The Pension Policy Institute recently published a paper on the inequalities of the tax relief system for UK pensions, and they have made a number of proposals to make the system of tax relief fairer to everyone making pension savings.
When HMRC changed the title of tax-free cash to ‘pension’s commencement lump sum’ some years ago, many commentators had suspicions that this was the start of changes to the much loved tax-free cash lump sum.
For many years there have been rumours about changes to the tax-free cash lump sum that could be drawdown from your pension savings, which is currently up to 25% of your fund in most cases, with some minor exceptions.
Ian Cowie (a financial journalist) wrote an article about tax free cash in The Sunday Times using the headline “Quick, show me the money”.
It was his conclusion that he would take his entitlement to the tax free cash lump sum whilst he had the chance, as he was fearful that the Government could remove or reduce the amount of tax free cash available from his pension fund.
There are some financial experts that do not agree with Ian Cowie and don’t expect the Government to make a change at this time, as this could undermine their objective of engaging more people to save for their retirement.
No one really knows what the government will do, there have already been a number of changes in respect of taxation for pensions in the last 12 months, with the reduction in the Annual Allowance for pension contributions being reduced from £50,000 to £40,000 from 6th April 2014, and a reduction to the Lifetime Allowance from £1.5m to £1.25m, also from 6th April 2014.
Both the Annual Allowance and Lifetime Allowance have been reduced more than once over the last few years.
So, what should you do if you are already entitled to take your entitlement to tax free cash?
Well the answer is, it depends upon your own personal circumstances, and as with most financial decisions there are advantages and disadvantages to consider.
You should ask yourself if you have a specific purpose for the tax free cash lump sum? Such as repayment of a mortgage or other debt which will help mitigate interest payments. You may be considering gifting the sum to help children and grandchildren with a deposit for a house purchase.
If you have no plans for the lump sum, the disadvantage could simply be that you are moving it from a relatively tax efficient environment into one where tax might be paid on any income you generate.
Additionally, by taking the tax free cash lump sum and not buying a conventional or enhanced annuity, you are exposing the rest of your pension fund to the potential of a 55% tax charge on your death where the beneficiary decides they want the balance of the fund to be paid to them as a lump sum.
For some clients, the decision to take tax free cash is based on their need to deploy the capital and/or income – for some it may be that they do not trust the Government and want control of the capital, for others the best course of action is to retain pension benefits until capital and income is needed.
If you would like help in planning how and when you take your pension benefits, then please get in touch.