Taking pension lump sum now - thoughts?
Discussion
Up until this year, advice was that your pension should be the last asset to access for retirement income. My original plan was to die with most, if not all, of my SIPP pension intact.
With the new IHT changes and marginal rates of tax on pensions (after death inc spouse) at rates of 64%-90%, they've suddenly become the most taxed vehicle. Therefore it seems to make sense to now access a pension as the first asset class, rather than the last.
My concern is that a bit like the increase in CGT rate has actually reduced the government CGT take, there will be a large number of people like me now accessing their pension earlier than they would do, and therefore we'll have pension funds reporting very large amounts of tax free lump sums being taken, and a consequential reaction by Rachel to reduce the tax free lump sum allowance.
So my thinking is to take the max tax free lump sum now, while it's there to be had, and then begin drawdown on the pension pot with a plan to empty it by the time I'm 80-ish (24 years from now). My wife and I have many sources of capital and income, so this is just a juggling of access priorities on them. The tax free lump sum would be bed&breakfasted into ISA allowances over a couple of years, and/or go towards normal costs of living that we would otherwise have to realise investments to fund.
Anybody else thinking similar?
TL;DR drain pension pot dry over a period of time, rather than die with it as old advice would have it?
With the new IHT changes and marginal rates of tax on pensions (after death inc spouse) at rates of 64%-90%, they've suddenly become the most taxed vehicle. Therefore it seems to make sense to now access a pension as the first asset class, rather than the last.
My concern is that a bit like the increase in CGT rate has actually reduced the government CGT take, there will be a large number of people like me now accessing their pension earlier than they would do, and therefore we'll have pension funds reporting very large amounts of tax free lump sums being taken, and a consequential reaction by Rachel to reduce the tax free lump sum allowance.
So my thinking is to take the max tax free lump sum now, while it's there to be had, and then begin drawdown on the pension pot with a plan to empty it by the time I'm 80-ish (24 years from now). My wife and I have many sources of capital and income, so this is just a juggling of access priorities on them. The tax free lump sum would be bed&breakfasted into ISA allowances over a couple of years, and/or go towards normal costs of living that we would otherwise have to realise investments to fund.
Anybody else thinking similar?
TL;DR drain pension pot dry over a period of time, rather than die with it as old advice would have it?
55palfers said:
I was considering this course of action too.
Might sit on my hands until after the lovely Rachel's next budget though
Might that be too late, if she announces an immediate slashing of the TFLS allowance?Might sit on my hands until after the lovely Rachel's next budget though
There's no good news for government finances right now, I can see her tinkering more and more with the allowances that affect only the "broadest shoulders".
Sheepshanks said:
Anyone discussed with an IFA? Mine is kind of saying he can't professionally recommend a course of action based on future changes until they've happened.
I suppose there's also the possibly they might be reversed by another party, but I can't see that happening.
My father has recently spoken with his IFA - He's now looking at taking the TFLS before October, as well as investigating the "Gifts from surplus income" approach to reduce the size of the pension pot - Both were brought up by the IFA as things to now consider doing. I suppose there's also the possibly they might be reversed by another party, but I can't see that happening.
I think it makes some sense to take the TFLS now, but it's not without some risk - i.e. you might prefer to wait do do this until after age 75 or closer to April '27, and you might want to consider whether TFLS vs 25% TF per year is more efficient for you.
But if your problem is that you have a large pension pot that you didn't intend on spending, then taking 268K out of it to "guarantee" that piece doesn't get double taxed is probably a good move imho.
PhilboSE said:
Up until this year, advice was that your pension should be the last asset to access for retirement income
Advice from anyone who profited from your pension staying where it was...Drawing down 4 - 5 % is unlikely to drain anyone's pot and doesn't mean leaving the pension alone
If your pension pot currently stands at £1,073,000 or more, then there is zero downside in taking the entire TFLS now (well, not quite the entire TFLS, leave a couple of quid behind so you don't accidentally dip a toe into the taxable part).
What remains in your pension pot will easily provide £50270 / year until the state pension kicks in, and then ~£39K / year after that. Anything above that means you're a 40% tax payer, so any "tax free growth" that your TFLS would have "enjoyed" had you left it in your SIPP is going to be taxed by at least 40% when you wanted to spend it.
