikely) I would like the opportunity of wolfing out more TFLS, person agreed a good ploy just in case.

I'm also on the fence just now about buying an annuity and the information from SIPP & IFA people is any annuity would first consume crystallised pot and then remove required balance to complete annuity purchase and the remaining uncrystallised funds will just remain in the SIPP until I do something else. 

I think the previous main driver for early crystalising above the LTA/PCLS limit (apart from drawdown or simplification)  was mitigation against the  LTA penalty tax being re-introduced. Hopefully LTA has gone forever - but you never know.

Albermarle

roadweary said:

Thanks.  If I were confident the cash free amount weren't going to change, I'd definitely leave it in my pension.

I think the pension will probably increase at a greater rate than these index-linked gilts over the fullness of time and that I could avoid drawing down funds for a period should they dive for a while.

So, definitely seriously considering the gilts.

I guess the other consideration is that I'll have crystallised all the funds in my pension if I take out the 25% tax free amount.  My pension is already a draw-down one....it's just the way the company set it up.  So the remaining 75% of my funds would just sit in the pension waiting.

I think I read somewhere else that some annuity providers won't take crystallised funds?  An annuity wasn't part of my plans anyway, but are there any other downsides to consider about crystallising the funds?

AIUI , most ( all?) will. 

FIREDreamer

roadweary said:

Thanks.  If I were confident the cash free amount weren't going to change, I'd definitely leave it in my pension.

I think the pension will probably increase at a greater rate than these index-linked gilts over the fullness of time and that I could avoid drawing down funds for a period should they dive for a while.

So, definitely seriously considering the gilts.

I guess the other consideration is that I'll have crystallised all the funds in my pension if I take out the 25% tax free amount.  My pension is already a draw-down one....it's just the way the company set it up.  So the remaining 75% of my funds would just sit in the pension waiting.

I think I read somewhere else that some annuity providers won't take crystallised funds?  An annuity wasn't part of my plans anyway, but are there any other downsides to consider about crystallising the funds?

AIUI , most ( all?) will. 

Indeed, you can buy an annuity with crystallised (drawdown) or uncrystallised funds.

eg Hargreaves Lansdown …




Then it asks if the money is in drawdown or not …

I have bought two annuities from drawdown funds this way.

You dont have to use the whole of a drawdown pot to buy an annuity so a partial transfer is allowed. If transferring a drawdown pot to another pension provider (ie not buying an annuity), the fund must be transferred  in its entirety - partial transfer of crystallised funds are not allowed.

michaels

SO I have a few things going on:
1) Want to build an index linked gilt ladder to cover the equivalent of state pension (well 12.5kpa) for the next 12 years
2) AM worried that a reduction in the max TFLS would be costly
3) AM planning to take big chunks of TFLS over the next 5 years to avoid having taxed income that would reduce student loan eligibility for my two students
4) The markets seem to be relatively high

So I am going to do two things:
A ) Move money out of shares (global tracker) into the index linked gilt ladder
B ) Move TFLS money out of the pension before the budget

Combining these, I will have the low coupon part of the index linked gilt ladder outside of the pension to avoid exceeding the savings allowance (and also keeping my income down for student loan purposes) with the majority of the returns instead coming via the tax free capital gains on the gilts held to maturity.

Can anyone see any downsides of this plan?  Thanks

ali_bear

Reduction in TFLS is not impossible but I don't believe anyone really could see it happening overnight, it would affect too many people like us who have based their plans around using it. Please don't move TFLS out before the budget.