• The Institute of Economic Affairs (IEA) has called on the Government to scrap pensions tax-free cash to help pay for inheritance tax abolition (https://www.thetimes.co.uk/article/a-brave-chancellor-must-be-ready-to-cut-taxes-and-simplify-the-system-clh5m2bg3)
• Proposal would risk creating a damaging cliff edge unless protections were introduced for those who have built up savings
• Rumour and speculation about the future of tax rules, and tax-free cash in particular, affect investor behaviour and damage long-term confidence in pensions
Tom Selby, senior analyst at AJ Bell, comments: “Axing pensions tax-free cash just as automatic enrolment is fostering a fragile savings culture in the UK is a terrible idea.
“Being able to access a quarter of your pension pot tax-free from age 55 is one of the best understood benefits of saving in a pension, so ditching it altogether would have potentially disastrous long-term consequences.
“Rising average life expectancy, the increasing state pension age and the disappearance of guaranteed defined benefit provision is placing ever greater onus on individuals to provide for their own retirements. Given this context, public policy needs to be focused squarely on ensuring the environment encourages more pension saving, rather than pulling the rug from under people.
“There would also be severe practical issues if the Government attempted to end tax-free cash for all.
“Those who had saved money on the assumption they would get 25% of their final fund tax-free would justifiably feel aggrieved at an essentially retrospective tax grab. Even introducing a cap on tax-free cash would create a severe cliff-edge, so it is likely complex transitional measures would be needed.
“Younger savers could also justifiably argue this would represent another kick in the teeth for their retirement ambitions as they would be less able to benefit from the tax-free cash incentive than their older counterparts.
“The floating of half-baked ideas such as this is exactly the reason the Government needs make a genuine attempt at bringing some certainty into pension tax policy. Savers need to feel confident that the pension tax rules won’t be changed every 5 minutes, which feels reasonable given we are asking them to lock their money away for decades.”
