Labour Changes and Clients wishing to Take PCLS
Hi All,
I work as a paraplanner at a firm in the west midlands. Over the past week we have had over 10 requests from clients wishing to take their PCLS with no real objective other than the speculation that labour may change rules around accessing PCLS.
Have any firms also experienced this and how are the advisers going about managing the clients? Additionally, if anyone has got to case stage how is this being documented or are advisers saying that it is impossible to advise on legislation that has not already been put in place.
Cheers
Cal
Comments
Hi Cal
Yes plenty of clients think the same it seems! We have reiterated the point to clients that any big changes like this have also largely included some new form of protection for benefits already accrued. Also, in June Labour said specifically they are not doing anything to tax-free cash, although that was before they discovered the black hole.
If you can't see a good reason to advise the client to take it, then I don't think following an insistent client or execution only process is a problem here.
Also, as was pointed out the other day, some providers offer a cooling off period for PCLS so if it taken between 2nd October and 29th October they can change their mind if nothing happens in the budget (need to check with the provider though and of course find out about timescales, some seem to be very slow in paying right now...)
Tom
Using cancellation rights for the PCLS as a hedge against the Budget doesn't seem to be in the spirit of tax law.
What do HMRC say about tax avoidance? Artificial transactions designed to obtain a tax advantage fall under the general anti-abuse rules.
There have been a few queries at our firm, but as history tells you, if you make rash decisions on speculation or summary comments made in a budget speech that have yet to make legislation with all the detail attached to it, you risk putting yourself in a much worse position. If I was an adviser I certainly wouldn't be advising any client to go ahead on speculation, and would go down the execution only route as a last resort.
I don't think changes to the PCLS will have much impact on their "black hole" as people would just navigate around it somewhat in the short term (e.g. if PCLS rate dropped to say 20%, you would just allocate more to drawdown to get the same level of PCLS you originally wanted, albeit you would have to crystallise more as a result). They could target the level of LSA available, as anyone with £1m+ of pension assets is probably considered "wealthy" by labour.
A much bigger tax impact, which has no impact on the actual pensioner, is changing the favourable death benefit regime, especially when it comes to death pre-75, plus the disconnection of the LSDBA and nominee drawdown.
I've heard rumour (and it's just that... rumour...) that with the exception of dependants benefits (i.e. spouse / dependent children), all non-dependent death benefits regardless of age at death will be fully income taxable on the recipient. So if you nominate your sister and die at age 65, she will pay tax the same way as you currently would if you died post 75 (unless it's proven she was fully dependent on you for some reason).
If they're going to tinker about with death benefits for pensions, they are surely going to remove the IHT exemption on pension funds.
I would be shocked if the IHT exemption remains in place after the Budget.
Thank you everyone for your replies, they have been very helpful!
Yes, even as a small firm supporting 1 adviser we have had more reviews booked in for November, requests for Tax Free Cash etc.
Same as the other replies our adviser has said unless there's a reason, probably don't do it as it's all just speculation at this point.
But I also live in a very Tory part of the country, and we instantly got doom and gloom emails after the election anyway.
If there was already a plan to draw it in the future i.e. phased UFPLS, or an intention to gift next year, or use PCLS to replace a car next year etc etc, then you could argue there is a case for bringing it forward. Otherwise, acting on speculation should be discouraged, imo.
The settlement is specifically exempt from entry, periodic and exit charges. That’s the only exemption.
https://www.ftadviser.com/pensions/2024/07/04/how-to-avoid-bringing-pensions-into-the-iht-regime/
> Pensions are not exempt from IHT they are treated the same as any other assets using general IHT principles.
>
> The settlement is specifically exempt from entry, periodic and exit charges. That’s the only exemption.
> https://www.ftadviser.com/pensions/2024/07/04/how-to-avoid-bringing-pensions-into-the-iht-regime/
I think this is exactly why they will target death benefits through income tax and not IHT
The number of people who die before 75 is tiny. It wouldn't raise much money.
According to the ONS, in 2022, there were 167,266 registered deaths for all under 75s, with 395,906 deaths for over 75. Source: https://ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/articles/deathregistrationsummarystatisticsenglandandwales/2022#number-of-deaths-by-age
If you take out the under 50's, it's still 153,401 deaths, which is 27% of all deaths. I wouldn't call that tiny.
(edit: for england and wales only)
There is a huge potential to tax pension on death. We had it at 55% / 25% above LTA for nearly 20 years. Eliminating that to marginal rate above LSDBA has surely made a negative contribution to future revenue?
