25% Tax Free - What to sell?

[Pheidippides]

I put a chunk of my TFLS Into Premium Bonds. Easy access, near cash and totally safe with the “fun” part of the monthly draws and the possibility of becoming hat makers - (little Slumdog reference)

If I needed cash now (not that I’m spending much ATM), then I would take the cash from here, as opposed to denuding my portfolio.

I am also firmly if the opinion that the 25% is very much under threat. I have the last part of my TFLS in cash in AJ Bell, waiting for imminent withdrawal - certainly before the next budget

Regards

Pheid

[ursaminortaur]

I put a chunk of my TFLS Into Premium Bonds. Easy access, near cash and totally safe with the “fun” part of the monthly draws and the possibility of becoming hat makers - (little Slumdog reference)

If I needed cash now (not that I’m spending much ATM), then I would take the cash from here, as opposed to denuding my portfolio.

I am also firmly if the opinion that the 25% is very much under threat. I have the last part of my TFLS in cash in AJ Bell, waiting for imminent withdrawal - certainly before the next budget

Regards

Pheid

There has been talk of an emergency budget in July.

https://www.dailymail.co.uk/news/article-8373589/Rishi-Sunak-draws-emergency-budget-coronavirus-meltdown.html

[neversay]

Thanks OP and all for an interesting thread. I hope you don't mind if I ask a related question:

Having my own business, my wife and I take a mixture of salary and dividends to just below the higher rate threshold and then put £40k as a direct company pension contribution through my SIPP. The plan is to take 25% tax-free lump sum at 55 (7 years time) and roll it into ISAs. Is this still a rational way to proceed or should I be more cautious about possible changes to the SIPP rules?

Obviously Governments are unpredictable but just want to check people are still using this strategy for tax-efficiency. We are very comfortable living (and saving) on two lower-rate incomes but will have higher expenses in 7 years or so as the kids go through uni, so the available capital would be useful (but not essential) from a liquidity/flexibility point of view.

[Darka]

Is this still a rational way to proceed or should I be more cautious about possible changes to the SIPP rules?

Until the rules are changed, we can only do our best based on the current rules, so yes I would say it's still a rational idea.

[Darka]

Thanks everyone, I'm now looking at a different plan based on some of the advice above and my own thoughts.

Retiring as soon as possible is my main goal, has been for over 10 years, I do not enjoy my current job but as I get paid well, I'd rather not move until I retire.

25% tax free
When our SIPPs become available, take the 25% tax free and reinvest it all across our ISA accounts - maintaining income levels.

This gives us a small safety margin of a couple of % when my wife's SIPP is due in 1.3 years; this increases to 35% when my SIPP becomes available (3 years later).

In addition to my SIPP, from February this year I've been salary sacrificing (32% of pre-tax salary, going to 36% this September) - all of this will go into the SIPP just before retirement, boosting the safety margin even further, likely towards 45%.

Realistically, this should be plenty of income, considering we'll also have about 25% discretionary spending that can be cut if necessary.

Reserve
In the meantime, I'm going to start heavily building the 2 year reserve, by:

- Paying away all ISA dividends into the reserve (don't need to reinvest this as already should have enough income)

In addition to the salary sacrifice, we save around 50% of our joint post-tax salary, so will move 50% of this into the Reserve and the other 50% split across both of our SIPP's to boost them a little more.

Hopefully this would mean I could retire in just over 2.5 years with a reduced safety margin and income, knowing that when my SIPP kicks in 2 years later, we should have plenty of income.

Anyway, that's the draft plan.... need to think about it and see if there are any flaws that I am missing, which there probably are.
Obviously the government could change the rules in the meantime.

[Alaric]

- Paying away all ISA dividends into the reserve (don't need to reinvest this as already should have enough income)

If you don't need the money o spend, isn't it better to leave ISA dividends in the ISA? Cash won't give any return and Premium Bonds aren't allowed, but near cash such as short bond ETFs is possible.

