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Steve Webb: Pension tax-free lump sums set for ‘extinction’

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Chancellor George Osborne is to announce a dramatic overhaul of pensions taxation, according to former pensions minister Steve Webb, including the “extinction” of tax-free cash.

Speaking to the Sunday Times, Webb says Osborne is likely to flip the retirement taxation regime on its head so pensions are taxed in a similar way to Isas in his March Budget, but the former minister also notes this will include abolishing the right to a 25 per cent tax-free lump sum.

Webb, now director of policy at Royal London, says the Chancellor is likely to avoid alternatives, including introducing a flat-rate of relief, seeking instead to gain from the earlier yield of taxing pension contributions up front.

Webb says: “I do not believe that the flat-rate was ever the Treasury’s first preference.”

However, he adds this will likely lead to the end of tax-free cash.

He says: “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.

“Given that the tax-free lump sum costs the chancellor around £4bn per year in lost revenue, it is easy to see why he might like to get rid of it. It is remarkable to think that one of the most popular and best understood parts of the tax system — the tax-free lump sum — could be on the brink of extinction without anyone noticing.”

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Comments

There are 26 comments at the moment, we would love to hear your opinion too.

  1. I think Mr Webb is an expert at throwing hand grenades and then running in the opposite direction. If he has firm evidence this is to happen then lets see it, if not his continued speculation does nothing but scare the electorate into making a bad decisions or alienating pensions through constant misinformation.

  2. and at a stroke, the Chancellor will kill pension funding. The UK population will stop funding for their retirement. the up-front tax relief, tax-free growth and the tax-free lump sum are the only real incentives to individuals funding their retirement. The plus point will be that hundreds of thousands of people will now go out and buy a new car with the money that they were previously putting into their pensions. A masterstroke. When will our politicians realise that the population will only save for their futures if there is (1) an incentive (tax relief etc) and (2) if there is someone to encourage them to do so (a Financial Adviser)

  3. The tax-free lump sum was first introduced diplomat looked after the great British as a way of enabling to purchase a property upon their return to the UK.
    Perhaps, with flexible drawdown and individual savings accounts it is time to get rid of it

    It is my hope as a trade-off he abolished the LTA .

  4. I hardly think that no one will notice, if this is true, it will be a major disincentive to anyone to pay money into a pension ever again! People are not saving enough into pensions at the moment anyway, so this would just make the situation worse.

  5. I wish Steve Webb would stop with the informed commentator act. He doesn’t know what is going to happen. Nobody outside the Chancellor’s team knows.

  6. I doubt very much that the tax free lump sum will be abolished. Makes a good story though doesn’t it?

  7. Hopefully if the chancellor does ever consider such a plan, it would be phased in for future contributions only, so as not to disadvantage those who believe that the tax free lump sum under their pension is a contractual right.

  8. Apparently, Steve Webb didn’t know anything about the Pension Freedoms until it was announced and he was in the Government then. Why would he know any more now when he’s not even in Parliament any more?

  9. Due to the comments we’ve had 6 clients contact us this morning to ask if lump sum should be taken now!

  10. Trevor Harrington 22nd February 2016 at 1:17 pm

    If we are into speculation …. then I would speculate that the concept of abolishing the tax free cash element of pensions has been flown out to public discussion so that we all get exercised over such a draconian change to financial planning ….. whereupon, all he will do is standardise tax relief on contributions at a level 20% for all ….
    Then we can all say “thank goodness for that … that is much better …..”
    Anyway … we will all know shortly.

  11. Sorry to post twice on the same subject – breaks one of my few rules – but I think Trevor above is spot on. It is part of the way we are governed; first the leak, from the government, on a non attributable basis – draconian measures adversely affecting masses of people – the public outcry – then the actual details which whilst achieving what the government wanted in the first place are nothing like as radical, leading to huge sighs of relief from the masses and the expressions of complete innocence from our masters amidst their claims they never seriously considered the more radical measures.
    Reminds me of Stephen Fry’s comment admittedly on a different issue -“sometimes you think there’s just not enough vomit in the whole world…”

  12. Won’t this be a bit awkward for Royal London if his statement turns out to be true. If I was age 55 or over with and uncrystallised pension fund with the Royal London group I think I’d be expecting them to issue a mass notification to urge me to seek advice or contact them to consider drawing my PCLS before the Budget. If I only found they “knew” this was going to happen but after PCLS had been abolished I might have to complaint to them.

