My friend Johnny Timpson put a thumbs down to an article in the Guardian . Not something that I’d expect; like the snoop I am, I decided to take a look.
Here’s the article in the Guardian.
Here’s why I give the experts advising us not to withdraw our cash “tax-free” due to “fear and rumour” the thumbs down too.
- A DC pension pot is not a pension – it is a pot. And if you want to draw from the pot, are you prepared to risk to pay from 20% to 45% of the withdrawal to HMRC if the Government choose to lower the cap on tax free cash?
- The current pension minister, who is heading up the budget thinking in the Treasury is no fan of tax-free cash making the likelihood of (1) happening the greater.
- Assuming we’ve got nothing good to do with cash is nonsense, many of us have mortgages which are offset by money in our bank accounts, or can be paid off over the phone
- Not paying mortgage interest out of taxed earnings means a tax-free saving of the bank interest rate +++. Tax free growth and income from an ISA can come from the same funds as your ISA (if you are like most of us – in trackers). Not much difference in price either.
- Getting money out of a pension pot (especially Nest) can be a nightmare, we have until November 26th till the budget, which might be time enough to get some of these pot administrators to cough up a transfer of our pot.
- The reason why this sum is currently available from the age of 55 (57 from April 2028). You can usually take up to 25% of your pension as a tax-free lump sum, to a limit of £268,275. The reason it is so complicated is because Chancellors are always having a go at it.
Now we come to the absurdities of the article
“Older savers should avoid making rash decisions about their pension cash based on “fear and rumour”
Does the Chancellor flag she or he is about to stop a tax-break? Put another way, will we get a window to get our money out – after Nov 26? Of course we won’t. That’s not the way that these things work – we only have “fear and rumour” to go on.
They warn kneejerk decisions could wreak havoc on people’s long-term plans.
- I don’t consider a couple of months “knee jerk“.
- Having cash in a an ISA or a reduced mortgage is not “wreaking havoc” it is “reorganisation”
- The idea that people need to have money in a pension pot rather than an ISA is ludicrous, they are both pots of money to call on. The ISA is the one you don’t need to pay tax to draw money from.
“pots are meant to last decades, not be raided in panic”
What kind of simplistic stupid advice is this from an adviser? What makes any adviser think that people are going to be irresponsible with money they have in their control rather than in their’s?
Rachel Vahey at the investment platform AJ Bell said the concern is “people aren’t making decisions based on what’s best for them but because they are worried about possible changes to pensions tax incentives”.
What evidence has Rachel for this? Is there not an equal likelihood that people are not going to risk losing up to 45% of their withdrawal as a donation to the “save the Exchequer” fund?
Or is this “save the pension managers and advisers fund?”
In March, the Guardian reported that financial firms were reporting a “huge” increase in well-off older people taking sizeable sums out of their pensions to splash out on family holidays and give to their children
Oh dear! This sounds like intergenerational transfer in the right direction! It sounds like people putting money back into the economy , it sounds like the kind of thing you’d be doing if you were being sensible about debt, care costs and many other liabilities that older people do seem to have!
Thumbs down.
Johnny Timpson and I are old enough to be able to take our cash before HMRC does. I will take my cash if Nest will allow me near it. Right now they tell me there are two Henry Tappers working for AgeWage and it will take them 6 weeks to sort that out. I am not sure I will get the chance of a tax-free cash sum by Nov 26th but I’ll keep trying,
I appreciate that this is a very complicated business – this pension stuff and of course it’s not my money – it’s the trustees! So I’ll keep my fingers crossed.
I agree Henry, I have discussed with my financial adviser and the risk seems asymmetric: if I take the cash now, I’ll have to do some investment reorganisation and probably lose a little in the short term in the way of taxed growth. But set against that is the risk of Reeves and Bell eradicating my allowance to prop up their economic mismanagement, resulting in my paying tens of thousands in extra tax; besides I’m already over the max TFC limit so any extra growth in my pension will be taxed anyway. To me it is a no-brainer to take the cash now.
What is the risk of the tax free cash limit being increased?
At least a DC has personal choice
Some examples
Will the benefit taken impact on further contributions? Should some of the funds be put into ISA for the family? Should the TFC be used to buy an appropriate PLA maybe joint life indexed and lower income tax charge?
Even subscribe to SEIS
Always give thought to the options available
True for some with large pensions maybe, but most people have nowhere near the LSA worth of TFC, no idea where to invest, and may rush without properly understanding the alternatives.
DB pensioners often don’t understand that if the ask for the tax free cash they are also asking for the pension to start. With some DC schemes if you ask for the TFC the scheme will buy an annuity as well as they don’t offer drawdown. The vast vast majority of DB pensions/DC pots are under £400k so unless LSA is reduced to lower than £100k they won’t be affected. Very few sadly use an adviser (“they’re too expensive” “they won’t talk to me – I’m not rich enough” “they’re only out for themselves”) or PensionWise (despite the nudge) so simply don’t understand these points.
I thought Steve Webb made some good points when we had this last year when he said words to the effect “You always have to think about the political optics and the headline that would appear in the Daily Mail the next day,
e.g. “Staff Nurse in tears as pension stolen – After her 40 years of dedication in the NHS, Nelly Nurse is ‘rewarded’ at the last minute with Robber Reeves stealing her tax free cash. “I was relying on that £100k to pay off the last of the mortgage, get the roof fixed and have a nice holiday, I feel I deserve it””.
They simply won’t want any such headline so it’s very unlikely the LSA would be slashed that far, trimmed maybe so they can claim it’s only affecting the wealthy, but not below £100k. And if you’re only trimming it, and it doesn’t hit that many anyway then why bother spending that political capital for small gains? Easier simply to let fiscal drag do your work for you.
I won’t be rushing to join the TFC exodus a) I think Steve Webb is right, and so the chance it will seriously affect me is slight b) I’m thinking that when I do start drawing my DB pensions in a couple of years I may well take the extra guaranteed income rather than the TFC anyway, further reducing the impact c) I can probably max out my annual ISA allowance from retirement income anyway if I want so squirreling TFC into ISAs isn’t really an option.
Those of you who have large pensions nudging towards or already over the current LSA, with large mortgages to pay off or other sensible uses of TFC lined up don’t let me put you off, it may well be in your best interests, but for those of us of more modest means it is less likely to be a good idea to act now. And for the average John/Jane Smith who has little/no DB, and a DC pot worth £30k (I think I read that’s the median at present) then it could be a really bad idea.
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