Tax Free Lump Sum and 2025 Budget

Albermarle

Moonwolf said:

This has been repeatedly floated before each budget. The justification is that it raises taxes and closes a loophole that you can save cash tax free and get 25% back tax free.

Although it has been repeatedly raised it hasn’t happened.

Firstly it would take a lot of time for most of the tax benefits to appear, so in the current situation is isn’t going to give the current government a lot of extra revenue this parliament. No idea how many people are retiring this year, but assuming most would leave the money in place for drawdown, or add it to an annuity the tax won’t be received until it flows into income. Tax doesn’t suddenly get paid because people can no longer take it out of the pension tax free.

This delay is particularly true if the government honours promises not to hit people with major changes within 10 years of retirement, it may be that someone argues this doesn’t count but many people will come forward with “plans” they had to pay off important things with the money. Note, no government has to abide by that agreement.

It would be unpopular amongst the right wing press and middle classes and generate a lot of noise and stories of hardship.

If it applied to only DC pots it would be seen as unfair, applying it to DB schemes as well and a lot of NHS staff and unions would add to the noise. “Nurse Jones has to retire a little early because of cancer after a lifetime of service and no longer gets the lump sum she needs to pay off the mortgage and ease her housing worries.”

This isn’t an open ended commitment, as it stands, fiscal drag will eat away at the benefit over time anyway.

So why would a government bring something in that would be unpopular, probably generate a lot more noise in the press than it deserves in proportion to the people it really hurts and doesn’t bring in a lot of extra tax in the near future.

I would be surprised, although I have been surprised before and I’m certainly not a tax expert or economist.

The 25% tax free is not in any way a loophole.
It is an integral part of the pension savings system.
Without it , saving into a pension becomes unattractive for many people.
So not only would it be unpopular, but illogical to get rid of it.

Albermarle

Cobbler_tone said:

Albermarle said:

roadweary said:

Hi,

Imagine the government does remove or reduce the TFLS at the budget, how would this be implemented does anyone know?

Could they announce it as effective immediately?  Or would that breach any rules or norms about allowing people approaching or of pension age having time to get their finances in order?

Thanks,
R

The chance of it being removed completely is less than zero.
The chance of it being any other % than 25 is less than zero.

Are you 1000% sure about that?

1,100% in fact.
However I would not be so surprised to see the IHT gift period extended to 10 years, the age 75 income tax issue for beneficiary pensions to be changed, or even the ‘gifts from income ‘ IHT loophole ( ?) to be closed off.
Or at least one of the three.

RogerPensionGuy

Albermarle said:

Moonwolf said:

This has been repeatedly floated before each budget. The justification is that it raises taxes and closes a loophole that you can save cash tax free and get 25% back tax free.

Although it has been repeatedly raised it hasn’t happened.

Firstly it would take a lot of time for most of the tax benefits to appear, so in the current situation is isn’t going to give the current government a lot of extra revenue this parliament. No idea how many people are retiring this year, but assuming most would leave the money in place for drawdown, or add it to an annuity the tax won’t be received until it flows into income. Tax doesn’t suddenly get paid because people can no longer take it out of the pension tax free.

This delay is particularly true if the government honours promises not to hit people with major changes within 10 years of retirement, it may be that someone argues this doesn’t count but many people will come forward with “plans” they had to pay off important things with the money. Note, no government has to abide by that agreement.

It would be unpopular amongst the right wing press and middle classes and generate a lot of noise and stories of hardship.

If it applied to only DC pots it would be seen as unfair, applying it to DB schemes as well and a lot of NHS staff and unions would add to the noise. “Nurse Jones has to retire a little early because of cancer after a lifetime of service and no longer gets the lump sum she needs to pay off the mortgage and ease her housing worries.”

This isn’t an open ended commitment, as it stands, fiscal drag will eat away at the benefit over time anyway.

So why would a government bring something in that would be unpopular, probably generate a lot more noise in the press than it deserves in proportion to the people it really hurts and doesn’t bring in a lot of extra tax in the near future.

I would be surprised, although I have been surprised before and I’m certainly not a tax expert or economist.

The 25% tax free is not in any way a loophole.
It is an integral part of the pension savings system.
Without it , saving into a pension becomes unattractive for many people.
So not only would it be unpopular, but illogical to get rid of it.

I fully agree, no government would try remove benifts from old or disabled people, totally unthinkable.

