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?

I can confirm that we cannot recommend cashing in money from an IHT sheltered wrapper

That's an entirely different question, though. What an adviser can recommend has no specific link to what a pension holder is allowed to do. To take a non financial example, a doctor couldn't recommend I become a professional whisky tester, but that doesn't mean I can't get a job as one.

UK tax if living abroad: many countries have double taxation treaties. Details vary but usually you only pay tax in 1 country, in some cases the country with a higher tax rate might require you to pay the difference rather than the full amount.

UK tax residency for UK nationals is slightly more complex than the 'in the country for half the year' that a lot of places use. They can look at ties to the country such as property and number of visits as well as total time, and last time I looked the base number for determining if you are tax resident was quite short. I think it may have been only 90 days.

I would not do this. Labour has ruled out that change.

I wasn't aware that Labour had ruled anything in or out on pensions - but just said we need to wait for the autumn statement

I think a better analogy would be for the doctor to say he can’t amputate your leg just in case you are worried it might get an infection (without one being present) and you deciding to cut your leg off yourself.

Again, we are liable for our advice and will not risk a potential claim in the hundreds of thousands.

@messybutfun again it's the clients money and your suitability letter should tell them the reasons why they have done this and the positives and negatives.

That’s not a good analogy at all - because an amputation definitely means that your mobility in the future is limited. But taking tax free money you are entitled to out of your pension might give a better outcome than if left inside, or it might give a worse outcome. It might improve someone’s mental wellbeing. It might lead to a whole new world for an individual. It’s dependant on what you do with the money, how the tax and economic environment changes and how long you live.

So if this is how mass financial market advisors are treating people then we have truly dumbed down to the lowest common denominator. The regulators and financial advisors are going far beyond what’s reasonable. The tax environment allows an individual to take 25% (up to £268k). It doesn’t not require anyone to have a reason. The pension freedom legislation was specifically enacted to give people more control over their, yes their, pension.

And let’s be clear, the financial services industry doesn’t exactly have great reputation for putting customers interests first - so over compensating for past failings in this way by is only going to lead to future claims when things go the other way. I can see it now:

Client: I’d like to take my £268k tax free sum please - please send it to my account
Advisor: oh really. Why? What are you doing with it
Client: none of your business - probably stick some in my ISA, buy a chunk of gold and put the rest in bonds, if there’s any left when I’m back from Vegas
Advisor: oh no, you can’t do that. Too risky, and tax inefficient. Try again
Advisor: terribly sorry - there’s been a global meltdown and your £1.3m pension fund is currently worth £500k. But don’t worry, it’ll recover. Investing is a long term game. We kept £100k in cash - suggest you spend less for a while
Client: Hang on, if you’d give me my £268k then my ISA would have only lost £12k, my gold would have doubled and my government bonds would have been worth more than the poxy funds you’re managing. You’ve cost me £200k. See you in court.

The IHT benefit falls away at 75 anyway, so thats no reason to prevent withdrawal. The tax shelter inside a pension might be of benefit to some, but in itself is not a reason to prevent withdrawal. After all, IHT, CGT and income tax rules are likely to change and despite their claims, financial advisors are no better informed than the general public on whether the changes will help or hinder them. Whether inside or outside a pension, assuming you live to be older than 75, it’ll be taxed one way or another for most people. If you’re going to die before 75 even more reason to get your hands on the money!

I assume the removal of the tax free 25% couldn't be put in place on the day it was announced. Surely when millions of people aged 55 and over remove their 25% to beat a deadline it would cause big financial market stress?

Rachel Reeves won't want to join the Liz Truss club 😀

Pretty sure that isn’t how it works. You can take the 25% lump sum without triggering the £10k a year rules. https://www.ii.co.uk/pensions/contributions/mpaa-triggers

I have to say that I agree with you.....and I'm a financial.adviser !

Going back 30 years I wonder what the fall out would have been if someone had wanted to transfer their Mirror pension and were told they couldn't, only then to find out Maxwell and defrauded the scheme and it was worthless.

