I have been reading more and more press reports that the chancellor is going to reduce the amount of tax-free cash lump sum that I can take to only £100,000.

I haven’t yet touched my SIPP but I’m really worried that I will lose out if this change goes ahead.

Can you tell me whether it is going to affect everyone, or only those who have not yet started taking their pension benefits? And is there any way I can protect what I have? Will it be an immediate change, and if so am I better taking my tax-free cash today?

Dan

Rachel Vahey, AJ Bell Head of Public Policy, says:

It will have been a wait of almost four months between Labour winning the general election and their first Budget. That is four months of mounting speculation on the tax measures the government could take to close the now infamous £22 billion black hole in public finances.

Many press column inches have been devoted to the possible tax cuts, balancing the pros and cons of each option, with a growing focus on pensions’ tax advantages.

From the most recent reports, it seems increasingly unlikely the Government will restrict tax relief on individuals’ pension contributions, but the rumours around a cut in the maximum tax-free cash still appear rife. Reports often refer to £100,000 – a figure suggested by an Institute of Fiscal Studies report a few weeks ago.

If the Treasury did make this change, they would cut the LSA (lump sum allowance). This is the maximum amount of tax-free lump sums someone can usually take in their lifetime. This is currently £268,275, and you’d need a pot of at least £1,073,100 to take full advantage of this.

We have had no word from the Treasury that they are going to make any changes. However, in the absence of hard facts, it’s very easy to feel pressurised. Pension schemes have generally seen a sharp increase in the number of people accessing their tax-free cash to make sure it’s not lost.

THINGS TO THINK ABOUT

But before you rush to do the same, there are a number of practical things to think about. First, you have to be over the age of 55 to access your pension pot today. If you are younger than that, you cannot take your tax-free cash.

It’s far from certain who any cut in the LSA would affect. On the past occasions when the pensions lifetime allowance has been cut, those who had amassed benefits based on the old limit have been offered protection. So, another layer of protection could apply if the LSA was cut, making sure people that have already saved based on the higher limit don’t lose out.

You will be removing the cash from an environment where it can grow tax free, so if you do choose to access it, at the very least make sure you have a plan for it. If you just take the money out of your pension and put it in a bank account earning little to no interest, its value will likely quickly be eaten away by inflation. 

It could also be a sizeable sum and may take several years to move to an ISA if using the maximum £20,000 a year subscription limit. Left outside a tax wrapper such as ISA or pension, and any growth will be liable to income tax and capital gains tax (the rate of which is strongly rumoured to increase in the Budget).

But if left in your pension, your tax-free cash entitlement could have the opportunity to grow tax free too, boosting your pension funds for when you need them.

To tackle their current financial woes, the Government needs a solution that is quick and easy to implement and raises sufficient funds to make it worthwhile. If they chose to cut the maximum tax-free cash, then theoretically that could happen immediately. But this would very much depend upon the wording of the Budget statement.

KEEP A CALM HEAD

However, it’s unlikely this change would deliver the substantial in-year savings sought by the Treasury, and pension savers would certainly change their behaviour to only take the maximum tax-free amount allowed. It would also be deeply unpopular – most people know they get 25% of their pension pot as a tax-free cash lump sum, and far more would have this capped were the maximum allowed subject to such a drastic cut.

With so much ‘noise’, it can be difficult to make a rational decision. But ultimately, pension savers need to take a cool calm look at their own situation and make choices based on what works best for their long-term future.

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