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Inside Edge – Steve Bee

Like most non-normal people, I have read and reread the Pension Green

Paper and Inland Revenue consultation paper many times already this

year. I need to get my head round them so I can do my job but I would

be lying if I didn&#39t say I find them really interesting too. The

Revenue paper, especially. Some of it knocked me out when I first

read it and some bits of it still surprise me as I keep going over

the words in my mind.

In particular, and to give you an example of what I am on about, take

tax-free cash lump sums. Now, excuse me but haven&#39t we been through a

decades-old annual pre-Budget ritual where every newspaper has been

required to carry worrying quotes from experts predicting the end of

tax-free cash on pensions? I think you will find we have. In fact,

it was only a few weeks ago, in the run up to the publication of the

Revenue paper, that this ritual was at the full height of one of its

periodic frenzies. Millions of people were worried, I&#39m sure –

unnecessarily, as it turns out.

Far from abolishing tax-free cash, the Revenue is actually proposing

that many people should get more tax-free cash under the new rules

than they would have done under the old ones.

Blimey, that&#39s a turn up for the books. No one was expecting that.

Inland Revenue 1, Pension Experts 0, sort of thing. Against the run

of play, some are saying, an own-goal even, sloppy back-pass, not the

sort of thing the home team will be happy with.

I don&#39t think I agree. If you read the words carefully (which is the

way the Revenue guys tend to choose them in the first place) they

seem to have had a road-to-Damascus moment on this.

First things first. Every self-respecting pension expert knows that

we only got tax-free cash in the first place because our private

pension system was based on the pension arrangements that were put in

place for civil servants in the 19th Century. They had an annuity and

an untaxed cash gratuity at retirement, so we all got the same.

Simple as that. That&#39s the way it was and we have always worried that

it would one day be seen as an anachronism that would have to be done

away with. That is why the experts have all had one eye over their

shoulder for so long wondering when the blow was coming. The Revenue

now seems to be saying it never will, if the words used in this

consultative paper are anything to go by. What they actually say is

this:

Generous as tax relief is, the Government recognises that people do

need encouragement to lock away their money, perhaps for decades,

until they are ready to begin to draw benefits from their pension

savings in later years. The tax-free lump sum provides that

encouragement. It can provide a substantial capital sum, perhaps

allowing people to put their financial affairs in good order when

they retire. It may even offer once-in-a-lifetime opportunities such

as visiting family in other countries or paying for home improvements

to make retirement more comfortable.

It&#39s difficult not to be amazed by that, isn&#39t it? Here we have the

Revenue saying there is a purpose to the tax-free cash sum after all.

It is a reward to savers for locking their money up for so long a

time. So, it doesn&#39t look likely that they will be able to get rid of

tax-free cash in the future, nor presumably would they even want to.

The only downside I can see to the whole thing is that personal

finance journalists will have to work a bit harder in future to find

a similarly compelling horror story to fill the gaps left by

perennial tax-free cash shock and panic stuff. But I am sure they

will come up with something suitable. People saving too much in

pensions and not spending enough in the high street perhaps?

Steve Bee is head of pensions strategy at Scottish Life

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