Tom
There is no-one I more enjoy debating pensions with than Tom McPhail.
I have recently applied to take my tax free cash early from my DC pot. I’m nearly 63 and in 2 years I have to pay off a £300k mortgage. If I crystallise today, I get £200k from an £800k pot (lucky me but it took a lifetime’s saving). If the Chancellor does nothing on budget day – October 30th – I will have lost the tax-free roll up on my money for a reduction of debt repayments at base +2. I will also have lost my annual allowance.
But if the Tax-Free- Cash sum is cut to £100k, as widely predicted, I will have to pay £40k more in tax to release my £200k and possibly £45k. It’s a dilemma. Can I afford to take the risk- on balance I’ve advised myself I can’t. Many other people in my situation have to face the same risk. It’s a rich man’s problem , I know, but there is pain- and there’s unnecessary pain.
So I have decided to put a contrary position to Tom’s, as posted on X
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https://t.co/w2Q7fiT1rK Is this holy cow – the tax-free cash sum – in Overton’s window? https://t.co/EjiDvDiBr7
— Henry Tapper (@henryhtapper) September 12, 2024
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Many have liked and admired Tom’s brilliant logic, Jonathan Purle among them
Well reasoned thread here.
I suspect the Chancellor just walked into a trap set by Treasury officials over the WFA, so it’s an open question whether she does it again with pensions taxation or is now alive to risks. https://t.co/rEZu9mB986
— Jonathan Purle (@jpurle) September 12, 2024
Here is the rest of Tom’s thread.
a younger Tom
Postscript
I will repeat my point made in my reply to your Overton window blog post on taxing retirement lump sum payments: https://henrytapper.com/2024/09/13/pension-tax-free-cash-why-its-in-overtons-window/
You note that half of those that would be affected would be public sector workers who have no option to reduce their lump sum payment to increase their annual pension. For those in their later employment life, the tax free lump is likely to have figured largely in their financial planning (and those on higher salaries are more likely to have done financial planning) particularly to use the lump sum to pay off mortgages. The restriction of the tax free element and hence the overall lump sum is likely to result in a double hit with continuing mortgage payments reducing the available post retirement pensions.
Will the Government really want to take on the public sector workers in this way?
Remember a DB pension is deferred remuneration from the employer!
I suspect that as with WFA, clipping the TFC would be unpopular for the well pensioned as well as those with decent DC pots. This Government, unlike the previous one, doesn’t seem particularly afraid of its backbenchers.
The 25% is unlikely to change as the policy makers value this
For themselves.
Your gamble is on the investment performance. I attended a discussion earlier in August cutting to the conclusions of a very lengthy presentation.
Over the next 6 months the US bond market under Trump or Harris, the debt will soar and the 10Y will have to adjust up towards 5.0%. If the fiscal stimulus overheats the economy once more, the 2Y will rise to 5.0% In 2026-27.
The bond market rally may last for a few months, approximately until Mar 2025. All bond yields would fall in this rally with the yield curve becoming flat and inverted relative to the fed funds rate that would drop around 1.5% in this time frame. From then on, yields will rise with the yield curve becoming upward-sloping, but the exact path is still unknown.
Be careful that the £800,000 does not decline in value.
Lady Lucy plus £200,000 today could be a better solution to sleep at night
Just withdrawing TFC or buying a lifetime annuity does not change the applicable annual allowance. MPAA/AAA would only be triggered when the pension is accessed flexibly, eh taking taxable money from a drawdown fund.
I do wonder how much long term financial planning is actually done and how much of that is useful.
I tried a bit 15 years ago when I started my main pension. That was especially about the choice I had between size of the PCLS and the size of the pension. I even included a bit of scenario analysis. What a waste of time all that was. Over the years, all sorts of things have changed in a way that some of them couldn’t even have been envisaged then never mind quantified.
It is far easier to take advantage of the rules as they exist today for short-term needs than to hope to get it right for the long term.
There has been at least one speculative article about tax-free cash being reduced or abolished in the run-up to every fiscal event since I first started working in pensions (in the last century). They’ve all been baseless. The closest we got was reductions in the LTA and freezing the amount in nominal terms (which seems likely to be the position for many years to come).
Similar to economists and recessions – pension professionals have predicted 50 of the last zero major restrictions to tax-free cash.
It seems incredibly unlikely that this is where the government will seek to raise significant funds from taxpayers – it would be completely contrary to the approach to taxation policy of picking the maximum number of goose feathers with the minimum amount of goose hissing.
Even if the government entertained political suicide, in practice any significant restriction would surely have to come with a protection regime (such as when the LTA was reduced and for the same reasons). Otherwise there would be incredibly unfair outcomes and many very irate voters.
I appreciate a new government and a fiscal black hole will get people thinking the unthinkable, but surely we should all have learned by now that speculation about this issue is always baseless. (Probably options for reducing /abolishing the tax-free lump sum are on a Treasury ready reckoner somewhere, but that doesnt mean serious speculation is warranted.) Obviously I will have to find a new job in a new field if it actually happens this time 😉
I have not been a Jeremiah in the past. I suspect the window is ope