The following is an article from This is Money on the MSN website by Tanya Jefferies.
Abolishing pension tax-free cash - or even just capping how much you can take - would cause such public uproar the Chancellor is unlikely to do it, says former Pensions Minister Steve Webb.
Speculation Rachel Reeves might clamp down on the popular perk in the Budget has prompted a rush of pension withdrawals, as some savers defy money experts' warnings doing this could harm your retirement finances for no reason.
'For example, what would people do if they had planned to use their lump sum to pay off a mortgage but now had to pay a chunk of tax on it?' 'Most people would feel that a change like this was like "moving the goalposts" and was fundamentally unfair.'
Fear that the Government will tighten the rules on tax-free cash, and people trying to pre-empt its plan to levy inheritance tax on pensions from April 2027, have prompted a rush of withdrawals. There was an unprecedented 60 per cent surge in tax-free cash pulled from pensions, amounting to £18 billion, in the last financial year.
Last week investment broker Bestinvest reported a 33 per cent rise in withdrawal requests from customers with self-invested personal pensions or Sipps in September. Money experts warn the decision is irreversible, and could damage your retirement finances if you are not planning to do something sensible like clear debt, or fulfil cherished spending plans for a home makeover or a dream holiday.
Some savers are pulling cash to give away as an early inheritance, which experts say they must balance carefully against denting their own retirement. If you give money away and survive seven years it typically falls outside of the inheritance tax net.
You can miss out on valuable investment growth under the tax protection of a pension in future - especially if you just stick the money in a current or savings account.
Could the tax-free cash cap be lowered?
Meanwhile, Webb says that if the Government did decide to cut the tax-free cash limit, it would probably have to introduce some form of ‘transitional protection’ to cushion the impact on anyone close to retirement.
But this would risk falling foul of age discrimination rules, and be so complicated it would probably take until at least 2027/28 to implement.
'A comprehensive system of transitional protection means few losers early on and therefore little money for the Government. A change which creates a lot of political fuss but little extra money before the election is not a great package for the Government.'
In this scenario, Webb says the Chancellor could announce ‘anti-forestalling’ measures in the Budget on 26 November to avoid a mad scramble to get tax-free cash out before the change. He explains this could say any protections on existing lump sums applied only to money paid in up to the Budget, not to money added between then and implementation of the change, but this would create even more complexity.
Webb goes on: 'There is a further challenge for a Labour government in cutting tax free lump sums. Those with long service in public sector schemes can build up a significant lump sums even if they have not been top earners. 'Hitting long serving public servants might be especially challenging for a Labour government and could inflame the already sensitive state of industrial relations in parts of the public sector.'
He adds: 'Whilst it’s theoretically possible that the Chancellor could drastically scale back tax-free pension lump sums, there are good reasons why successive Chancellors, having looked at this, have decided against.
'It would be a shock if the present Chancellor came to a different conclusion.'
As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
