Anyone drawing their 25% pension lump sum?
Discussion
I removed mine just before Labour won as didn’t want to take the risk of not being able to give the TFC to my 3 children as part of their house purchase funds as early inheritances.
3 of my FA’s 9 clients in similar positions did the same.
Rachel did nothing in her first budget and very much doubt anything will happen this year in any case but as I said I wasn’t prepared to take the risk and it allowed my children a huge kick start.
3 of my FA’s 9 clients in similar positions did the same.
Rachel did nothing in her first budget and very much doubt anything will happen this year in any case but as I said I wasn’t prepared to take the risk and it allowed my children a huge kick start.
I think it very much depends on how close your 25% is to the maximum allowed.
If you're close to it (i.e. over £250K), then it's pretty much a no-brainer to take it out, as there's no more tax free growth to be had.
If you've some way to go then personally I'd leave it where it is for the moment, but pay close attention when it gets close to budget time. It is my theory that anything potentially controversial is deliberately leaked prior to the budget, so you should have time to act if it starts to look like it's actually going to happen.
If you're close to it (i.e. over £250K), then it's pretty much a no-brainer to take it out, as there's no more tax free growth to be had.
If you've some way to go then personally I'd leave it where it is for the moment, but pay close attention when it gets close to budget time. It is my theory that anything potentially controversial is deliberately leaked prior to the budget, so you should have time to act if it starts to look like it's actually going to happen.
This.
I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
Zigster said:
This.
I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
Could be wrong but I spoke to a FA recently (I just turned 55 and am taking my sum to pay off my mortgage) and what he said gave me the impression you're not allowed to "recycle" money like that (bold bit). Make sure you check the rules out fully.I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
Skodillac said:
Zigster said:
This.
I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
Could be wrong but I spoke to a FA recently (I just turned 55 and am taking my sum to pay off my mortgage) and what he said gave me the impression you're not allowed to "recycle" money like that (bold bit). Make sure you check the rules out fully.I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
But I’m not aware there are any restrictions around “recycling” into someone else’s pension. See here for more info:
https://techzone.abrdn.com/public/pensions/tech-gu...
Zigster said:
This.
I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
I'm clearly dumb, as I can't see the point in taking something that is tax free and turning 75% of it into something that is potentially taxable.I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
Rufus Stone said:
Zigster said:
This.
I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
I'm clearly dumb, as I can't see the point in taking something that is tax free and turning 75% of it into something that is potentially taxable.I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
Rufus Stone said:
Zigster said:
This.
I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
I'm clearly dumb, as I can't see the point in taking something that is tax free and turning 75% of it into something that is potentially taxable.I’m comfortably over that limit (Jeremy Hunt’s budget where he “kind of” removed the LTA was the best one ever for me financially). So, when I hit 55 in the not too distant future, I’m taking out the max TFCS and using it for various purposes, including ISAs for my children to fund their university costs and paying some lump sums into my wife’s pension so we get another TFCS from her pension in the future when we “need” it.
Labour might not have tinkered with it last time but I think it’s ripe for reducing in the near future.
So, say I take £10k tax-free from my pension and she pays that into her pension. That becomes a gross contribution to her pension fund of £16.7k. Ignoring future tax-free growth, that would result in a net of 20% tax payment (on 75%) to her of £14.16k.
A 41.6% immediate return.
Zigster said:
I think you’re missing that my wife gets the tax relief (currently 40% for her) on any contributions to her pension fund.
So, say I take £10k tax-free from my pension and she pays that into her pension. That becomes a gross contribution to her pension fund of £16.7k. Ignoring future tax-free growth, that would result in a net of 20% tax payment (on 75%) to her of £14.16k.
A 41.6% immediate return.
A £10,000 contribution would be grossed up to £12,500 and she would get a £2,500 tax refund. So it's cost you a net £7,500.So, say I take £10k tax-free from my pension and she pays that into her pension. That becomes a gross contribution to her pension fund of £16.7k. Ignoring future tax-free growth, that would result in a net of 20% tax payment (on 75%) to her of £14.16k.
A 41.6% immediate return.
The £12,500 can then be taken as £3,125 tax free cash and £9,375 pension less 20% tax of £1,875. A net £10,625.
I guess it's worth it.
Rufus Stone said:
Zigster said:
I think you’re missing that my wife gets the tax relief (currently 40% for her) on any contributions to her pension fund.
So, say I take £10k tax-free from my pension and she pays that into her pension. That becomes a gross contribution to her pension fund of £16.7k. Ignoring future tax-free growth, that would result in a net of 20% tax payment (on 75%) to her of £14.16k.
A 41.6% immediate return.
