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Former pensions minister accused of scaremongering over tax-free cash fears

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Advisers have accused former pensions minister Steve Webb of scaremongering over claims George Osborne will scrap pensions tax-free lump sums in the Budget.

The Chancellor is currently considering fundamental reform of pension tax relief, including potentially overhauling the system so pensions are taxed in a similar way to Isas.

Webb, who is now director of policy at Royal London, told the Sunday Times the tax-free lump sum will become “extinct” if Osborne pursues this option – and indicated it is favoured by the Treasury.

He added: “Under the current system you can get tax relief on your pension contributions, enjoy tax-free growth in your pension fund and then take a quarter out tax-free — a hugely tax-advantaged way of saving.

“In effect, a quarter of the money in your pension never gets taxed at all under the current rules.

“But with a pensions Isa, this tax break quietly disappears. Since all of the money that goes in to a pensions Isa has already been taxed, there is no equivalent of the tax-free lump sum.”

But advisers have criticised Webb for stoking fear about a potential pensions raid by the Chancellor.

Ovation managing director Chris Budd says: “We have got clients who have been put into a panic by Steve’s comments.

“It’s telling that we have a Government that people don’t trust not to do something dramatic at the drop of a hat. When someone like Steve makes comments like that people believe  it could happen, because the Government has messed around so much.

“I wish he had chosen his comments more carefully.”

Austen Birkett managing director Mark Birkett adds: “Obviously nobody knows what is going to happen next but with everything that has gone on over the last couple of years, he could have conveyed his opinion differently.”

Webb says his comments were designed to alert people to the risks associated with the pension Isa model.

He says: “My point is partly that he wouldn’t have to utter the words ‘I’m abolishing the tax free lump sum’ – it would just quietly disappear.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Absolute nonsense! I have re-read Webb’s comments, and they are quite clear. If Osborne goes for the TEE / pensions ISA, then the advantage of the tax-free cash sum goes (since everything will be tax-free on the way out – but taxed on the way in). It is not Webb scare-mongering. It is reporters and advisers not engaging brain.

  2. Agree Siz; it was the reporting of what he said, not what he actually said.
    Have a go at the media if anyone…..if only they were accountable!

  3. I agree^ TFC being removed (for future accrual) is a non-story if all benefits are paid out Tax Free.

    I also fear a further raft of ‘protection’ and new rules where ‘pre 2016 EET’ pensions and ‘post 2016 TEE’ pensions have different rules and the need for advice becomes ever more costly because the rules have become ever more complicated.

    I can almost hear the budget announcement now …. ‘we are removing TFC’ (cue moans and groans and jeers from the reds/yellows) … dramatic pause, ‘because going forward, all pensions will be paid free from tax’ – cue raucous cheers from the blue side of Parliament. Small print – T&Cs apply.

    So much for pension simplification.

    Unfortunately, the rumour, guesswork and myth surrounding pensions continues to proliferate – I sat through a presentation recently talking about ‘potential’ outcomes! What’s the point of considering anything until it’s fact – blimey, it’s not like there isn’t already enough to think about.

    Sigh.

  4. The advantage of the TFCS in the current system is that it’s the one aspect that is Exempt Exempt Exempt, or EEE. If we move to TEE, that 25% EEE element is snuffed out- as Webb says, quietly.

    And different rules for EET and TEE? Not that hard. The Americans seem to manage just fine. Google “Roth IRA Conversion”.

    • Hi Will. I agree that different rules are doable – and in fact I can see it getting vociferous support from the industry (in spite of the fact that deep down everyone hates Johnson’s baby).
      All Gideon has to do is to announce at the Budget that he is going for TEE – because he wants the cash – and will consult on whether to do it for future accrual only or, in the interests of simplicity, change everything overnight: levy a tax on existing pension scheme assets in return for legislating that future chancellors cannot tax them later on.

      I suspect that this would get everyone saying how much they love the TEE-future-only model. So the Osborne gets to keep his vanity project of eliminating the deficit on track for a bit longer; and can do so by making a change that all the experts will support (influencing journos, the Opposition, and ultimately voters). Job done.

  5. Anything might be announced in next month’s budget statement. Webb is the EX- pensions minister. Is it likely that government insiders are feeding him advance information on G.O.’s plans?

  6. All we have to do is wait. He might be right, therefore it’s not scare mongering. If it doesn’t happen he could well be credited with scaring Orrible Osborne off.

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