[Darka]

- Paying away all ISA dividends into the reserve (don't need to reinvest this as already should have enough income)

If you don't need the money o spend, isn't it better to leave ISA dividends in the ISA? Cash won't give any return and Premium Bonds aren't allowed, but near cash such as short bond ETFs is possible.

Possibly yes, I'll have a look at the ETFs as I'm not familiar with them - I think vanguard do some low cost ones.

thanks,

[Alaric]

Possibly yes, I'll have a look at the ETFs as I'm not familiar with them - I think vanguard do some low cost ones.

It's an OEIC rather than an ETF, but this is one of Vanguard's offerings

https://www.vanguardinvestor.co.uk/inve ... ome-shares

[TUK020]

Possibly yes, I'll have a look at the ETFs as I'm not familiar with them - I think vanguard do some low cost ones.

thanks,

https://markets.ft.com/data/etfs/tearsh ... 15:LSE:GBP

[Pheidippides]

There has been talk of an emergency budget in July.

https://www.dailymail.co.uk/news/article-8373589/Rishi-Sunak-draws-emergency-budget-coronavirus-meltdown.html

Thank you for the heads-up

Regards

Pheid

[EthicsGradient]

Having my own business, my wife and I take a mixture of salary and dividends to just below the higher rate threshold and then put £40k as a direct company pension contribution through my SIPP. The plan is to take 25% tax-free lump sum at 55 (7 years time) and roll it into ISAs. Is this still a rational way to proceed or should I be more cautious about possible changes to the SIPP rules?

The current plan (though it looks like there is no law about this yet) is for the age you can take the cash to increase from 55 now, to 57, in 2028: https://www.thisismoney.co.uk/money/pen ... 55-57.html

So if you or your wife are 55 in 2027, it may turn out you can take it in 2027, but not 2028 - you'd then have to wait until 2029.

[xeny]

So if you or your wife are 55 in 2027, it may turn out you can take it in 2027, but not 2028 - you'd then have to wait until 2029.

While anything is possible, I'd be deeply surprised if they didn't implement the proposed change on a sliding basis, as they have with the recent increases in minimum pension age.

[TedSwippet]

While anything is possible, I'd be deeply surprised if they didn't implement the proposed change on a sliding basis, as they have with the recent increases in minimum {state} pension age.

The 2010 change from age 50 to 55 for access to non-state pensions was a "cliff edge".

http://researchbriefings.files.parliame ... N05847.pdf

A person born on 6 April 1960 will not be allowed to retire at 50, unlike a person born the day before. That has created quite a cliff edge. As I said, there are other ways of making the change; for instance, the Government could have phased it in over a period of years. I will be interested to hear an explanation from the Financial Secretary since the change will affect many people, and they will feel that they have been unfairly treated.

[xeny]

The 2010 change from age 50 to 55 for access to non-state pensions was a "cliff edge".

Ouch and good point. Presumably it was at least widely publicised in advance? In 2010 I must confess I was so interested in work, I was completely unconcerned about retirement trivia. A lot can change in 10 years.

[terminal7]

There has been talk of an emergency budget in July.

Until the rules are changed . .

If mindful of withdrawing the 25% TFLS provision, surely the Chancellor will just impose and not allow any time leeway to allow mass withdrawals. Those with a substantial SIPP pot would effectively stand to lose considerable amounts. Furthermore, I think it unlikely that there will be any damaging political flak as this can be portrayed as taking away a tax benefit to the rich at a time when we all need to contribute. It seems to me as an easy target. Remember the Brown raid on pensions early into that election cycle!

T7

[jonesa1]

If mindful of withdrawing the 25% TFLS provision, surely the Chancellor will just impose and not allow any time leeway to allow mass withdrawals. Those with a substantial SIPP pot would effectively stand to lose considerable amounts. Furthermore, I think it unlikely that there will be any damaging political flak as this can be portrayed as taking away a tax benefit to the rich at a time when we all need to contribute. It seems to me as an easy target. Remember the Brown raid on pensions early into that election cycle!