A £10,000 contribution would be grossed up to £12,500 and she would get a £2,500 tax refund. So it's cost you a net £7,500.So, say I take £10k tax-free from my pension and she pays that into her pension. That becomes a gross contribution to her pension fund of £16.7k. Ignoring future tax-free growth, that would result in a net of 20% tax payment (on 75%) to her of £14.16k.
A 41.6% immediate return.
The £12,500 can then be taken as £3,125 tax free cash and £9,375 pension less 20% tax of £1,875. A net £10,625.
I guess it's worth it.
In your numbers, the £7,500 gets turned into £10,625. That’s still an immediate 41.6% return. So, yeah, I guess it’s worth it.
In practice, we’ll be doing a couple of years’ worth of about £30k each year. So that’s a £25k gain just like that.
Actually, that reminded me that she is chatting to her boss to ask that she can pay the extra via salary sacrifice (ie, she sacrifices a chunk of her salary each month and we supplement our income with my TFCS) so she gets the full tax relief immediately rather than faffing about with tax return/tax codes. And, bonus, she saves the employee NI as well.
Edited by Zigster on Tuesday 18th March 14:36
I took all of it as I worked out it would take me around 16yrs to break even based on no annual growth of the lump sum despite having no need for it. A large TFLS can give you a lot of flexibiltiy early on. That said I'm FS index linked so have perhaps a dfferent perspective on those with invested schemes.
Quick question on this.
My main pension is not huge <£200k because I have other investments (property). I do however have a small pension from when I had a proper job. It's about £5-6k.
I assume that my 25% tax free is the £200k + 5k x 25% is that correct?
If so I think it would be easiest to close the small one and take the balance from the other, if I indeed decide to draw.
omniflow said:
I think it very much depends on how close your 25% is to the maximum allowed.
If you're close to it (i.e. over £250K), then it's pretty much a no-brainer to take it out, as there's no more tax free growth to be had.
If you've some way to go then personally I'd leave it where it is for the moment, but pay close attention when it gets close to budget time. It is my theory that anything potentially controversial is deliberately leaked prior to the budget, so you should have time to act if it starts to look like it's actually going to happen.
Thats not really correct though is it. The TFLS element will continue to grow free of CGT, whilst that growth will be liable to income tax when you take it. There is a balancing act between CGT if you take it out & IT if you leave it in growing tax free. IT needs to be looked at carefully & is not the no-brainer you suggest.If you're close to it (i.e. over £250K), then it's pretty much a no-brainer to take it out, as there's no more tax free growth to be had.
If you've some way to go then personally I'd leave it where it is for the moment, but pay close attention when it gets close to budget time. It is my theory that anything potentially controversial is deliberately leaked prior to the budget, so you should have time to act if it starts to look like it's actually going to happen.
Incidently i took the full TFLS last July. 2 reasons:
- my mortgage deal was expiring & I would need to remortgage at a much higher rate
- didn;t want to risk labour fiddling with this element of pensions,
GT03ROB said:
Thats not really correct though is it. The TFLS element will continue to grow free of CGT, whilst that growth will be liable to income tax when you take it. There is a balancing act between CGT if you take it out & IT if you leave it in growing tax free. IT needs to be looked at carefully & is not the no-brainer you suggest.
Incidently i took the full TFLS last July. 2 reasons:
Hmmmmm.Incidently i took the full TFLS last July. 2 reasons:
- my mortgage deal was expiring & I would need to remortgage at a much higher rate
- didn;t want to risk labour fiddling with this element of pensions,
If you've got £1,000,000+ in your SIPP, which is what would give you the £250,000+ TFLS, then how on earth do you think you're going to get your hands on the remaining £750,000+?
Once you reach State Pension age then that's going to take up pretty much all of your 0% tax band.
The £750,000+ will continue to grow
You're going to struggle to withdraw the £750,000+ in a tax efficient manner (max 20%) before you die.
I think this is the detail that people overlook - once you've got a pot of this size, then you're either not going to spend it all, or you're going to be paying tax at 40% on a chunk of it.
Take the £250,000+ and invest it outside the pension wrapper. Use your ISA allowances (potentially *2) and use your CGT allowances. If the TFLS element wasn't capped, then of course the tax-free growth would be worth having, but it is capped so there will be income tax to pay on all of the tax free growth.
Zio Di Roma said:
Quick question on this.
My main pension is not huge <£200k because I have other investments (property). I do however have a small pension from when I had a proper job. It's about £5-6k.
I assume that my 25% tax free is the £200k + 5k x 25% is that correct?
If so I think it would be easiest to close the small one and take the balance from the other, if I indeed decide to draw.
