To get a little sense into the discussion about the current tax free cash (TFC) and how most people are impacted by the Lifetime Savings Allowance (LSA), then we have to know that the LSA restricts the amount you can take as Tax Free Cash out of your pot. It can’t be more than £268,275 (25% of the former lifetime allowance).
It is a sign of how complicated this has become that I had to look the numbers up!
People are worried that they won’t be restricted to £268,275 but to a much smaller amount. My correspondent responding to the blog remarks.
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 they 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.
This chap , I know him, is spot on. Most people over 55 are totally confused about what to do and will listen to expert advice. It is a remote policy that the Chancellor will abolish the tax free cash and to suggest she might is irresponsible.
But right now there is no advice, so we will look at the rights we have and look to keep them, by exercising them. That’s why £70bn has come out of pensions (either to protect tax free cash or because people had money in pensions to protect the estate). It’s worth pointing out that the Labour party before being elected as Government made it clear what they wouldn’t do – to do with taxes and the triple lock- but taxation of the drawdown from pension pots was not inalienable.
What people do is work out the value of a benefit. The value to be lost, if people lose “TFC” is a number, their percentage tax or even a higher rate of tax multiplied by a quarter of their tax-free cash. People then think of that in terms of lost holidays, or whatever it is they value large sums of money as. To say that people “panic” over this is totally unfair because they have already banked the benefit. For me it was to first offset and recently pay off my mortgage, help the family with family finances. The important thing was that I had mortgaged my pension and the pension mortgage had been promised in my mind to protect all those who I felt responsible to.
The comments that followed me posting the “scrambling blog” above is indicative of the positions that people can adopt on principle.
Steve Webb is very vocal on this subject (as my commentator notices). He differentiates between taking tax free cash from a defined benefit scheme (where it has to be taken with the income) and the DC decision (where the TFC can be stripped from the pot while the rest can be kept in that pot).
Here he is on taking money from a defined benefit pension
Steve Webb goes on to tell Portfolio Institutional
Steve Webb
“Raiding pension tax relief may look superficially attractive for a cash-strapped Chancellor. But lying beneath the surface are multiple traps for the unwary, meaning that reforms might raise far less than expected, break manifesto promises to workers or put additional burdens on employers who are already under pressure,” said Steve Webb, the report co-author and partner at LCP. “The political backlash against such reforms could easily echo previous Omnishambles Budgets where a u-turn was made within a matter of weeks.”
I am with Steve Webb that the Reeves/Bell Budget team should not take away the basis of all personal pension mortgages – TFC. I agree with Webb that tax-free cash is not always worth it (mine wasn’t worth taking when I started a defined benefit pension) but I don’t agree with the Society of Pension Professionals
Steve Hitchiner, Chair of the SPP Tax Group, said;
“Pension savers should only withdraw what they need, when they need it”
No employer, trustee of provider is insuring the downside, the only person that could lose the benefit of tax-free cash is the saver.
I leave the final word with Tom McPhail