I'm of the mind that I am there to advise my clients of what they can do within the legislation, to explain different tax benefits / drawbacks and to make sure they are in full knowledge of the facts. What they then do is up to them & I should be allowed to assist them on that.

@Tryingtokeepgoing
The IHT exemption does not fall away at 75, pensions are currently outside of a person’s estate at any time - it’s very basic concept and you shouldn’t need a financial adviser to tell you that - but go on keep telling me you know more than me

Also, if you are likely to die before 75 and you don’t need the money, you can leave it to your beneficiaries free of income tax as well, currently

And one more time, if you are worried about losing money and want to be in cash, I can move your pension funds into cash so they don’t drop by a third next time some idiot crashes the markets.

I didn’t say that the IHT exemption falls away. I said the benefit of it falls away. DC pension funds are subject to income tax at the recipients marginal rate when drawn down following a transfer on death post 75, so from a tax perspective the cost for most people is the same, if not more, as if it had been subject to IHT. If you’re arguing that’s not the case (a) that’s semantics on the name of the tax, and (b) I’m glad I don’t pay you for advice.

Though, in general, financial advisors are never as well off as those they advise…which tells most people all they need to know I think ;)

The original post referred to “very high earners” which is not somebody on 95K (even our tax brackets accept that.)

You said ‘the IHT benefit falls away at 75’ - it’s very clearly wrong.

The fact that a beneficiary will be taxed at their marginal rates IF they take money out, doesn’t mean that they will end up paying tax on it. Most beneficiaries have no need to take all the money out at once so can avoid 40% tax.

My DH retires in September and he's already sent off his request to take 25 percent lump sum tax free and is very relieved he'll get it before the end of October when RR dies her review.

Not all pensioners are like your Mum with over £200k in the bank. Some only have full state pension so £11,502 pa. They are £3 above being able to claim Pension Credit. It would have been fairer to say it's a capped for pensioners living off more than £23,795 which is equal to minimum wage working 40 hours.

I can think of the introduction of government subsidised childcare for over 2 year olds. That was very welcome.

That really would not save much money though. £23,795 goes a lot further in the homes of many retired people. A lot of these people have their mortgage paid off and are no longer responsible for children.

Why should £23,795 go much further in the home of retired people? That is such a flippant statement. Older people have to pay council tax, electric, gas, water rates, food, going out, holidays and hobbies and socialising too or do you think they should all stay in and not go on holiday? They may not be responsible for young DC but many like to treat their DGC. £23,795 is what a single person working for minimum wage with no kids earns. If they had kids they'd get benefit top ups. Why should a single pensioner living alone be worse off than those people? As you get older it often costs more not less as older people often feel the cold more.

You were talking about comparing to the minimum wage. Holidays, hobbies that cost money and treating grandchildren are things most people on the minimum wage usually can’t afford.

My mother manages on less than £23,795. Yes as she is housebound and can no longer have holidays but out of this she pays for a weekly cleaner and a care visit once a day. She has savings but doesn’t need to go into them.

I personally feel sorry for people who earn just above the limit to get fuel allowance but not pensioners who can afford it, including me.

This is getting quite a long way from the Original post.

I was only giving one example of why I agree there should be a cut off. I know what the cut off is.

A big difference is housing costs. An OAP who is still renting will struggle unless eligible for help with rent payments. An OAP who owns their own home and has neither mortgage nor rent to pay is usually in a far better position than someone on minimum wage with housing costs.

You don’t trigger the MPAA (£10k contribution limit) if you take all or some of your 25% tax free cash

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

I’ve taken some, but not all of my allowance. Overpaid the mortgage, put some in ISAs. I was testing how easily it can be done and surprisingly it was, in my case. The Telegraph is reporting today that the industry is struggling with a lump sum stampede amid fears over a tax raid. I doubt changes will happen quickly.

Well it appears all the right wing press fear mongering on pensions was just that