The average pension fund for people between 50-75 is lower than the current LSA. You could very easily remove age 75 completely and make the LSDBA £400,000, LSA £100,000, and have almost no impact on most people. You could then simply revert to the non-PAYE tax charge on death at the old 55% rate, and not tax income payments that come from subsequent beneficiary FAD.
No idea how much it would raise, but it would be more than none. That's just a simple idea off the top of my head and could have much more wrong with it than right. But taxing pensions on death is very achievable without going near IHT. Politically though, what does the media do with that and what wider damage does it do to pensions saving?
The people who die under 75 are predominantly poorer and less likely to have sizeable pension pots.
Reducing the tax-free lump sum would be very unpopular and would be regarded as a form of retrospective taxation.
I cannot see Labour doing that.
IHT on pension funds would be easier to implement and create less backlash from the public.
This is not accurate information and I want to take a moment to give the proper context to who owns pension wealth.
The ONS has published data on this going back to 2006. Current release is up to March 2020 i.e. 14 years of returns data from registered pension schemes.
It shows that:
Median 50th percentile point for those with private pension wealth (i.e. it strips out people who don't have private pensions) is:
The data shows that as people move towards the 55-64 bracket they increase the value of their pension funds, and then they spend it before age 75. On what? Don't know. 25% could just be the removal of the tax-free cash in one hit during that ten-year period. It might just be reinvested elsewhere. Given that the rate of increase will be limited by what someone can save, versus the rate of decrease effectively being unlimited other than by how much they have, it would seem logically to hypothesize that people accrue up to a point in mid/late 60s and then decumulate more rapidly.
In any case, the total number of people with pensions in the first three brackets is 17.625m (out of 23m people overall in the UK) and the number over 75 is 3.4m. There is a much higher amount of pension wealth in the hands of 55-74 yr olds and taxing that would generate higher revenues than the current system.
And whilst politically unpopular, simply reducing the LSDBA/LSA to something like £400,000/£100,000, would have absolutely no financial impact on more than 50% of the pension savers in the UK, whilst still generating a decent revenue from a good chunk of people who have much higher pension funds that they won't need (because they are dead).
I think we are all on the same page with pensions as a viable source of tax revenue.
Les mentioned the problem with IHT. Your comment on the perception of the LSDBA reduction is also entirely valid and presents a different problem.
Not sure where that leaves us. Maybe they make no change - that would be nice!
Interesting to see what people are saying here.
Essentially, without tearing up the relevant property regime legislation, you are left with only a handful of options which I can't see being as administratively cumbersome:
1) Abolish the tax-free pre-75 rule for non-dependents (if you abolish for all, you're essentially abolishing the LSDBA all together)
2) Change the rates of LSA/LSDBA
As far as the relevant property regime is concerned, could they make it so that beneficiary drawdown falls into the relevant property regime? This could in theory stop pension assets just accumulating down the generations and being outside of the beneficiary's estate?
I don't think you'd need to worry about that last point. Most accumulated family wealth doesn't last beyond three generations anyway, because it gets diluted and spent by future beneficiaries, thereby finding its way back into the economy.
I think your option 1 assumes that abolishing age 75 would revert to the post-75 outcome for everyone?
You could also abolish age 75 and revert to the pre-75 system for everyone, with a lower LSDBA and a flat tax charge on the fund when it leaves the member's pension (whether as a lump sum, as an annuity, or a beneficiary DD).
I would say tax that at 40% (or the current rate of IHT on death) and then simply abolish non-dependants DD and revert to pre-freedoms, with dependant's FAD, or annuity, tax-free. Only route for a dependant's DD on subsequent death is a lump sum to beneficiaries.
As I said, this new LSDBA could easily fall to half its current level and affect fewer than 6 in 10 people over 55. And if you wanted, you could give a special LSDBA of double the standard for those who die under, say, NMPA (to provide some level of relief against widow/ers losing DIS payments to a tax charge).
And it would be really simple to understand pensions:
You save in accumulation. Get tax relief at marginal rate. You can save £60k pa (and the tapering is the best way to limit tax-relief so let's forget this flat rate nonsense!) limited to 100% of earnings.
You can take the first 25% of payments in retirement tax-free, up to the amount of the LSA, which is 25% of the LSDBA.
The remaining LSDBA you have when you die is tax-free to your beneficiaries. The rest is taxed at 40% and if they're a dependant they can use this to get a tax-free income thereafter. Everyone else get the balance as a lump sum.
Index-link the LSDBA and leave pensions alone for 20 years.