It depends on what sort of pensions you have:My main pension is not huge <£200k because I have other investments (property). I do however have a small pension from when I had a proper job. It's about £5-6k.
I assume that my 25% tax free is the £200k + 5k x 25% is that correct?
If so I think it would be easiest to close the small one and take the balance from the other, if I indeed decide to draw.
I’m assuming the £200k main pension is defined contribution (or “money purchase”) rather than defined benefit (often a “final salary”) type of pension? If £200k is the fund value then the max cash is 25% of that, or £50k.
With the other pension, is that DC or DB? So is it a fund value of £5k or is it a promise of a pension of £5k per year from retirement until you die? If the former, then the tax-free cash is 25% of that (so £1,250); if the latter, it’s a more complicated calculation but you might expect to be able to give up around £1.25k pa in return for a one-off lump sum of around £25k. Th actual figures depend on some pension scheme specific detail which we don’t have.
You would treat the two pensions separately for this purpose: you can’t take all the cash from one of them. You might be able to transfer the smaller pension to the bigger one to make things easier. Again, it depends on what sort of pension the smaller one is.
omniflow said:
Hmmmmm.
If you've got £1,000,000+ in your SIPP, which is what would give you the £250,000+ TFLS, then how on earth do you think you're going to get your hands on the remaining £750,000+?
Once you reach State Pension age then that's going to take up pretty much all of your 0% tax band.
The £750,000+ will continue to grow
You're going to struggle to withdraw the £750,000+ in a tax efficient manner (max 20%) before you die.
I think this is the detail that people overlook - once you've got a pot of this size, then you're either not going to spend it all, or you're going to be paying tax at 40% on a chunk of it.
Take the £250,000+ and invest it outside the pension wrapper. Use your ISA allowances (potentially *2) and use your CGT allowances. If the TFLS element wasn't capped, then of course the tax-free growth would be worth having, but it is capped so there will be income tax to pay on all of the tax free growth.
Exactly this!If you've got £1,000,000+ in your SIPP, which is what would give you the £250,000+ TFLS, then how on earth do you think you're going to get your hands on the remaining £750,000+?
Once you reach State Pension age then that's going to take up pretty much all of your 0% tax band.
The £750,000+ will continue to grow
You're going to struggle to withdraw the £750,000+ in a tax efficient manner (max 20%) before you die.
I think this is the detail that people overlook - once you've got a pot of this size, then you're either not going to spend it all, or you're going to be paying tax at 40% on a chunk of it.
Take the £250,000+ and invest it outside the pension wrapper. Use your ISA allowances (potentially *2) and use your CGT allowances. If the TFLS element wasn't capped, then of course the tax-free growth would be worth having, but it is capped so there will be income tax to pay on all of the tax free growth.
You need to be able to do something tax-effective with the TFLS but, assuming you can (eg, paying off mortgage, paying into ISAs, paying into spouse’s pension) then, if you are up against the LTA, it is more efficient to take the max TFLS as soon as you can. The more you leave in your pension, the more will subsequently be subject to income tax at at least 20% and quite possibly at 40%. Back when there was an IHT loophole, it might have made sense (from a tax perspective) to leave money in your pension but not any more.
Zigster said:
Zio Di Roma said:
Quick question on this.
My main pension is not huge <£200k because I have other investments (property). I do however have a small pension from when I had a proper job. It's about £5-6k.
I assume that my 25% tax free is the £200k + 5k x 25% is that correct?
If so I think it would be easiest to close the small one and take the balance from the other, if I indeed decide to draw.
It depends on what sort of pensions you have:My main pension is not huge <£200k because I have other investments (property). I do however have a small pension from when I had a proper job. It's about £5-6k.
I assume that my 25% tax free is the £200k + 5k x 25% is that correct?
If so I think it would be easiest to close the small one and take the balance from the other, if I indeed decide to draw.
I’m assuming the £200k main pension is defined contribution (or “money purchase”) rather than defined benefit (often a “final salary”) type of pension? If £200k is the fund value then the max cash is 25% of that, or £50k.
With the other pension, is that DC or DB? So is it a fund value of £5k or is it a promise of a pension of £5k per year from retirement until you die? If the former, then the tax-free cash is 25% of that (so £1,250); if the latter, it’s a more complicated calculation but you might expect to be able to give up around £1.25k pa in return for a one-off lump sum of around £25k. Th actual figures depend on some pension scheme specific detail which we don’t have.
You would treat the two pensions separately for this purpose: you can’t take all the cash from one of them. You might be able to transfer the smaller pension to the bigger one to make things easier. Again, it depends on what sort of pension the smaller one is.
The small one; I have no clue. It’s an old BT pension from the 80s.
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