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Whether to take a lump sum at 55

Including Financial Independence and Retiring Early (FIRE)
swill453
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Re: Whether to take a lump sum at 55

#256546

Postby swill453 » October 8th, 2019, 10:45 am

ayshfm1 wrote:Divorce, pension share - wait a year ot two re-marry. Problem solved.

As long as the spouse hasn't run off with a younger model.

Scott.

Pheidippides
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Re: Whether to take a lump sum at 55

#256715

Postby Pheidippides » October 9th, 2019, 8:12 am

The big elephant in the room on this is this, or a future government.

The 25 % TFLS is tax-free. The government have generously chosen NOT to charge you tax on a quarter of your pension pot. I am very cynical that this “generosity” is not reduced and then removed over time.

Regards

Pheid

Gostevie
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Re: Whether to take a lump sum at 55

#256716

Postby Gostevie » October 9th, 2019, 8:21 am

Pheidippides wrote:The big elephant in the room on this is this, or a future government.

The 25 % TFLS is tax-free. The government have generously chosen NOT to charge you tax on a quarter of your pension pot. I am very cynical that this “generosity” is not reduced and then removed over time.

Regards

Pheid


Indeed:

https://www.ftadviser.com/pensions/2019 ... -proposal/

This is why I took my lump sum as soon as I could when I reached 55 last year.

Gostevie

OLTB
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Re: Whether to take a lump sum at 55

#256724

Postby OLTB » October 9th, 2019, 9:15 am

The above comments may be true - the term 'tax-free cash' is no longer referred to in pension parlance, although most people still use it. The term introduced a few years ago for the 25% cash is, 'Pension Commencement Lump Sum'. With no 'tax-free' in those four words, a potential future change in the tax regulation is set up nicely.

Cheers, OLTB.

hiriskpaul
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Re: Whether to take a lump sum at 55

#256733

Postby hiriskpaul » October 9th, 2019, 10:27 am

Is a full tax free 25% available from a SIPP if a DB pension is already being paid and the SIPP crystallisation subsequently pushes one over 100% LTA?

For example, if the DB pension used up 90% of the LTA and the SIPP is 60% of the LTA, is a tax free 25% of the entire SIPP available as a tax free PCLS? I have a feeling the answer is no and only 25% of the 10% unused LTA allowance can be taken as a tax free PCLS.

I don't have a DB pension, so this issue did not arise for me, but you might want to check this out and feed into your sequencing decision.

I have not done the calculations, but my gut instinct would be to start the DB pension at 55, with actuarial reduction and then fully crystallise the SIPP when you get close to 100% LTA.

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Re: Whether to take a lump sum at 55

#256768

Postby ursaminortaur » October 9th, 2019, 12:44 pm

hiriskpaul wrote:Is a full tax free 25% available from a SIPP if a DB pension is already being paid and the SIPP crystallisation subsequently pushes one over 100% LTA?

For example, if the DB pension used up 90% of the LTA and the SIPP is 60% of the LTA, is a tax free 25% of the entire SIPP available as a tax free PCLS? I have a feeling the answer is no and only 25% of the 10% unused LTA allowance can be taken as a tax free PCLS.

I don't have a DB pension, so this issue did not arise for me, but you might want to check this out and feed into your sequencing decision.

I have not done the calculations, but my gut instinct would be to start the DB pension at 55, with actuarial reduction and then fully crystallise the SIPP when you get close to 100% LTA.


The maximum tax free lump sum you can take is 25% of the LTA.

See the example of Charles in

https://www.closebrothersam.com/news-and-insights/lifetime-allowance-planning/

Charles’ tax-free lump sum will be the lesser of:

25 percent of the pension value at the crystallisation date (£1,400,000 x 25% = £350,000)
25 percent of the Lifetime Allowance at the crystallisation date (£1,055,000 x 25% = £263,750)

In this scenario, Charles will receive a tax-free lump sum of £263,750


If you have multiple pensions which you have already taken using up a percentage of your LTA then the maximum tax free lump sum on taking the last of those pensions would be

the lesser of:

25 percent of the pension value at the crystallisation date
25 percent of the remaining Lifetime Allowance at the crystallisation date

which could be zero if taking those other pensions had already used up all of the LTA.

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Re: Whether to take a lump sum at 55

#256846

Postby Kantwebefriends » October 9th, 2019, 9:01 pm

Since if the SIPP isn't crystallised it will continue to grow during those 5 years ..