And indeed 25% TFLS isn't a loophole, but reducing or removing may indeed reduce pension savings currently and obviously increased tax receipts now and spool up the economy. 

And thus I'm a 100% sure I can not guess what they will do these next few years. 

michaels

From the (revenue) govt point of view, as long as people are saving enough that they don't qualify for benefits in retirement (state pension plus compulsory employer ad employee contribution?) then any further pension saving beyond that is a bad thing, it definitely defers and also decreases overall tax take not just income tax but also potentially VAT if money received now is spent now rather than saved which also boosts GDP in the near term.

So the fiscal economics is very clear, bring in polices to discourage pension savings beyond the minimum compulsory level.  So less tax breaks on the way in for pensioners and perhaps even give public sector workers the option of taking taxable income now at the expense of less generous pensions later....

Cobbler_tone

I’m as sure as I can be that I have ‘won’ and there aren’t any changes that could supper my plans, although the price of groceries is an annoyance. Maybe I’d crunch the numbers again if they stuck 10% on the basic rate of tax. 

bonnyrigger

I wonder if instead of touching the TFLS they might look at setting TR at a flat 25%.  Chatty took 45 seconds to estimate a saving of £10 billion a year, but it would actually be beneficial to large majority of workers.
I suspect it's never talked about as the financial journalists would be among the losers.

artyboy

Isthisforreal99 said:

roadweary said:

Marcon said:

roadweary said:

Hi,

Imagine the government does remove or reduce the TFLS at the budget, how would this be implemented does anyone know?

Could they announce it as effective immediately?  Or would that breach any rules or norms about allowing people approaching or of pension age having time to get their finances in order?

Thanks,
R

They could.

!!!!!!    (v impressive redaction of a gentle expletive )

Much like the reaction to most on this forum at this question being asked for the umteenth time.

I heard a rumour that in the next budget, MSE will halve the allowance for new threads that speculate on TFLS reductions. 

So better get in quick!

FIREDreamer

bonnyrigger said:

I wonder if instead of touching the TFLS they might look at setting TR at a flat 25%.  Chatty took 45 seconds to estimate a saving of £10 billion a year, but it would actually be beneficial to large majority of workers.
I suspect it's never talked about as the financial journalists would be among the losers.

Why would a 40% taxpayer pay into a pension (beyond maybe that needed for employer match) on that basis? An effective 15% tax charge on the contributions when made and at least 20% tax on the pension at the end. 

They would just use an ISA or possibly something like VCT / EIS instead for 30% tax relief and tax free thereafter on the VCT / EIS.

And how do you deal with employer contributions (and salary sacrifice) and even more complicated defined benefit accrual?

EDIT: I retired last year, am a higher rate taxpayer due to high annuity rates that I locked in, so no skin in this game apart from the £3,600 round robin going forwards which is peanuts and neither here or there. Would be throwing money away if doing that if only getting 25% relief.

RogerPensionGuy

bonnyrigger said:

I wonder if instead of touching the TFLS they might look at setting TR at a flat 25%.  Chatty took 45 seconds to estimate a saving of £10 billion a year, but it would actually be beneficial to large majority of workers.
I suspect it's never talked about as the financial journalists would be among the losers.

Can I just confirm if TR at a flat 25% means Tax Relief on inbound pension contributions being set at 25%?

The most stuff I've read is if they set pension inbound Tax Relief at 30%ish it may be neutral overall for the current Tax Take and be very helpful for 20% Tax Payers, but the 40 & 45% inputers not so happy.

I guess the bean counters know the numbers and I can certainly see a flat 25% may sound and look good from a PR point of view, basically pension Tax Relief going up from 20 to 25% is indeed a headline a 25% uptick in that zone and was it 10 billions of saving per year. 

Did I recently read current govement says the state pension tripple lock is guaranteed this sitting and the parties are saying they will also guarantee the tripple lock if they get in for that term, potentially 9 more years of a guaranteed tripple lock. 

So if the tripple lock is such a hot don't touch item, they may indeed tinker & taper pensions espically the DC SIPP ones.

Only 6 more weeks to enjoy the media show, I need more coke & popcorn I think. 

FIREDreamer

RogerPensionGuy said:

Only 6 more weeks to enjoy the media show, I need more coke & popcorn I think. 

Probably the other type of coke is needed - and I don’t mean Pepsi! 🤣🤣🤣