Pensions and the budget

[BasketOfBubbles]

I am due to retire on 1st November ie a couple of days after the Budget. I have put-in for a 25% lump sum. The paperwork is going through.

I'm now panicking that the tax rules might be changed with immediate effect on October Budget day and I'll be screwed.

That couldn't happen could it? We'd need a bit of notice??

It is entirely possible for the government to change tax rules effective from Budget day. If you have the ability to withdraw earlier than 30 October I would do this if you were going to take the tax free sum anyway.

I am going to make my additional voluntary contribution to my pension fund to clear before 30 October this year in case relief is also cut from budget day.

I think there can be immediate changes to taxes but what you're talking about is pensions reform which I would have thought require the Finance Bill to be voted through Parliament

I guess it depends which specific aspect of tax and your pension you're worried about?

i work in pensions and I and my colleagues think this is just scaremongering

A Finance Bill can be retrospective though - as long as they get it through in the same tax year - so by March 31st.

I really do hope it's scaremongering... I don't think I can change retirement date now it's all in motion.

My worry is they'll change the amount of lump sum you can take tax free and I'll be left with an unplanned tax bill.

The 25% tax free lump sum.

If there was any chance this was to be reduced or removed it would affect the retirement plans for a lot of people so if retirement was imminent, I can understand why people may want to take their pension sooner rather than later.

There has been no hint of this in the media. All I have seen is suggestions that they will tinker with tax relief (reducing available reliefs for higher rate taxpayers), reintroduce the lifetime allowance (although that's unpopular with some unions) or change the £60k annual limit.

There are quite a few reports today @TeenagersAngst that the max tax free lump sum might be reduced to £100k. That would affect me very significantly.

Ah, I see. Sorry to hear that. I have been half expecting it ever since the rules were changed several years ago.

I can see the tax-free amount being limited, but I suspect / hope they’d make an exception for people who had already applied for it by the date of the Budget. I seem to remember that’s how some of the changes have worked in the past.

It’s been rumoured for years that there was a reason the name changed from “tax-free cash” to “pension commencement lump sum”!

My memory may be failing me here but there’s never been a change of this type in pensions without there being some transitional protection. It would be far more likely for tax free cash to be kept at current levels and no more building up in the future. Even then it would extremely unusual for there not to be some form of consultation before adoption.

@AuntieJoyce I saw an article earlier from the Independent which said similar. That people plan for their pension arrangements well in advance so there would need to be a transition period.

I do hope so!

I think it's UNLIKELY it would happen absolutely overnight - what happens if (for example) your normal retirement age was the day after the budget, and you'd already Exchanged Contracts on a house purchase based on the lump sum you were expecting to get? At the very least those who had already asked to retire would surely have to have those requests honoured. I think more likely is any changes will be a bit more forward looking (though no one can know for sure).

From memory, when there've been changes affected capital gains tax or stamp duty etc on house sales/purchases, there's been a period of a few weeks (maybe 8 weeks) between announcement and implementation to allow for transactions already in progress to be concluded. Obviously no help if it couldn't be concluded within those 8 weeks. But it's not "open ended" in the way that ALL transactions started could be completed, there being a time period imposed which would enable MOST transactions to be completed.

I'd expect similar for any significant changes to pension tax free lumps

But, by contrast, a while ago, there were capital gains tax changes (business asset relief or whatever it was called back then) that applied virtually immediately so caught transactions that were virtually complete.

There's so much scaremongering about this - It's highly unlikely this change will be made in a way that affects money already in pensions.

unfortunately theres been no reassurance coming from the government and there is plenty of speculation in the media about the tax free lump sum being heavily restricted.

This will cause financial chaos if it goes ahead.

I keep seeing similar threads on pension tax-free cash and wanted to post a detailed response to dispel some fears and hopefully stop people making costly mistakes. Apologies if you see this reply in multiple places for that reason.

I work in a role that makes me familiar with the pension system - although there’s always someone more expert - but not in a government role that gives me any special insight. I don’t know for certain what might happen, although I do have grounds to make a few educated guesses based on experience of previous changes to the system.

TLDR: It’s highly unlikely, in my view, that tax-free cash already held in pensions would be subject to extra tax.

It has been suggested in different places that this could be an area the Government looks to raise tax. The IFS has suggested a reduction on the limit for tax-free cash from £268,275 to £100,000. That’s what’s driving the reports you’re seeing.

But there are good reasons to think they won’t make this change at all. Or, at worst, make it only for money that is paid into pensions from now on.

The case against making it at all is that it will greatly reduce the tax-advantage of saving into a pension for many people - and the Government does actually need people to save for their retirement. Also, it would be incredibly unpopular in general, but particularly unpopular with public sector workers because these people tend to have the best pensions. This is a very difficult group for Labour to make enemies of.

But if they were to make this kind of change, I’m very confident that it would only be for money paid into pensions from now on - not for money already held in a pension. Why am I so confident? Because this is money that people have been counting on getting, building long-term retirement plans based on the level of tax-free cash they think they will get. That could be money they need to pay off their mortgage, or to pay for a house they’ve already put an offer on.

When previous changes to pensions have been made (changes which were honestly not as significant as this would be) the government has put in long-term transitional arrangements to phase in the change. When the Lifetime Allowance has been reduced over the years, for example, those with money already in pensions above the new limit were granted protections so money already held in pensions was not caught by the extra tax.

When the State Pension Age was increased for women it was ruled that the Government had an obligation to inform the public in good time that the change was coming.

I don’t see how, in this context, the Government could impose a new set of rules on money contributed to a pension under an old set of rules. It would be an effective miss-selling of the pension.

Could they still do it? Yes, ultimately they can change tax rules as they wish but it would be completely unprecedented and exceedingly difficult to do.

I don’t see how, in this context, the Government could impose a new set of rules on money contributed to a pension under an old set of rules

Restriction of the lump sum has happened before - I agree they’d probably reintroduce some form of transitional protection, but legislation around pensions has had at least 2 significant changes in the last 20 years so I wouldn’t bet against it.

IF any change was made I don’t think it would be retrospective, but may well apply to any application to take benefits made after Budget date.

Thank you for these continued responses. I do take some comfort when hearing that past changes had TP.

I'm just so close to my date that to have a sudden unexpected tax bill would be horrific. We have made a lot of plans and commitments based on my chosen mix of lump sum and ongoing pension. And the lump sum is large - over £100k.

This in itself would be a change so fundamental that it would devastate many people's retirement planning. Anyone who is in their 50s is likely to have been planning for some time and working on the basis that at least for funds already in the pension they would be getting 25% out tax free.

The lump sum has been restricted to 25% of what used to be the Lifetime allowance. So in effect no change there. Those who already had higher amounts before lifetime allowance was reduced, have been able to protect their higher tax free cash.

Lots of worry about nothing?

Well looks like all of my DC pot is now about to be taxed if I haven’t spent it when I die so not ideal . Better than tax changes to pension contributions or salary sacrifice though

The changes to pensions could have been worse but as expected, DC pensions (Most private sector pensions) are now subject to IHT. That's a fundamental and potentially enormous change and pushes millions of people into the category of having IHT payable on their estates.