Pensions - take 25% now, before Labour can tax it?

[missinglalaland]

I can see Labour are preparing the ground for tax rises. With promises not to raise income tax or national insurance, I think they will have to come after pensions.

My DH is 55, and still working with no plans to retire. He has not saved enough to hit the maximum tax free ceiling on a lump sum.

Should he take out 25% of what he dies have and crystalise that pot? Bung the money in ISA’s and against the mortgage, and keep saving into his pension?

Idea is to do it now before the October budget, when the tax free lump sum could disappear.

I cannot see any downside. What might I be missing?

The problem is that no matter what the government do to raise money - constantly cutting stuff and raising taxes wherever they can - nothing ever gets better does it? I wouldn't mind paying more tax if I thought it would actually improve things, but it never does does it? Can anyone think of something that has actually improved over the last 30 years?

Everything is much more expensive now, the NHS is up shit creek and it's a black hole no one could fill, roads are falling apart, there's not enough housing but building huge numbers of houses means green spaces and fields previously used to farm and produce food are being destroyed, water quality is awful in rivers, public transport costs are really high, council tax goes up more and more every year to pay for social care, the police and other public services are a disaster, universities are at risk of going bust, there aren't enough teachers or dentists or doctors, libraries are hardly ever open and when they are it's due to volunteers, there aren't enough prisons so they just let people go early, the list goes on and on.,,,,

I'm just tired of things getting cut and taxes going up all the time and nothing ever getting better. I have zero hope that this government will be any different because no one tackles the root causes of anything - they just find short term sticking plasters to try to make it look like they're holding everything together while they're in power.

That is disingenuous and you know it.

Individuals absolutely are able to inherit a million tax free ! It is extremely common here in the south east where property values are extremely high.

One spouse dies and the other inherits through mirror wills. The first spouses IHT allowance and main residence allowance isn't used and goes to the surviving spouse . When that spouse dies the child will be able to utilise 2 x IHT @ £325k (650k) plus 2x main residence allowance @ 175k (350k) a nice round £1m. Tax free.

I have no issue with the new government lowering the IHT or getting rid of the ability to inherit a dead spouse's unused allowance. This country's public services have been run in to the ground by a bunch of corrupt self serving grifters . The only way to get our public services back up and running again is to raise taxes and inheritance tax seems ideal.

I am in the position of the 'child' above and will inherit my mothers just over 1 million pound house tax free. This is completely unearned and only made possible by the good jobs my parents had as they were able to go to university free of charge and then buy property on a single salary so child care was never required. Leaving them very financially secure . I didn't contribute to that in anyway - so it is only right that I pay a proportion in tax for my good fortune. So that the wealth is spread around through well funded public services.

it's more usual for people to be married than not.

Is it? It's possiblly more usual for people to get married than not. But some people remain single, a lot of.people are in unmarried relationships, and almost half of marriages end in divorce. So it seems quite feasible that being married at the time.of death is the minority position.

The spouse having no money for IHT and being turfed out of their house is an easy fix though. Keep thr ability to transfer assets tax free to a spouse, but remove the ability to transfer the allowance.

As for taxes going up and everything getting worse- all the examples given aren't last-30 years issues; they're last-15-years issues. All parties are not the same.

I payed the 40% due on the part of the estate it was due on. As the executor it's not within my power to take other people's money (I am not the only beneficiary, and one is a minor) to seek to pay a tax that isn't due.

While I agree with higher taxes, as do many people, I've never met anyone who voluntarily pays tax (though I know it is possible to).

And of course it "suits me" that my mother died. I was over the fucking moon.

I've checked, it's actually just fallen to under 50% of (adult) people married or in civil partnerships.

I agree re the house stuff - since the allowance only became transferrable in my lifetime, and the residence allowance too, there was a way they did it previously.

Ref "nothing ever getting better". Well - lots of things got better in the late 90's and early 2000's in my view. And under the Tories my ability to save more in my pension got better, so there is that......

Until something is announced, this is all speculation. I can’t see the pension tax relief of a flat 30% will happen as it the administration will be too challenging- it’s been an idea floating around HMT for at least a decade and no-one’s ever gone for it even in peak austerity. I could see them tightening up the £60k annual allowance for pensions by restricting it to db pensions only- the only reason it was raised was to stop senior doctors having a tax charge.

At the moment, you’ve got a situation where very high earners can put £60k into a pension annually and then potentially pass on huge pension pots inheritance tax free.

I could see inheritance tax on pensions coming in- it is currently used as a bit of a dodge for passing down wealth and doesn’t seem that fair tbh. I could also see inheritance tax thresholds coming down- it’s hard to argue that allowing £1m between married couples is really that fair.

I think they were right to means test winter fuel in principle but I think they’ve set the threshold too low and I’m sure this will lead to some problems this winter for people above the cut-off.

I could see them tightening up the £60k annual allowance for pensions by restricting it to db pensions only- the only reason it was raised was to stop senior doctors having a tax charge.

I thought it was the lifetime allowance they removed for that reason?

Totally agree re inheritance of pensions. It seems odd to me. Obviously it's only dc ones anyway.

Some people used to change their DB pensions to DC, there was a time when you could get a good deal on doing this, probably did it so they could pass the pension down free of IT

Pensions should definitely be taxed as part of the deceaseds estate.

