Will 25% tax free pension lump sum get axed in the Budget?

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Budget risk: Will the Chancellor axe the 25% tax free lump sum in the Budget, and if so will it take effect immediately?


I plan to take the 25 per cent tax free lump sum from my pension in the next six months.

Do you think the 25 per cent tax free lump sum is at risk in the Budget? If there were changes, when would they come into effect?

Can I wait and see what happens in the Budget and still have time to take the lump sum at 25 per cent should it be changed or do I need to take a view now as to whether I need to take action in October to ensure I benefit from the lump sum at 25 per cent?

SCROLL DOWN TO FIND OUT HOW TO ASK YOUR PENSION QUESTION    

Budget risk: Will the Chancellor axe the 25% tax free lump sum in the Budget, and if so will it take effect immediately?

Budget risk: Will the Chancellor axe the 25% tax free lump sum in the Budget, and if so will it take effect immediately?

Steve Webb replies: Ahead of every Budget there is always speculation that the Chancellor will make major changes to pension tax relief.

Given that there have been six separate cuts to the limits for pension tax relief since 2010, this is hardly surprising.

But in my view the chance of the Chancellor doing something as radical as scrapping or capping 25 per cent tax free lump sums, especially for those close to retirement, is close to zero.

The ability to take a quarter of your pension as a tax free lump sum is one of the most attractive features of the pension system.

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

Steve Webb: Find out how to ask the former Pensions Minister a question about your retirement savings in the box below

There is no doubt that the Treasury would be keen to find a way to reduce this tax perk if they could.

As long ago as the 1980s the former Chancellor Nigel Lawson admitted in a Budget speech that he had considered taking action. 

But he told MPs he had decided not to touch what he called ‘the much loved but anomalous’ tax free lump sum.

The reasons for this are mainly to do with politics.

Pretty much everyone who is building up a pension can look forward to a tax free lump sum. 

With nearly ten million more people automatically enrolled into pensions since 2012, there are even more people who are now set to benefit from this option.

Although many of these people only have tiny pension pots at the moment, they may be looking forward to a time when they have a bigger pot and the chance of a lump sum, and they would not thank a Chancellor who took it away.

At the other end of the age scale, there are those who are coming up to retirement for whom a tax free lump sum is a crucial part of their financial planning.

For example, there are many people who still have a balance to pay off on their mortgage, especially if they have an ‘interest only’ mortgage.

The tax free cash may have been earmarked for this purpose and it would be totally unacceptable if the rules were to change at the last minute.

Given that the Chancellor only has a majority in Parliament with the aid of the Democratic Unionist Party, only a handful of people on his own back benches voting against a Budget measure would see him lose the vote, and an attack on tax free cash would be sure to generate a rebellion.

If there were to be any changes, I think that they would be gradual, and therefore someone such as yourself who was about to draw their tax free cash would be extremely unlikely to be affected.

One possibility is that at some point there could be a limit on how much tax free cash you can draw.

This is an idea that is starting to be floated by ‘think tanks’ such as the Resolution Foundation who recently advocated a cap of just £42,000 on tax free lump sums.

This sort of figure would cause a political storm and simply will not happen in the short-term. 

But you could imagine a future Chancellor, perhaps in a different government, introducing some sort of cap on tax free cash.

It would probably start relatively high and be set at such a level that it would affect relatively few people. But each year it might be gradually lowered until it made a significant difference.

This is, of course, all speculation. In the short term, I think that there is virtually no chance of a major change on tax free cash in the October 2018 Budget.

And even if there were, there would almost certainly have to be transitional arrangements to protect those who were already very advanced in their retirement planning.

Ultimately you will need to decide when you want to access your lump sum, but my own view would be that there is no need to rush to do so.

ASK STEVE WEBB A PENSION QUESTION 

Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Since leaving the Department of Work and Pensions after the May 2015 election, Steve has joined pension firm Royal London as director of policy.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.

Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful. 

If you have a question about state pension top-ups, Steve has written a guide which you can find here. 



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