Is it the end of the tax-free lump sum for pension savers?
There have been dramatic changes to pension legislation over the last 10 years, so we should never expect this to not continue; however the comments made by Steve Webb (former Pensions Minister), with particular reference to his suggestion that tax-free cash could disappear immediately following the March Budget, would appear drastic.
The Chancellor is considering restructuring the tax position of pensions. This has been widely publicised, and all considerations will have pros and cons for both the Treasury and the people. It would, however, be very short-sighted of the Chancellor to abolish tax free lump sums with immediate effect, as it would cause issues for too many people/providers.
- Clients have signed up to interest-only mortgages based on their ability to use their tax-free cash/PCLS as a repayment vehicle;
- Will the banks have to write to all clients now? Will they revoke their deals?
- Clients have planned, paid money (to IFAs/accountants) and started retirement by including tax-free lump sums as a method of producing tax-efficient income, and providers have changed their systems to allow this;
- Clients will have moved out of a Final Salary scheme for the potential of considerably higher tax-free lump sums that their Scheme offered;
- Final Salary Schemes are set up as contractual/trust arrangement. Can the Government even change it so that these schemes are not allowed to offer a tax-free lump sum?
These are just four of what we could call ‘worst case’ scenarios. All these situations would suggest an outright abolishment of tax-free cash could cause outrage, especially as pension funding was just getting to a level where client confidence was increasing and there were indications that we may see the retirement gap shrink.
If legislation such as this is introduced and/or a ISA-style pension process is introduced, would you want to save into a pension? The answer for many people, regardless of whether they choose to seek advice on it, will be likely be no.
In my opinion, it will simply scare people off pensions, scare them away from saving into a pension, and scare them away from seeking and paying for advice in relation to them.
If you have concerns about your pension and how is could be affected be the Budget, it may be worthwhile speaking to a financial adviser,
The Government may need to increase its tax inflows and reduce its tax breaks, but reducing pension funding, which is what this would do, has to be one the worst ways of going about achieving their aim. With an election looming in 2020, such dramatic changes may make the Government party unelectable.
Pros & cons of drawing your tax-free cash
Drawing your tax-free cash unless needed could cause several problems, such as:
- A shortfall in retirement
- Reducing the potential for growth
- Entering your estate for IHT purposes
- Triggering fees/costs that could be avoidable
The pros of releasing tax-free cash are client specific; if you don’t need it, there isn’t a reason to take it.
Who may want to consider drawing it now?
If you are likely to always be a taxpayer, even more so as a higher/additional rate taxpayer, you may want to consider drawing your tax-free cash now if you have the ability to avoid paying tax; however, this should be discussed and agreed with your adviser/accountant before going ahead.
Advice for clients/pension savers?
Making a rash decision caused by comments from somebody out of the decision process is certainly not recommended, and it may not be suitable for individuals to draw their tax-free cash now even if the option is to be removed.
If you have worries/queries regarding this you should speak to your adviser or look to appoint one.
We have had clients ring up and question this and not once have we yet recommended they draw any tax-free cash on the back of it ‘potentially’ being removed. Our best advice is to seek advice specific to you; don’t rely on information published for the masses.