I’ve been saying for some weeks that I think the pension tax-free cash allowance is under threat – I think it will be reduced. Those more expert than I think it will be reduced to £100,000 impacting anyone with a pension pot of more than £400,000 and with a defined benefit cash commutation of £100,000 + (it’s based on pension payable).
If you are in the fortunate position of being with a provider that allows you to take your cash independently from the rest of your pension, you do not have to cash in the lot or start your pension, but most pension providers (including NEST) won’t allow you to take your cash out independently.
My experience with L&G has been a curate’s egg. I have had to brave the Royal Mail’s capacity to deliver paper documents and had to fill out a lot of forms to get my money and though I started the process in August, it won’t be till October that my transaction will be completed.
To give you an idea , here is the initial correspondence made on the in-mail facility of my worksave pension portal
Things started speeding up when I was allowed to go digital but even when my application form arrived towards the end of September, I had to send it back, together with a wet signature on my Lump Sum Allowance declaration by post.
To the credit of L&G they assigned me a case-worker who has liaised with me, agonising over the four days it took for the application to get to L&G. But I have no idea of what price my units were cashed. The account balance on my “pension” has been blanked out as “Temporarily Unavailable”.
So I don’t know what my tax free cash entitlement is or what I’m getting when the money finally arrives. I am of course subject to a single swinging price on encashments. If there are plenty of people taking money on the day I take money, then the price is likely to be lower – reflecting liquidity – I wonder when I get my statement of withdrawal whether I will have got out at fair value or at a calculation of units based on a price that “swung” against me. Of course it could swing in my favour as well but as I haven’t had access to my unit price for some days (due to a systems problem at L&G) you can imagine I’m a little concerned!
In my case a 1% swing in the price represents around £2,000 in added or lost value.
So what does my story tell you?
It tells me that even with my L&G pension , I needed five weeks to get my money , though I may have transacted in four,
The Chancellor is announcing her budget on Wednesday 30th October. If you are seriously thinking of taking your tax-free cash early, you should be aware that as part of the Budget measures, the Chancellor could include a forestalling clause to prevent people rushing for the door after she makes an announcement. She could include an emergency measure to forestall tax free cash being taken from budget night.
I am not advising you to take your tax-free cash but suggesting that if you are over 55 and have the capacity to take cash from your pension and have a tax-free cash sum that you see as “under threat”, then you have a vanishing window to get on with it. I have given up on Nest who require me to take all my money now or transfer to another – I suspect that transferring and then stripping cash will take months- I have no wish to go through that pain so will probably leave my money with Nest – and if the Chancellor abolishes tax-free cash – lose my entitlement. I did not take the tax-free cash entitlement when I became a pensioner from my DB scheme (which I am now delighted about).
I have this morning received the L&G IGC report (thanks Stuart Murphy) and I will read with interest anything it has to say about the speed of making the claim. I was in the lucky position of having someone jolly things along and hope that other policyholders do as well. It may be that L&G have sensibly worked out that it is their policyholders with more than £400k in their pot who need this help, if so – well done them.
For all the talk of lifestyling, savers at the point of claim still look very vulnerable to market fluctuations and I’ve been surprised by how I have been given no information of the terms of my trade. What I receive by way of a transfer to my bank account (I hope not a cheque) will presumably be a matter for my bank to tell me – not my pension provider.
I am hoping I am transferring out at a benign moment but as I don’t know even the day of transfer let alone the price of the units I am selling, I am totally in the dark. This is the dark side of DC, an area of unremarked opacity where all the cards are in the hands of the provider.
I would be interested in other people’s experience of avoiding forestalling and protecting their tax free cash as I am doing.
What is the threat?
The FT article is only one of many that has appeared in the past few weeks. It simply states that recent comments from the Treasury suggesting they won’t be able to screw more money out of “non-doms” makes it more likely that they’ll have a go at pensions. Maxine’s article says workplace pensions but any tax-take will almost certainly include non-workplace pensions (SIPPs and legacy personal and stakeholder pensions). The rumour is that tax-free cash will be capped at £100k but it may not be touched or it could be abolished altogether.
The FT article also points to the increasing likelihood of the Chancellor taking away the tax-free inheritability of pension pots if you die before 75 (a handy tax-perk for those with IHT problems). There’s not much you can do to pre-empt this – but you will probably have a financial adviser in your ear if you are one of the people worried.
Tom McPhail and opine about TFC and inheritability , both suggesting this is an accelerating threat.
Jon Greer of Quilter and Nick Nesbitt of Mazars play down the likelihood that the Chancellor will tamper with the tax-relief offered on contributions.
Both arguments make sense but isn’t this all a bad way to be thinking about our pensions?
On Thursday I spent four hours in a room with pension experts discussing how to turn pots to pensions with no thought of tax at all. That is where we should be focussing our main intent and if the Government do take away the advantages of tax-free commutation and inheritability, we will at least be left to focus on the main event.