T7

The primary justification behind tax breaks on pension contributions is to reduce the number of pensioners dependent on the state topping up their (fairly minimal) state pension. On that basis, there is no need to do more than encourage people to save enough to bring them up to a minimum level and it could be argued that further encouragement is a waste of tax payers' money. If the Chancellor takes that line, then the first thing to go would be at least some of the tax relief for higher earners. Limiting the tax-free lump sum from existing pensions could be done, but it might be politically difficult as it would involve reneging on previous commitments (to a more influential group than the WASPI women). For basic rate tax payers, loss of the tax free lump sum would make saving more than the minimum (to get employer contributions) into pensions pretty pointless, so it could be an option to limit the amount, rather than stop it completely.

A better option (for a socially left leaning government by Tory standards) may be to draw a line under pensions as they now stand, stop all tax reliefs on future savings and introduce a new scheme which gives a capped state top up to savings that are held until pension age (along the lines of the LISA). This could be presented as targeting state support to those most needing it and stopping the state subsidy of wealthier individuals. To be properly equitable though, they would also need to tackle public sector pensions, many of which (such as Alpha a career average DB pension) simply increase the burden on future tax payers and scheme members, as there is no fund backing them.

[Alaric]

A better option (for a socially left leaning government by Tory standards) may be to draw a line under pensions as they now stand, stop all tax reliefs on future savings and introduce a new scheme which gives a capped state top up to savings that are held until pension age (along the lines of the LISA). This could be presented as targeting state support to those most needing it and stopping the state subsidy of wealthier individuals.

But would you also abolish the income tax payable on benefits received from pension funds? A common opinion is, or was, that pensions (with the meaning of amounts paid after retirement) are deferred pay and thus are taxed in the same manner. That includes the contributions by employers being treated as a business expense and not being treated as a benefit in kind in the hands of the employee.

[jonesa1]

A better option (for a socially left leaning government by Tory standards) may be to draw a line under pensions as they now stand, stop all tax reliefs on future savings and introduce a new scheme which gives a capped state top up to savings that are held until pension age (along the lines of the LISA). This could be presented as targeting state support to those most needing it and stopping the state subsidy of wealthier individuals.

But would you also abolish the income tax payable on benefits received from pension funds? A common opinion is, or was, that pensions (with the meaning of amounts paid after retirement) are deferred pay and thus are taxed in the same manner. That includes the contributions by employers being treated as a business expense and not being treated as a benefit in kind in the hands of the employee.

If such a scheme was introduced along LISA lines, then withdrawals would be tax free (the input would already have been taxed, apart from the bonus to encourage saving), but there would be limits to how much income could be sheltered in the scheme. Other wealth might get taxed a lot more (on the basis of the broadest shoulders carrying more of the burden). The current ISA regime has mostly benefitted better off people, so maybe it could become less generous, forcing people to hold more of their wealth in taxable forms. Ultimately it all depends on the direction this government plans to take and I don't think we really had much idea even before their finances were impacted by COVID. To what extent are policies going to move to shore up the northern working class vote? I think it would be wrong to assume they will keep things broadly as they are, but we don't know where the focus will be. BJ spent an awful lot of political capital to retain Cummings, I assume there was a reason for that.

[terminal7]

I have concluded that even with a small probability of the end or diminution to TFLS at the July budget there is little to lose by extracting the 25% asap. Not having funded my (and the OH) ISAs this FY - clearly this can be the destination for some of the released funds. You can clearly place a proportion of the released funds back into the SIPP - though fully aware of the restrictions re recycling. Seems to me a sensible hedge against the possible loss of this benefit.

T7

[terminal7]

As reported yesterday:

Asked about whether he would break his manifesto guarantee not to hike taxes, Mr Johnson said: “I think you should really wait to see what the Chancellor has to say in the course of the next few weeks and months.

Johnson clearly no longer ruling out - in his piffle - tax increases. Be prepared!

T7