Budget anticipation is building, with rumours about changes to the 25 per cent tax-free lump sum available to most savers when accessing their pension.
Royal London has already started to see a slight increase in customers asking about taking tax-free cash as a result of speculation, but to date there hasn’t been a significant increase in those taking it.
It seems a case of déjà vu, with similar concerns raised about tax-free pension cash caps being suggested before the last Budget. As it turned out, no changes were made although some people regretted having brought forward a key element of their retirement planning, by taking their tax-free lump sum ahead of the Budget.
Speculation about possible changes to pension rules ahead of the Budget is a given. Perennial predictions relate to annual or lifetime allowances. This has often led to people paying more into their pensions ahead of any announcement. While in many cases the changes they feared haven’t materialised, there is little to regret in having saved more towards your retirement fund, where people can afford to do so.
The difference between this and previous speculation about changes to annual and lifetime allowances is that it drives a very different response from worried pension savers aged 55 or over – withdrawing their lump sum.
While, for some people this may be simply a function of bringing forward their plans by a few months, for others, it could have more significant implications.
For example, some people may still be saving towards their retirement, and taking 25 per cent tax-free now could be worth less than had they left it until their overall pension pot grows further. Also, if the money isn’t needed immediately, holding it in a bank account may depreciate its value over the years that follow, instead of remaining invested in their pension and benefiting from potentially higher returns.
For good reason, the Chancellor will not want to confirm or deny Budget speculation, as doing so would ultimately reveal the details ahead of time. However, it’s worth considering how the Government may weigh up the pros and cons of cutting tax-free cash.
First of all, there is the question of political risk. Tax-free cash is one of the most popular and best understood features of pensions, and those that have amassed significant savings over a lifetime will often have plans for this money, such as paying off a mortgage, helping their children or grandchildren onto the housing ladder, or simply having the holiday of a lifetime as they enter retirement. Scuppering such plans is unlikely to be warmly welcomed.
Second, there is the question of complexity. It sounds simple, reducing the amount from its current limit to something lower, but similar reductions to allowances in the past have usually been accompanied by a complex set of protections for people with existing entitlements. Protections which require monitoring and may last for years, possibly decades.
Third, there is the fundamental question of how much revenue it raises, and over what timeframe. Assuming there are some protections introduced, and that few people would simply withdraw an amount above any new limit and pay the tax, this doesn’t look like it would amount to much, at least in the short term.
Hugely unpopular, complex, and with minimal return: while the Chancellor evidently has some difficult decisions to make, cutting tax-free cash doesn’t look like an obvious choice.
