There has been a lot of comment in the press about the possible changes in the Autumn Budget (end of October) including the potential impact on the ability to withdraw money from a pension completely free of tax (Tax Free Cash). This, rather unfortunately, in the industry, is now called the Pension Commencement Lump Sum (PCLS).
I have written before about pensions and ways in which the government might make changes to increase tax but this is one aspect needs particular attention.
BACKGROUND
Most people can take up to 25 per cent of their fund tax-free from the age of 55, which is due to rise to age 57 in 2028. For Occupational schemes the rules are different but a lump sum, that is currently tax free, is also available – it just isn’t 25% as it is calculated in a different way.
The most savers can take from pensions over their lifetime tax-free is capped at £268,275 but the government could theoretically lower this amount, or abolish the entitlement in its entirety.
However, this would be ‘deeply unpopular and fundamentally undermine wider government efforts to boost long-term investing’ as well as being ‘hugely complicated.’
WHAT WAS THE RUMOUR & WHERE DID IT COME FROM?
A story in The Telegraph today claimed Rachel Reeves could look to cut the maximum tax-free cash entitlement from £268,275 to £100,000. So immediately we can see that the potential rumour isn’t about taking away the tax-free cash that everyone is entitled to but more about affecting a small subset of people with larger amounts of capital in their pensions.
An industry commentator, Tom McPhail said “The tax-free cash rumour is particularly problematic as it is now prompting people to rush into decisions which they may later regret.”
According to the IFS, a cut in the tax-free cash sum could affect one in five savers and almost half of all public sector workers.
McPhail added: “An abrupt cut affecting those close to retirement would be hugely damaging and might even be open to legal challenge. It would also undermine confidence in the system. Hopefully, if the government does decide to go ahead with a cut to the TFC sum, they will at least introduce it in a measured and fair way, over a long period.”
OPTIONS & OPINION
Whilst it might be complicated and unpopular for the Chancellor we should still weigh up the likelihood of this possible change so that you can make a decision that is informed. Ultimately, no-one knows and you might want to consider if you are willing to take the risk, or not, that your pension lump sum might suddenly become taxable or not and, all tax changes will upset someone!
Here are a few points to consider:
AGE
Will you need to take your pension before another election? Could you be patient and wait for a more sympathetic administration? Do you actually need your lump sum during your lifetime?
AMOUNT
Do you think that you have a pension of enough value to warrant being caught by any new legislation? Do you think that your finances are such that you fit a demographic that will attract this kind of attention?
NOW
Do you have any medium-term needs that will mean additional capital is going to be spent especially during the lifetime of this parliament? Could you ‘hedge your bets’ taking some and leaving some capital intact?
LOSS
What might you lose by taking your tax-free sum now? Could you then find that you have added an additional problem, the money is then exposed to inheritance tax when it wouldn’t be inside a pension.
No one can really know what the new Government will do unless they are sitting inside the Treasury alongside the civil servants advising Rachel Reeves. Rumours leading up to a budget are common as it is so hard to really predict what will happen as there are so many options open to the Labour Party to increase taxes. We need to all weigh the likelihood of this particular change (or any) and the impact on them personally and if they are willing to take the risk.
If you have any questions or want to talk to us, please contact NBL.
