With the Autumn Budget looming, there is growing speculation that there could be significant changes about to come into play. One thing that may be changed is the tax free lump sum allowance that can currently be taken out of our pensions…
Lump Sum Allowance
Normally, you can take up to 25% of your overall pension fund as a tax-free lump sum, up to a maximum of £268,275. This is your lump sum allowance.
This tax-free lump sum does not affect your personal allowance. You can withdraw money from your pension as a lump sum, rather than taking it all as a regular income, but you should bear in mind that everything over that first 25% of your pension fund is taxable. This means that if you were to take all of your pension pot as cash, you could end up paying a higher rate of tax for that tax year, whereas spreading the withdrawals out over several years could help lower your tax burden (as you still get your personal allowance, and our tax system is progressive).
Those holding a protected allowance may see an increase in the amount of tax-free lump sums they can take from their pensions. The increase will depend on the type of protected allowances you hold. Click here for more information on the different types of protected allowances.
Budget Speculation
The new government are set to announce their first Budget at the end of this month, and there are rumours that the 25% tax-free pension lump sum could be at risk.
This has not been confirmed yet, so it’s important to not make any rash decisions with your pensions and to take independent financial advice from a regulated and qualified adviser before making any major decisions.
The kind of options that exist if changes to the lump sum allowance were to be made are things like cutting the percentage from 25% down to something like 20%, or to reduce the maximum tax-free amount from £268,275 to a smaller amount.
IFS Calls for Reform
The Institute for Fiscal Studies (IFS) has previously called for reform of the tax-free lump sum for pensions, arguing that it unfairly favours higher earners.
“The current system of pensions tax provides overly generous tax breaks to those with the biggest pensions, those with high retirement incomes and those receiving big employer pension contributions, and there is a strong case for reform. However, insufficient support for pension saving could risk inadequate accumulation of private retirement resources and greater reliance on the state” – The Institute for Fiscal Studies
However, the IFS has also stressed the importance of maintaining a clear pensions policy to create stability, rather than changing direction frequently.