You will pay tax on some of the growth of the TFLS when it's outside of your pension wrapper, but not on all of it. Depending on your marital status and other considerations it could be as little as 7 years before the whole lot is inside an ISA wrapper.
What remains in your pension pot will easily provide £50270 / year until the state pension kicks in, and then ~£39K / year after that. Anything above that means you're a 40% tax payer, so any "tax free growth" that your TFLS would have "enjoyed" had you left it in your SIPP is going to be taxed by at least 40% when you wanted to spend it.
You will pay tax on some of the growth of the TFLS when it's outside of your pension wrapper, but not on all of it. Depending on your marital status and other considerations it could be as little as 7 years before the whole lot is inside an ISA wrapper.
omniflow said:
If your pension pot currently stands at £1,073,000 or more, then there is zero downside in taking the entire TFLS now (well, not quite the entire TFLS, leave a couple of quid behind so you don't accidentally dip a toe into the taxable part).
What remains in your pension pot will easily provide £50270 / year until the state pension kicks in, and then ~£39K / year after that. Anything above that means you're a 40% tax payer, so any "tax free growth" that your TFLS would have "enjoyed" had you left it in your SIPP is going to be taxed by at least 40% when you wanted to spend it.
You will pay tax on some of the growth of the TFLS when it's outside of your pension wrapper, but not on all of it. Depending on your marital status and other considerations it could be as little as 7 years before the whole lot is inside an ISA wrapper.
And significantly less time if you have children who don't use their ISA allowance.What remains in your pension pot will easily provide £50270 / year until the state pension kicks in, and then ~£39K / year after that. Anything above that means you're a 40% tax payer, so any "tax free growth" that your TFLS would have "enjoyed" had you left it in your SIPP is going to be taxed by at least 40% when you wanted to spend it.
You will pay tax on some of the growth of the TFLS when it's outside of your pension wrapper, but not on all of it. Depending on your marital status and other considerations it could be as little as 7 years before the whole lot is inside an ISA wrapper.
omniflow said:
If your pension pot currently stands at £1,073,000 or more, then there is zero downside in taking the entire TFLS now (well, not quite the entire TFLS, leave a couple of quid behind so you don't accidentally dip a toe into the taxable part).
What remains in your pension pot will easily provide £50270 / year until the state pension kicks in, and then ~£39K / year after that. Anything above that means you're a 40% tax payer, so any "tax free growth" that your TFLS would have "enjoyed" had you left it in your SIPP is going to be taxed by at least 40% when you wanted to spend it.
You will pay tax on some of the growth of the TFLS when it's outside of your pension wrapper, but not on all of it. Depending on your marital status and other considerations it could be as little as 7 years before the whole lot is inside an ISA wrapper.
Who are you and how have you accessed my SIPP? What remains in your pension pot will easily provide £50270 / year until the state pension kicks in, and then ~£39K / year after that. Anything above that means you're a 40% tax payer, so any "tax free growth" that your TFLS would have "enjoyed" had you left it in your SIPP is going to be taxed by at least 40% when you wanted to spend it.
You will pay tax on some of the growth of the TFLS when it's outside of your pension wrapper, but not on all of it. Depending on your marital status and other considerations it could be as little as 7 years before the whole lot is inside an ISA wrapper.
Situation pretty much as you describe above; SIPP valuation been bouncing a bit just under the old LTA for a few years (up and down with Ukraine, Trump, Rachel etc.), so I'd planned on taking the £250k TFLS and £50k in lumps thereafter. 5% growth on residual funds has the pension pot running out in 27 years; 7% growth has the pot pretty much standing still. We can stuff 5 ISA allowances (as we currently do from other sources) so it will all go into tax-free wrappers sooner or later.
Thanks all, seems to be a general consensus that taking the TFLS while it's there to be had is definitely a valid consideration.
fat80b said:
investigating the "Gifts from surplus income" approach to reduce the size of the pension pot - Both were brought up by the IFA as things to now consider doing.
Yes, although the whole thing has to be "normal". You can't just grab a big hit of additional income and give it away. You also need to have enough left to maintain your normal standard of living for a decent period of time. You can't give away all your income and live on capital.Personally I prefer the 7-year rule. At least you know that once the gift has been made Rachel Reeves can't change the rules on that gift.
