Time to take your tax-free cash?

Apparently 40 Conservative MPs have attacked the pensions industry and in particular the tax relief that is available against contributions and the “much loved” tax free cash lump sum.

Calling for the abolition of the tax-free cash lump sum from pensions is not a clever idea because it is likely to cause a bit of a reaction.

Anyone who is over 55 and who has not yet taken their tax free cash lump sum is likely to be “knee jerked” into doing so now.

Certainly this potential threat to the benefit was a contributory factor in the decision made by some of my clients this morning who have decided it just isn’t worth the risk of waiting.

I recall way back in 2006 writing an article that was published in a pensions magazine pondering on why HMRC had changed the name tax free cash lump sum to pensions commencement lump sum.

Surely it was because there was an intention to tax the lump sum? If not why take away the tax free part of the title?

We have had to deal with a succession of rumours over the years about the abolition of tax free cash, most of which have been unfounded but some have had elements of the truth about them.

But can you imagine how disappointing it might be if by failing to take tax free cash now you either missed out on it entirely or saw it significantly curtailed?

Of course there are some disadvantages to taking tax free cash earlier than planned.

The pension plan owner who does so is taking capital out of a fairly benign tax environment and then has to do something with that money.

Assuming they don’t spend it it may need to be saved or invested and potentially any growth might be taxable.

Having taken the tax free cash any death benefits payable as a lump sum will then be subject to a 55% tax charge (potentially in addition to inheritance tax) rather than being paid tax free on death if tax free cash had not been taken.

So the trade off is one of potential disappointment if tax free cash were to be abolished versus a movement out into a potentially greater taxed environment to avoid that disappointment.

Each individual will be driven by their own motives and of course all this speculation may come to nothing but it will make sense to take expert advice about your own circumstances.

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