Chancellor Rachel Reeves has confirmed there will be no reduction in the pension commencement lump sum following months of speculation.
Prior to today’s Budget (26 November), over three-quarters (88%) of advisers were concerned that the tax-free lump sum would be reduced and 28% worried that HM Treasury would flatten the rate of pension tax relief at c.20-30%.
“Attacking tax-free cash at the Budget would have been a massive own goal from the chancellor, raising little money and causing uproar from young and old alike,” says Tom Selby, director of public policy at AJ Bell.
Previous reports had Reeves slashing the allowance from 25% of a private pension pot (up to £268,275) to £100,000 to plug the £30bn fiscal shortfall.
This led to high-net-worth-individuals (HNWIs) taking tax-free pension cash and u-turning on investment strategies.
HNWIs taking tax-free pension cash and changing investments due to upcoming Budget
“There was a huge sigh of relief as tax-free cash cuts did not feature in today’s Budget. It’s a move that had potential to do huge damage to people’s retirement resilience.
“The actions people take when there’s a vacuum of information can be damaging and underlines the importance of putting in place a stable long-term framework for pension tax,” adds Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
Richard Knight, partner and head of pensions at Burges Salmon, agrees this was the right decision, but if there is no action to adjust the allowance in the future “it will continue to be eroded in real terms by the rate of inflation”.
“This is likely to have a material impact in the public sector, where most schemes remain defined benefit (DB) and members are still accruing benefits – so may have pensions worth more than the LTA.”