I keep going on about this but I do think a tax on lifetime gifts may look attractive to Ms Reeves and she can impose that immediately from budget day.
Panamax said:
Yes, although the whole thing has to be "normal". You can't just grab a big hit of additional income and give it away. You also need to have enough left to maintain your normal standard of living for a decent period of time. You can't give away all your income and live on capital.
Personally I prefer the 7-year rule. At least you know that once the gift has been made Rachel Reeves can't change the rules on that gift.
I keep going on about this but I do think a tax on lifetime gifts may look attractive to Ms Reeves and she can impose that immediately from budget day.
Whilst I would put nothing past her not sure in the real world how that would be policed ?Personally I prefer the 7-year rule. At least you know that once the gift has been made Rachel Reeves can't change the rules on that gift.
I keep going on about this but I do think a tax on lifetime gifts may look attractive to Ms Reeves and she can impose that immediately from budget day.
Taxing " gifts " might actually be a step too far !
Fwiw I took the entirety of the balance of my TFC( I I had previously had a couple of years of dd using 25% of my chosen total) just before Labour won the election given I did not want to take the risk that they either outlawed it or more likely reduced it.
The money was as early inheritances for my children's house purchase funds.
I was previously lucky enough to have FP2014 so was a decent sum to risk.
At the time my FA had 9 clients contact him of which a third elected to take the TFC.
The money was as early inheritances for my children's house purchase funds.
I was previously lucky enough to have FP2014 so was a decent sum to risk.
At the time my FA had 9 clients contact him of which a third elected to take the TFC.
alscar said:
Whilst I would put nothing past her not sure in the real world how that would be policed ?
Taxing " gifts " might actually be a step too far !
It's done in France.Taxing " gifts " might actually be a step too far !
I also wonder how it would be policed. I buy my kids cars. If I don't highlight it, does anyone know?
My IFA hummed and harred about whether it might be OK as I've done it regularly so maybe it counts as a pattern.
One of them is just off to DisneyWorld with her little family. I offered to pay the balance - who would know? Anyway she wouldn't hear of it.
alscar said:
Taxing " gifts " might actually be a step too far !
Back when dinosaurs roamed the earth there was a tax called CTT - or Capital Transfer Tax. It was the immediate predecessor of IHT.Essentially CTT was a gift tax with a rate of 20% on lifetime gifts, 40% on inheritance and a sliding scale upon death within three years after a lifetime gift.
As regards policing collection of the tax, it was no harder than CGT.
Wikipedia: "In the United Kingdom, Inheritance Tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing Capital Transfer Tax. The UK has the fourth highest inheritance tax rate in the world."
Panamax said:
Back when dinosaurs roamed the earth there was a tax called CTT - or Capital Transfer Tax. It was the immediate predecessor of IHT.
Essentially CTT was a gift tax with a rate of 20% on lifetime gifts, 40% on inheritance and a sliding scale upon death within three years after a lifetime gift.
As regards policing collection of the tax, it was no harder than CGT.
Wikipedia: "In the United Kingdom, Inheritance Tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing Capital Transfer Tax. The UK has the fourth highest inheritance tax rate in the world."
Interesting although still not sure how me giving gifts to my children or sheep paying for their cars or holidays would necessarily be able to be policed though - easily or otherwise ?Essentially CTT was a gift tax with a rate of 20% on lifetime gifts, 40% on inheritance and a sliding scale upon death within three years after a lifetime gift.
As regards policing collection of the tax, it was no harder than CGT.
Wikipedia: "In the United Kingdom, Inheritance Tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing Capital Transfer Tax. The UK has the fourth highest inheritance tax rate in the world."
Maybe I’m being extremely naive but it seems to me that it’s Executor’s when dealing with a deceased estate first start to ask these questions.
HMRC don’t even have forms for gifts it seems and when I have asked my FA previously all his advice was “ you keep a record “.
However having touched IHT heavily last year I don’t see this happening.
I’m leaning much more towards a simple increase in income tax given election pledges are now worthless and the sums can be more readily justified and demonstrated.
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