  13. sorry am I missing something?? If the proposed move it to an ISA style model then the entire fund will be tax free at retirement not just 25% of it!! moving from a Net, Net, Taxed model to a Taxed, Net, Net model??

    • No you are not missing anything. Webb is just pointing out that one consequence of moving to the ISA style model is to remove the advantage of the tax-free lump sum.

      To put this in context, it is widely anticipated (but not guaranteed) that in the Budget Osborne will announce a change to the pensions tax regime for future pension accrual. The two front runners are a flat rate relief on pension contributions (which was Webb’s baby, which has had some support) and an ISA model (Michael Johnson’s idea, which nobody likes).

      The odds on the ISA model may be shortening: not because it is a good idea, but because it will bring forward tax receipts, which recent economic forecasts suggest will be necessary if Osborne is to meet his ambition of balancing the books in time for the next election.

  14. Public Sector schemes were always 80ths plus cash, cannot see that one going down too well, or will special rules apply, just as with the more favourable LTA calculation for Defined Benefits?

  15. Won’t the relief be palpable when the abolition of the PCLS doesn’t happen but its restriction to prob £150k max going forward won’t seem so bad.

  16. We almost hear more from this guy now he’s the Ex-Pensions Minister than we did when he was in office. I agree with Gavin Thorn’s comment above ~ just who’s passing him all these spicy leaks as to what G.O. plans to announce?

    That aside, he was quoted in yesterday’s Sunday Times that he thinks removal of the 25% TFC at retirement option will apply only in respect of funds accumulated from future contributions. But who knows? If it’s withdrawn for all funds but with a period of grace, there’ll be a stampede for the exit door before the draw bridge comes slamming down. Providers and advisers may find themselves unable to deal with the logjam.

  17. If even half true – added to all the other restrictions – it will be a case of RIP DC Pensions.

  18. PS. How keen will people now be to be auto enrolled? What of those who still have pension mortgages? Orrible Osborne’s usual orrible mess.

  19. And what will then happen to auto enrolment if the gov removed tax relief?

  20. Surprise,surprise, he is a Lib Dem.

    Is this a political hand grenade or a way of forcing George Osborne’s hand.

  21. In fairness to Webb, its a message to Osborne not to think the unthinkable. He stated on the Daily Politics show today that this would be a massive dissincentive for people to save in pensions.

  22. Steve Webb of Royal London is responsible for developing policy, overseeing public relations and public affairs activity. He has failed on all counts and should be made to resign. His comments have thrown the issue of pensions into disarray causing the public to lose their faith in retirement savings.

  23. None of the options which seem to be floated out there are easy to implement;

    Restriction of tax relief to a flat figure. How will those who pay under the gross pay scheme be treated, will it now be a benefit in kind? How will people who have arranged salary sacrifice be treated?. What about company contributions for directors? What will the administration of all this cost?

    Removal of tax free cash. How will people who planned to use this over many years to repay their loans or undertake other arrangements be treated, what about public sector arrangements, what about those with deferred schemes with Tax Free Cash sometimes up to 100%, what about planning for retirement which takes people decades to undertake destroyed in one swoop for political expediency.

    The problem with suggestions he will do this arrangement “over time” or “phase in” disregards the reasons he is really considering this. He wants to access the money in pensions now to make political capital. He would not change arrangements in such a way that would benefit a future chancellor (potentially of another persuasion) as no one in that job makes long term decisions which will benefit us in many years time as they will not get the political credit. Short termism rules unfortunately.

  24. He might reduce the percentage to 20 and impose an overall limit of, say, £50,000. That would certainly be consistent with the LTA and AIA, would it not?

  25. The argument that the funds within the pension have not been taxed as the reliefs were given is true. You paid your money in, at one point you gained 33% tax relief as a basic rate tax payer! That said, many have based the repayment of mortgages and other debt repayment on the receipt of this non taxed lump sum.

    He most likely will want the income tax revenue from funds already vested, so I would have thought it would apply to new funds vested from the new tax year. Clearly it would need to be a very close deadline, most likely by the 5th April 2016. How would the industry be able to implement the rush of pension holders over the age of 55, rushing to get their PCLS if this were to be back dated? If he does not back date the ruling then on the 5th April every pension arrangement in the UK will need to be effectively stopped, a new account opened to separate the arrangement.

    The cost of implementing any of this is likely to be horrendous. If this where to be fully implemented this could be the council tax equivalent of the 80’s that could see the down fall of this Government.

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