Wheelers Words

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Mar 9, 2023

Wheelers Words – Are we to see the end of tax-free cash?

For many, the report issued by the Institute of Fiscal Studies (IFS) at the start of February focusing on pension reforms will have gone broadly unnoticed, by both clients and advisers alike.  Although the IFS are an independent body, and as such this is not legislation, if the report is implemented in the future, this could have wide reaching effects on anyone who has saved in a pension environment.

In the report, the IFS suggest that tax support for pension saving is overly generous for higher earners and needs to address the imbalance of little to support many of those facing low income in retirement.

As part of the reforms, it suggests removing the 25% tax-free withdrawal limit to provide a more equal subsidy to all private pensions, benefitting those with a low retirement income.  As a minimum, it goes on to suggest that if the tax-free withdrawal component remains then it should be capped so that it only applies to 25% of the first £400,000.  Although the report claims that it will only affect 20% of those approaching retirement, for those affected it could have a significant impact on their future plans.

Individuals may well have been planning for their future retirement with the intention of using the tax-free cash element of their pension to not only provide for retirement, but also to reduce borrowings and mortgages which may well come to maturity at a similar time.

Also included in the report, it recommends making the annual allowance, which is currently £40,000, more generous and scrapping the tapering annual allowance for high earners.  The proposed reforms also consider the lifetime allowance and possibly linking the current lifetime limit with a lifetime contribution cap.

Finally, and perhaps one of the proposals which could have the most significant impact, is the proposal that income tax should apply on withdrawals from inherited pensions irrespective of the age of death, and that all pensions should also be considered to be part of a deceased’s Estate for Inheritance Tax purposes, including those currently exempt where written into Trust.

Although we cannot be certain that any of these proposals will make it into legislation, pensions have always been an area which Government seek to continually adapt and change the rules.  Since pension tax simplification on 6 April 2006, nearly 17 years ago, the changes affecting pension legislation has changed on numerous occasions.

Whilst, for many, these changes are simply a part of life as changes in rules develop, for those reaching retirement it can give an unhelpful complication on their current planning.  As a result, for those who are reaching the point of retirement or who have pension funds with a value in excess of the £400,000 noted above, I would recommend that you talk to your financial advisers to consider if any forward planning would be prudent.