Treasury rules out pension ‘tax-free cash’ reduction

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The Treasury has ruled out a reduction in the pension Lump Sum Allowance (tax-free cash) ahead of this month's Autumn Budget, which will come as a relief to those with personal and workplace pensions.

This is great news following speculation that the Chancellor was considering reducing the allowance (currently £268,275), which is the maximum amount that can be withdrawn from your pension free of tax. Not only would this have caused chaos, but it would have been a real kick in the teeth for those who have been diligent enough to save for their retirement. Furthermore, it would have been an enormous disincentive to those who are earlier in that saving journey.

While this is good news, damage may have already been caused, as for those who have already taken their tax-free cash, the decision is irreversible. The money can’t be put back.

There is a large amount of anger and discontent in the pensions and financial services industry, as this is the second year in a row that rumours have been allowed to run for a number of weeks before the Treasury has provided clarity. However, it also highlights the potential risk in making decisions based on rumour.

A decade ago, ‘automatic-enrolment’ was launched, making pensions effectively compulsory for employers and employees. A big driver for this was to ensure people saved enough to have an enjoyable retirement, and to reduce the dependence on State Pension and benefits in retirement. This ‘need’ remains more important than ever as inflation and the cost of retirement is growing much faster than was the case in 2015.

Despite this very clear and obvious need for pensions, I can’t help but feel the stigma caused by speculation of the lump sum and the impending changes to pensions and the Inheritance Tax regime has set us back 20 years.

Pensions are a fantastic savings vehicle for retirement; there are many, many benefits to having a pension. Policy makers must consider the long-term nature of a pension (20, 30, 40 years +) and allow those who have made long-term, sensible, diligent commitments to save for retirement not to be disadvantaged by short-term changes in policy. If you have any questions around your pension, please reach out and seek advice before making big decisions.

Armstrong Watson is hosting a live webinar the day after Rachel Reeves makes her statement to the Commons. Join us to hear from our specialists in tax, financial services and accounting who will be examining the announcements and their impact. To register, please visit armstrongwatson.info/budget.