A question that I keep getting asked right now is, should I take my pension tax free cash?
The rumours are rife that Labour may do something with pensions when their first Budget comes round on the 30th October 2024.
We know they plan to raise money from somewhere to plug the so-called ‘fiscal black hole’ so could they really reduce or even remove the 25% tax free lump sum?
If they do indeed plan to do something with the tax free lump sum it may prompt you to cash it in now before you lose the chance to. But is this a good idea.
Let’s look at what the government might do and the pros and cons of taking your pension tax free cash now.
We know the new Labour government plan to raise taxes following Chancellor Rachel Reeves speech regarding the £20billion black hole.
We also know they have committed to not raising the three big taxes, Income Tax, National Insurance and VAT.
So that doesn’t leave them much else to raise significant funds and therefore seems likely that something could be done with pensions.
Focusing on the tax free lump sum or the Pension Commencement Lump Sum (PCLS) to give it its proper technical name, let’s just remind ourselves of how this currently works.
When you reach minimum pension age, 55 changing to 57, currently you have the right to access and withdraw money from your private or workplace pension.
One of the options you have when you want to make a withdrawal is to take up to 25% of your uncrystallised pension as a lump sum that is tax free.
You don’t need to take the tax free lump sum all in one go, you can phase this over a longer period of time.
There is already a cap in place that limits the total amount of tax free cash you can take over your lifetime. The current Lump Sum Allowance is £268,275. You may be entitled to a higher allowance if you have some form of Lifetime Allowance protection.
So, the easiest thing for the government to do would be to reduce the Lump Sum Allowance cap. This may not raise that much tax for the government though.
If they were to reduce it or remove the ability to take a tax free cash lump sum altogether this could trigger a number of problems for the government.
For a start it could get very complicated. Lots of retirees would have already taken some tax free cash but not all of it. Others will be just about to retire and have planned to use their tax free cash in a certain way.
All this could mean bringing in some form of protections like governments have done in the past when changes to the Lifetime Allowance were made.
It could also wind up those in the public sector that also benefit from the tax free lump sum when taking their pensions.
We have seen in the past that when pension contributions have been restricted, Doctors and Nurses ended up leaving the NHS to avoid big tax bills.
If the government were to announce a removal of the tax free lump sum and give people time to prepare, it could cause a big sell off in the stock and bond markets as people rush to get their money out of their pension. It could also lead to a number of people leaving the workforce as they bring forward their retirement.
On this basis, if they were to do something as radical as removing the tax free lump sum, they will probably need to do it midnight the day before they announce it.
So, if you are concerned about the potential reduction or removal of the pension tax free lump sum and do decide to take it now what are the advantages of doing this?
They key advantage is that by taking the tax free lump sum it gives you options.
There are however a number of disadvantages if you did decide to take your entire tax free lump sum now in one go.
Remember there is no guarantee the government will make any changes to the tax free lump sum. We are only working on rumours.
Ultimately, we just don’t know what is going to happen at this stage and we can only make educated guesses.
I would suggest that if you were going to take the tax free lump sum anyway and you have a plan for it that fits your overall goals then you might want to do this sooner rather than later.
However, if you don’t need the pension tax free lump sum and have no plans for it for a number of years then you are probably best to leave it where it is and see how this all plays out. This latest government’s term may only be five years by which time a new government could come in and it be all change again.
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10 сен 2024
