Tax-Free Lump Sum Scare Triggers Backlash

Ex-pensions minister Steve Webb was recently quoted as saying that the ability to access 25% of pension savings as a tax-free lump sum was on the ‘brink of extinction’. His comments were initially brought to the attention of the public in an article published in the Sunday Times, which unsurprisingly triggered widespread fears among hundreds of thousands of pension savers.

Expanding on his comments, Webb would then go on to say that given the fact that it costs the treasury in the region of £4 billion, it would somewhat make sense for it to be eliminated as part of the 2016 budget by the Chancellor. Given the fact that the government is known to be investigating whether or not the current system should be overhauled, it is not impossible to believe that this particular withdrawal could be rolled out in April.

Reports suggest that a new system offering flat rate relief between 22% and 23% is being mulled over.

Unfortunately, the comments of Mr. Webb have led to a great deal of largely unnecessary confusion and fear among the British pension saving community. Independent financial advisers across the country are finding that their clients are extremely concerned that the ability to offer tax free cash will be withdrawn this April.

Even though Mr. Webb has since spoken about the prospect in a manner that to somehow toned down the likelihood of it occurring, it is still a very real possibility and one that has pension savers rather worried.

In terms of easing fears, the vast majority of forward thinking independent financial advisers appear to agree that while it is definitely possible that the withdrawal of the 25% rule may happen, it is highly unlikely that existing policies would be affected by it. The simple fact of the matter is that pension providers cannot make such incredible changes at the flick of the switch and the Chancellor would be foolhardy to proceed as such.

In addition, the change in policy would enormously reduce the appeal of the pension system as a whole, augmenting any potential benefits the government could expect should it go ahead.

Of course, most independent financial advisers are not going so far as to guarantee their clients any specific outcome as of April this year – it is technically impossible to know which way the government will go. Nevertheless, the contingency of experts who believe and confidently proclaim that the abolition of the 25% tax-relief lump sum will not occur is much smaller than the crowd that believes it will happen.

Many have gone so far as to accuse Mr. Webb of being entirely irresponsible with his comments, having outlined a proposal that could in many ways spell the death for British pensions as we know them. It is perfectly possible that modifications to current allowances and benefits will be made, but to completely and comprehensively withdraw the 25% tax-relief lump sum privilege would be rather on the severe side to say the least.

So while it is not to say that this is all an act of 100% scaremongering, the truth and the reality will undoubtedly be less unnerving that the prospect.