Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
A slash of tax-free cash is said to be off the table for this month’s Budget, according to a confirmation by treasury officials to the Telegraph.
Attacking tax-free cash at the Budget would have been a tough sell for the chancellor, raising little money and causing uproar from young and old alike.
It would also likely have led to further industrial action from public sector trade unions, including senior NHS staff, at a time when public services are already creaking.
No change to tax-free cash entitlements at the Budget is good news, but it doesn’t ensure a lasting commitment from the government for long-term stability so people can plan for the future with confidence.
While any changes to pension tax relief would almost certainly come with protections for those close to retirement, it is entirely understandable that people are concerned by the speculation witnessed in recent months. When you save diligently throughout your career you deserve the right to plan ahead without the threat that government may move the goalposts before you can access your money.
Constant rumour and speculation will damage confidence in long-term saving, lead people to make short-term decisions that may be bad for their long-term financial health, and cause wariness about household spending choices for fear government tinkering may upend financial plans. How many people will have taken a ‘wait and see’ approach to booking a holiday of a lifetime or pressed pause on a house refurbishment because they can’t trust government not to make a mess of their financial plans?
That is clearly contradictory to the government’s growth agenda, as well as the stated aim of boosting long-term investing and pension adequacy.
Pension Tax Lock
AJ Bell has consistently campaigned for government to commit to pension tax stability, with a focus on key tax incentives – tax-free cash (pension commencement lump sum) and tax relief.
Constant speculation about potential changes to retirement saving incentives, particularly tax-free cash, undermines confidence in the pensions system and leads to people making irreversible decisions based on fear, rather than their long-term financial goals. This is an unacceptable position given pensions form the cornerstone of long-term financial planning and personal financial responsibility.
Furthermore, it runs counter to wider government efforts to boost pensions adequacy and drive greater levels of investment, including in the UK economy.
The Tax Lock proposal calls for a government commitment to the two core tax incentives in-built in the pension system. These include tax relief, whereby individuals are expected to pay tax in retirement but receive tax relief on contributions at their marginal rate, and tax-free cash, entitling individuals to take 25% of their pension tax-free, normally referred to as tax-free cash or a pension commencement lump sum. At the very least this entitlement should not be reduced from its current level of £268,275.
Last month the business launched a petition demanding government commit to a Pension Tax Lock. It has so far garnered over 20,000 signatories. Government responded on 22 October. On 5 November, the Petitions Committee asked it for a revised response.
Tom Selby: Director of Public Policy
Tom Selby is AJ Bell's Director of Public Policy. He joined the company in 2016 as a Senior Analyst before becoming Head of Retirement Policy. He has a degree in Economics from Newcastle University.
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