Tax-free might not mean tax-free

Last week the Chancellor dropped his bombshell news about pension benefits rule changes.

From April 2015, as well as taking 25% tax free cash, pension plan holders will be able to take the rest of their  pension fund as a lump sum (albeit taxed as if it were actually income).

The Institute for Fiscal Studies has questioned whether allowing savers to take 25% tax free cash might be too generous.

Previously Government has calculated the lost tax take on tax free cash lump sums as £2.5billion. This is by no means a small amount.

But any recalculation of the cost of tax free cash must surely take into account all the balancing factors.

Much of that tax free cash will be reinvested to generate further retirement income and by no means all of that income will be tax free.

If it is not reinvested for income it will be spent and that money in the economy will itself generate further tax revenues for the Government.

Those who choose to take the balance of their pension fund as a taxed lump sum will pay income tax on the excess over the 25% and that income tax I suspect is likely to be a greater and clearly a more immediate amount than the income tax due on a series of income payments received many years into the future.

I suspect that the last thing we need to encourage future pension saving is a further attack on the “much loved” tax free lump sum.

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