I have written on this subject before most recently when the Pension Policy Institute published a paper on the inequalities of the tax relief system for UK pensions and when a band of Conservative MPs wrote a letter to David Cameron suggesting the abolition of tax relief and tax-free cash.
In fact that recent blog was not the first time I have written on this contentious subject.
When HMRC changed the title tax-free cash to ‘pensions commencement lump sum’ some years ago I wrote that my suspicious mind led me to suspect that this was a set up for some change to the much loved tax-free cash lump sum.
I reckon almost every year of my long experience in financial services there has been some rumour about change to the tax-free cash lump sum.
To be fair whilst there has been some change, that change has not resulted in anything too dramatic.
At the weekend Ian Cowie wrote about this subject in The Sunday Times – “Quick, show me the money”.
His conclusion was that he would take his entitlement to the tax free cash lump sum whilst he had the chance.
His fear was that at a stroke the Government could remove or seriously curtail the amount of tax free cash available from his pension fund.
Other commentators disagree and don’t expect the Government to make a change like this that would seriously undermine the planning of many people.
I hope that is the case but can we really trust politicians of any political persuasion?
So if you are aged 55 or over and have not yet taken your entitlement to tax free cash should you take immediate steps to do this?
I don’t know is the honest answer because it depends upon your own unique situation.
Like with any financial decision there are always disadvantages as well as advantages to consider. So perhaps I have more questions than answers.
Were you intending to take the tax free cash lump sum anyway?
Perhaps you had some form of capital project in mind. Using the tax free cash at retirement to pay off mortgage debt for example. Or gifting away monies to the next generation as part of an inheritance tax mitigation exercise.
Or perhaps you had rationalised that taking the tax free lump sum and investing it for income was going to be a more efficient thing to do than buying an annuity.
But if you had no plans for the lump sum the disadvantage could simply be that you are moving it from a relatively tax benign environment into one where tax might be paid on any income you generate (and I fully appreciate that ISA allowances can be used for some of this money).
If you took the tax free cash lump sum and simply held it in a bank or building society deposit you would be faced with the challenge of low current interest rates and also possibly tax on the interest.
Remember also that by taking the tax free cash lump sum and not taking any income you are exposing the rest of your pension fund to the potential for a significant tax charge on your death if your family then needs/wants the balance of the fund to be paid to them as a lump sum.
How do you feel about the 55% tax charge of such funds on death?
Where will the tax free cash come from if you do decide to take it?
Is it the already in your pension plan or will you have to disinvest assets to create it? Does that make sense in terms of your long term planning needs?
So don’t be panicked into making a decision but do recognise that pensions have been and remain a political football and like any football get kicked into touch from time to time.
