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Is your tax-free cash under threat?

Steve Webb, the former Pensions Minister in the previous coalition government, was quoted in the press at the weekend speculating that the Chancellor may remove the facility to draw 25% of your pension fund as a tax free lump sum.

We know that the Chancellor will use next month’s budget to announce his plans for the future of pension tax relief following last year’s consultation. The treasury is keen to reduce the cost of providing this benefit, particularly to higher and additional rate tax payers. He has a number of options for doing this, but the most likely is a reduction in upfront tax relief.

The 25% tax-free lump sum is one of the most attractive features of the current pension regime and forms the basis of many peoples’ retirement planning. Withdrawing this facility retrospectively would be political suicide for a Chancellor with serious leadership ambitions, so we urge savers not to panic.

We believe the most likely outcome is an attack on upfront tax relief for pension contributions

Any change is only likely to apply to future accruals, but even this probably won’t achieve the desired policy outcome. It would also create an awkward dual system for pre and post budget pension accruals. The UK’s big pension companies, who have just spent millions implementing pension freedom changes, will be lobbying hard against any kind of two-tier pension system.
Let’s not forget that Steve Webb now works for Royal London, a pension company with a drawdown product to promote. The type of product that anyone withdrawing their tax free cash in a hurry would need to use.

We believe the most likely outcome is an attack on upfront tax relief for pension contributions. This is a big cost to the treasury that benefits high earners disproportionately and would give big ongoing savings. The magnitude of the saving is only going to increase when you take into account the increase to Auto-Enrolment contribution rates. Putting a lid on his tax relief ‘costs’ would be preferential.