I probably didn't word that right, they cashed in the value of the DB pension so it was like a DC one where you have a large lump of money

That's the second time this misleading info has been presented on this thread.

There is a limit on how much you can pay into pensions and receive tax relief (called the money purchase annual allowance). But that only kicks in after you have flexibly accessed pension benefits, mainly drawn anything taxed as income. If you just take the tax-free lump sum you will NOT be subject to the money purchase annual allowance. You will continue to be subject to the standard annual allowance on all contributions though, which is usually £60k pa (less if you're a high earner) and restricted by your pensionable earnings if lower than the AA.

In short, taking a tax-free lump sum does NOT change how much you can contribute to your pensions in the future under current rules. But it would if you withdrew taxable income in excess of the tax-free lump sum.

"My beneficiaries won't get that, because I'm unmarried with no kids"

Here we go - some people do have kids and hate the idea of them losing 40% of estates accumulated out of already taxed earning. And yes, I don't want mine to be redistributed to Labour blueprint state like in Wales

Next election will be very interesting

I think they were right to means test winter fuel in principle but I think they’ve set the threshold too low and I’m sure this will lead to some problems this winter for people above the cut-off.

The problem.is the cutt-off needs to be tied to an existing known quantity, such as receiving a specific benefit. If they means tested separately that would cost money - probably more than they'd save - and a lot of people who need it wouldn't apply. They could maybe link it to tax thresholds as an alternative - not sure how easy that woukd be to administer, but would give a little more flexibility.

I thought it was the lifetime allowance they removed for that reason?

It was both. In a DB pension, your annual allowance use is calculated on pension growth - not on what is paid in like a DB pension. The formula means that with the £40k annual allowance your pension only had to increase by about £2.5k to exceed it.

And because of a quirk of the dates used in the calculation, NHS pension growth calculations used to include the inflation uplift as well as salary factors etc. (They have fixed the inflation bit now.) So people had no control over their annual allowance growth and a relatively modest payrise in a high inflation year could end up in a situation where the tax charge on their pension wiped out the payrise.

The lifetime allowance and the tapering of the annual allowance for people earning more than £240k could affect senior consultants, but the basic annual allowance trap was catching some staff much further down the payscale. And they were paying tax now on money they wouldn't actually get for another 20 years.

You don't lose 40% of estates. This is pure hyperbole. As stated, a married couple who passed on a family home to offspring have ONE MILLION POUNDS before they pay a penny in tax. Then 60% of anything else.

A million not enough for your kids? Maybe bring them up to be a bit less grabbing?

IHT is only paid by a tiny number of people but the DailyFail likes to tell everyone they’ll have to pay it.

I know, I've made this point several times on this thread.

@nearlylovemyusername Here we go - some people do have kids and hate the idea of them losing 40% of estates accumulated out of already taxed earning. And yes, I don't want mine to be redistributed to Labour blueprint state like in Wales

Also BS that it’s already taxed earnings. The majority of estates are made up of wealth from property, the gains on which gave soared for anyone over 50 and all of which are completely untaxed. I think for this reason either IHT should be abolished or CGT should be introduced on primary residence.

Back to the OP's question........

The FCA have a problem with people accessing the 25% tax-free allowance for no good reason. If you go through an advisor expect to be told that you can't do it unless you are paying off high interest debt or have a specific need such as DC's wedding or helping with a house deposit.

It is very much frowned upon to simply take it out & put it elsewhere, especially if the elsewhere is a simple bank deposit account. You might get away with putting £20k into an ISA (each) but other than that be prepared to be told you can not be trusted with your own money.

Not for a DC scheme if you only take the tax free lump sum. It’s only when you stat to draw an income that the lower limit kicks in, assuming you weren’t subject to tapering of the annual allowance in the first place which would have reduced it anyway.

But doesn’t that just mean any changes, if they are to raise much money, will mean bringing more estates into the IHT scope by lowering limits? I can imagine that lowering the IHT limit to something like the average house value would be a Labour thing to do, as well as trying to limit gifts during a persons lifetime. Though how they’d actually track that I have no idea…

“At the moment, you’ve got a situation where very high earners can put £60k into a pension annually and then potentially pass on huge pension pots inheritance tax free.”

This is misleading. For the highest earners the tax free element of this is tapered down to 10k per year. Anything more is taxed at 45%. And then 75% of it is taxed again on the way out (certainly when alive) subject to usual tax thresholds. So even the current policy actively disincentivises people to save much into a pension when top earners.

You’d be earning £360k for that to be the case, which is a tiny minority of people.

I’m not so confident that any changes won’t affect entitlements already built up. When the drawdown age increases to 57 the amounts we paid in before this changed are not going to be ringfenced and allowed to be accessed at 55 are they?! If governments want to incentivise saving for retirement they really need to stop messing with the rules.

@Smigglewriggle if you google protected pension age you can see that, where you were a member of a pension scheme in 2021, there are rights that still allow you to take your benefit at 55. As a general rule pension changes generally take effect for the future. There is a lot of older pensions case law which establishes this principle. The lifetime allowances were a bit of an anomaly. But even they allowed you to stop growing pension benefits and keep the rights you have.

I agree they need to stop messing around with pensions as it discourages people from saving.

That’s shocking!

who decides how you get to spend your own money!