Tax-free cash in the 2016 Budget

Posted By: Phil Handley DipPFS AwPETR On February 29, 2016 Category: Tax-free cash

I’ve had an influx of people last week enquiring about taking 25% tax-free cash from their pension before the Budget (2016). Steve Webb, the former Liberal Democrat Pensions Minister, writing for the Sunday Times, suggested that George Osborne could be set to axe access to the pension tax free lump sum.

The 25% tax-free cash element of pensions is one of the biggest incentives to pay into one. Many people look forward to taking this tax-free cash at retirement and rewarding themselves with a holiday or a new car.  Other rely on it to pay off their mortgage.

And herein lies the problem with the proposed claims.

Abolishing the right to this money would leave thousands of people in mortgage difficulties, even homeless. For those who have taken interest only mortgages, or even pension mortgage where the pension was geared up to pay off the mortgage, there is going to be a final demand from the bank with no ability to repay.

Yes, the pension freedoms do now allow full access to your savings, however with a tax burden as it’s treated as earned income.

It would be political suicide for Osborne to make such an announcement, and it’s a decision which would affect everyone.

Of course there is no guarantee that it couldn’t happen, it’s just highly unlikely.

If there was going to be any raid on tax free cash it’s more likely to be for future contributions, and therefore locking in any previous entitlement. The incentive to do this is it could save the Treasury £4 billion a year.

There are of course, further changes expect to pensions in the Budget 2016. We’ve had to virtually retrain in the industry as professionals over the last few years. On this year’s likely agenda is a change to the tax on contributions.

Some commentators are forecasting an equalisation of tax relief. So rather than a higher rate tax payer receiving 40% and a basic rate tax payer 20%, maybe a flat 25% for all.

Others are talking up an ISA-style saving vehicle, where contributions are paid from taxed income, with no income tax to pay once in retirement.

The ISA style savings vehicle is more likely what Steve Webb was referring to meaning a future loss of tax free cash, not benefits already accrued. The media reaction to the comments have left people feeling a little uneasy, with one of my clients saying it’s not the right time in his life to be taking risks on what might happen, and insisting he wanted the tax-free cash now whilst the rules still exist.