That seems to me to be a bold assumption. I think I'd wait for a market crash that takes the DC down well below the LTA and crystallise it then.

ursaminortaur
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Re: Whether to take a lump sum at 55

#256870

Postby ursaminortaur » October 9th, 2019, 11:41 pm

Kantwebefriends wrote:Since if the SIPP isn't crystallised it will continue to grow during those 5 years ..

That seems to me to be a bold assumption. I think I'd wait for a market crash that takes the DC down well below the LTA and crystallise it then.


The idea being discussed was whether holding off crystallising the SIPP for 5 years until the OP could take the DB pension first was a good idea which unless the crash happened just as he was about to take the DB pension wouldn't allow for crystallisation of the SIPP at that low point - and I did mention the possibility of a market crash or some other catastrophe overtaking his SIPP.

ursaminortaur wrote:Since if the SIPP isn't crystallised it will continue to grow during those 5 years and all that growth will make the LTA excess larger. (I'm assuming here that he achieves a reasonable growth and there isn't a worldwide financial crash, or that brexit or some other catastrophe doesn't destroy the value of the OP's SIPP which would obviously solve the OP's LTA problems but would be a bit of a pyrrhic victory).


Of course the OP could try to manufacture such a fall by investing in what look to be failing companies so as to lose money but it seems an odd strategy since it loses you 100% of the foregone growth rather than the 55% loss of the LTA excess charge. Whereas the strategies I have been discussing try to keep as much growth as possible whilst minimising the LTA excess and hence the LTA excess charge.

ursaminortaur
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Re: Whether to take a lump sum at 55

#256940

Postby ursaminortaur » October 10th, 2019, 1:09 pm

Gostevie wrote:
Pheidippides wrote:The big elephant in the room on this is this, or a future government.

The 25 % TFLS is tax-free. The government have generously chosen NOT to charge you tax on a quarter of your pension pot. I am very cynical that this “generosity” is not reduced and then removed over time.

Regards

Pheid


Indeed:

https://www.ftadviser.com/pensions/2019 ... -proposal/

This is why I took my lump sum as soon as I could when I reached 55 last year.

Gostevie


As it mentions in the article there has been talk of removing or capping the tax free lump sum for decades

Paul Gibson, managing director at Granite Financial Planning, noted the withdrawal of tax free cash had been talked about since he entered the profession over 20 years ago.

In particular it seems to be something that gets raised before every General Election. It hasn't happened yet and as explained in the article there are good reasons for keeping it.

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Re: Whether to take a lump sum at 55

#257259

Postby Shelford » October 11th, 2019, 10:28 pm

Many thanks for your thoughtful replies. Judging by the number of these and quantity of readers, this is a live topic. The number of folk getting caught out by the lowering of the LTA is getting much bigger. I suspect few readers of this board are wealthy in the Coutts Bank sense of the word. Many though I suspect are fed up by the unnecessary complexity of a system that by default appears to catch people unawares. It is hardly an incentive to save for old age.

One practical question if I may: if I take a TFLS from my SIPP at 55, but defer taking a pension from a DB pension till 60, does the BCE at 55 include the value of my DB pension for tax calculation purposes? My assumption is not on he basis I’m not exercising the DB pension, but I’d like to confirm this before doing my budgets!

ursaminortaur
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Re: Whether to take a lump sum at 55

#257261

Postby ursaminortaur » October 11th, 2019, 10:53 pm

Shelford wrote:Many thanks for your thoughtful replies. Judging by the number of these and quantity of readers, this is a live topic. The number of folk getting caught out by the lowering of the LTA is getting much bigger. I suspect few readers of this board are wealthy in the Coutts Bank sense of the word. Many though I suspect are fed up by the unnecessary complexity of a system that by default appears to catch people unawares. It is hardly an incentive to save for old age.

One practical question if I may: if I take a TFLS from my SIPP at 55, but defer taking a pension from a DB pension till 60, does the BCE at 55 include the value of my DB pension for tax calculation purposes? My assumption is not on he basis I’m not exercising the DB pension, but I’d like to confirm this before doing my budgets!


No, each pension is treated separately so if you crystallise the SIPP at 55 and take the TFLS then that will be tested against the LTA and a certain percentage of the LTA will be deemed to have been used up. When you come to take the DB pension it will be tested against the percentage of the LTA remaining. The LTA is supposed to increase with CPI so hopefully that remaining percentage will represent a larger monetary amount in the future - though as history shows that isn't guaranteed it is quite possible that the automatic CPI increases will be stopped or the LTA even cut again.


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