Experts warned it wouldn’t end well and it hasn’t.
Jo Cumbo and the FT have been speaking to senior wealth managers who find clients betwixt and between when maximising the tax-free lump sum they can draw from their pension pots.
This is not about hardship , the people with tax-problems like this will feel aggrieved but can hardly feel uncomfortable. However, they join many others – such as those who were supposed to be protected from rapacious freeholders – in wondering just why political expediency over the calling of an early election , works out against them.
Many (including me) are wondering what happened to the idea of a fixed parliamentary term which would have meant that legislation could have been planned around a defined back-stop. Political expediency trumps such considerations – we have to suppose.
So what’s the problem?
The problem affects people who took advantage of an “enhanced protection” arrangement introduced in 2006 to ensure those with the largest funds were not unfairly hit by the imposition of a new £1.5mn tax-free cap known as the lifetime allowance.
Even though the Conservatives scrapped the lifetime allowance in April, errors in the legislation affected people who relied on the enhanced protection arrangements giving them the right to take out more than £375,000 in tax free lump sums.
In April, HMRC advised those savers to consider delaying their retirement plans until the rules were corrected. Until this week, officials were working with The Investing and Savings Alliance (TISA) and other industry bodies to fix the errors so those affected could access lump sums without the worry of triggering large tax bills, or losing their tax free cash entitlement, potentially worth tens of thousands of pounds.
Part of the wider “cash” problem…
We are all aware that pensions are complex; to access our pension pots takes nerves of steel or the payment to a financial adviser. Even when you pay an adviser, you can find yourself caught short.
But the wider problem is not about pensions, it is about people trying to free themselves from pensions. Almost all the issues we have with pensions are to some extent “liberation problems” where people are looking to draw pensions as cash, leave their pensions on death as cash or transfer pensions from a wage-for-life solution to – you guessed it – cash.
We have a taxation system designed to give an Exemption at the point of contribution, Exemption on investment gains and Taxation on the proceeds. The tax-free cash sum was the first pension freedom to be introduced and is so well established it has taken over in the popular imagination from the pension itself.
Of course it only represents 25% of the pot and now less than 25% of a big pot which is un-protected. Once again, the problem is not with the pension but with the pot.
The time is now, to insist that what we are saving for is not the freedom to have a capital reservoir of wealth but a wage for life in retirement. It is the insurance against living too long which gets pensions the exemptions on contributions and investment and so long as we argue over the right to maximise tax-free cash, we trivialise the main event.
High net worth financial advisers, much quoted in the FT article, are part of this problem as they have convinced not just the mass affluent, but the Treasury itself , that pensions are not lifetime income but wealth.
This misconception needs to be stopped. This ridiculous pandering to the wealthy to allow them special privileges on tax free cash should stop. A new Government should make it plain that the price for having no Lifetime Allowance is a cap on tax-free cash , set at a fixed amount and not revalued.
We have quite the most regressive taxation system on pensions as it is , and this incessant bleating from the wealth management industry does nobody any favours.