I am surprised to read this from CityWire’s New Model Adviser.
The government’s guidance service and the FCA have updated their websites to urge people not to act rashly over their 25% tax-free pension lump sums amid rumours of changes in the upcoming Budget.
The government’s money guidance service, MoneyHelper, last week updated its website to encourage the public to be cautious before making hasty decisions.
The move follows many providers reporting a big uptick in pension withdrawals, particularly from tax-free lump sums, because of Budget rumours.
A post on MoneyHelper reads:
Is the 25% tax-free pension lump sum ending?
‘The Labour government is set to announce its first Budget at the end of the month and, as usual, there are rumours about potential changes.
Importantly, this is a rumour. We’ll only find out if anything is changing (and what any start date would be) when the autumn Budget takes place from midday on 30 October 2024.
The rumour is not that the lump sum is ending , but that it is likely to be limited, as it was when the LTA was abolished.
Of course the people at MoneyHelper are no better informed about the Chancellor’s intentions than the people who go onto its website for advice. And let’s be clear, they are being advised. They are being advised that the money in the pension pot is growing tax-free , is free from inheritance tax, is there for the whole of retirement and that in any case, you are unlikely to be able to get your cash out as the article was published on 12th October and turning round a Pension Commencement Lump Sum payment typically takes a month (and the budget announcement is 30th October).
If I could sum this up, MoneyHelper is saying – don’t panic – there’s not much you can do about it now but if things do change – it won’t be so bad.
At last week’s PLSA conference, an early morning session focussed on the choices available to the Chancellor when it came to raising money from pensions.
Surprised by this pic.twitter.com/XL5kMYGtm5
— Henry Tapper (@henryhtapper) October 19, 2024
If you have difficulty reading this , here is an enlarged version
Of the 205 votes, only 8% of respondents said they would prefer the tax-free cash lump sum to be reduced while 37% wanted NI to be applied to contributions and 34% were happier to see IHT exemptions removed.
This is not what experts expect to happen but what they would prefer to happen and a vanishingly small number of the people in the room, 16 out of maybe 1000 actually voted they’d prefer tax-free cash to be reduced.
Now this really is interesting, because most of the people sitting next to me were over 50 and had done most of their saving. Any NI taxes on pensions will not impact them as they will impact youngsters.
Hymans come up with this remarkable statistic
In short, employers are much more likely to reduce contributions for those saving if NI is introduced than savings rates being voluntarily reduced because tax-free cash limits are reduced.
I am afraid to say that I and my 200 colleagues who voted in the room, preferred lower pensions for our kids rather than reducing our own tax-free benefit.
So what do we learn?
We are being advised not to panic over tax-free cash but whether it is the general public or the experts, tax-free cash is what people most want to preserve.
I attended that session and what resonated with me was the comment from Andrew Harrop of the Fabian Society who stated that if it was the Government aim to reduce the lump sum tax free allowance this would be a gradual tapering process. This was for two reasons: there is likely to be low additional short term tax revenue because where possible those with larger pots will arbitrage tax rates by restricting the lump sum taken; whereas those in the public sector for whom the lump sum payment is part of their employment contract will be affected at a relatively junior level and this would run counter to the Governments target of retaining the over 55 (or 57) year olds in the workplace.
One point that hasn’t had enough attention is the effect on public service DB schemes. These almost all, at Treasury insistence, have commutation rates of 12:1 written into the rules. Assuming a cost neutral commutation rate of 20:1, if only because it makes the sums easier, public service pensioners are effectively paying a tax rate of 40% on their so-called tax-free lump sum.
Many people still go for the cash, however, even though financially it’s a very poor deal. It means that the Government will pay out more, eventually, if it limits the amount of cash that can be taken. In other words, it might actually make members, on average, better off, at least over time. They will still be against the change, which provides an interesting reflection on individuals’ subjective discount rates, as opposed to those in the market.