For decades, pensions have been the cornerstone of retirement planning in the UK. Tax relief on contributions, tax-free investment growth and a 25% tax-free lump sum at retirement formed a powerful trio of incentives.
But with each passing year, the appeal of pensions is being eroded — and if rumours of the removal of tax-free cash prove true, we may be looking at the slow death of the pension as we know it.
First came the removal of inheritance tax (IHT) efficiency for pensions (although I appreciate that this is draft legislation). For years, financial planners used pensions as a wealth transfer vehicle — a client could draw from Isas and other taxable investments while leaving their SIPP untouched, preserving it as a tax-sheltered, IHT-free pot.
But the draft legislation has seen that benefit significantly diluted, particularly for beneficiaries inheriting from clients who died post-75.
If rumours of the removal of tax-free cash prove true, we may be looking at the slow death of the pension as we know it
Then we also have the raising of the normal minimum pension age (NMPA) to 57 from 2028. While understandable in the context of rising life expectancy, the change further separates people from their own money — especially hard to swallow for those planning early retirements or working in physically demanding professions.
Now we have the persistent rumours that tax-free cash may be removed, or reduced (how many times have we heard this?!) If that happens, it’s not hyperbole to say the pension wrapper will become a hard sell for many clients.
Without tax-free cash, pensions begin to look alarmingly like just another tax-deferred income product, with layers of complexity and limited flexibility.
I would also caveat this by saying I completely agree with Noel Butwell’s article and am not advocating that clients act on speculation and start withdrawing tax-free cash in advance of the budget.
But, from a client’s perspective, why tie up money for 30+ years, with restricted access, only to be taxed like any other income in retirement — and potentially taxed again upon death? Why not choose Isas?
As advisers, we’ve spent years educating clients on the advantages of pensions. If tax-free cash goes, we must be ready to pivot
There is even an argument for general investment accounts (GIAs), onshore/offshore bonds, which offer more control, earlier access and potentially better tax-planning opportunities in retirement. If I was a basic-rate taxpayer in my 20s, I would struggle to see the benefit of investing in a pension.
As advisers, we’ve spent years educating clients on the advantages of pensions. Many of us have built entire planning frameworks around strategic pension withdrawals, sequencing of returns and multi-decade decumulation plans. If tax-free cash goes, we must be ready to pivot.
This is not just a question of client messaging; it’s a shift in strategic architecture. Future retirement plans may need to be built around Isa maximisation, intergenerational investment strategies and far greater use of trusts, especially for high-net-worth individuals.
Tax-free cash is more than a retirement perk; it’s the final anchor holding pensions in place as the preferred long-term savings vehicle
Pensions have survived multiple raids over the decades — the abolition of dividend tax credits, the introduction of the Lifetime Allowance (and its subsequent scrapping), the reduction of the Annual Allowance and tapered rules that still confuse even the most seasoned professionals.
But this? This would strike at the heart of the system’s integrity. If the Treasury removes tax-free cash, they will fundamentally alter the behavioural contract that underpins long-term saving in the UK. It may well render pensions obsolete for all but a narrow band of higher-rate taxpayers with few alternatives.
Tax-free cash is more than a retirement perk; it’s the final anchor holding pensions in place as the preferred long-term savings vehicle. Remove it, and we may be left watching the slow, unnecessary obsolescence of a once-great system.
Shelley McCarthy is managing director of Informed Choice
