Tax Free Cash Cut Rumour Damaging Pensions Industry

We have already experienced rumours this week via The Times that changes to pension relief are to be scrapped and now yesterday, an article in the Telegraph suggests that the Chancellor may cut the tax free cash limit to £100,000 from its current £268,275.

It was the Conservative Government in the Spring Budget 2024 that introduced the tax free Lump Sum Allowance of £268,275 therefore capping the maximum amount of tax free cash for all of the lower of 25% of your pension fund values or £268,275.   So the precedent of capping tax free cash which will gradually become less valuable and mean more tax payable over the coming years is set.

It is therefore viable for the coming budget that Tax Free Cash Cap could be reduced.

Comment

Speculation and uncertainty will damage the pensions industry.  We need clarity and less speculation.

We suggest this would mean another systems adjustment for pension providers meaning that it could not be an overnight change but more so a change likely to come in April 2025 at the earliest.

This may be viable for higher earners still getting tax relief at 40% and 45% and then only have to oay say 20% income tax when they retire and draw pensions in excess of the £100,000 cap.  We also believe this sets a benchmark that lower earners will not wish to build up pension funds worth more than £400,000.  What is the point in saving abd getting 20% tax relief only to then have to pay 20% income tax when you retire.  A better benchmark might be say £150,000, meaning a pension fund target of £600,000, with the balance of £450,000 able to deliver a sustainable income of say c£22,500 pa on top of say £12,500 pa state pension, delivering a healthy retirement income of around £35,000 pa.