Tax Free Cash – The rumours

There is much speculation about Rachel Reeves forthcoming budget and what taxes she will raise to fill the “£22bn” black hole left by the previous government. There is also lots of talk about VAT on school fees and the tax status of Non-doms (someone – usually a wealthy individual – who is a UK resident but whose permanent home for tax purposes is outside of the UK).

In recent days the Chancellor seems to be back peddling somewhat as there is some suggestion that the Office for Budget Responsibility (OBR) think that the move could actually cost the Treasury money.

But to things that affect mere mortals like us:

Pension Tax Free Cash – there has been a lot of rumours written about Tax Free Cash (TFC) including whether it will be scrapped or reduced in the upcoming Autumn budget. This would be a tough call (and a harsh one) for any government to make as most Individuals use pension savings to achieve long term goals. Many rely on the tax free cash to repay mortgages or other loans at retirement. Restricting or removing this benefit could have significant consequences for many people. 

There are also other unintended consequences such as disruption to financial markets as people rush to sell investments so that they can withdraw TFC. The political backlash would be significant, there are easier ways for the government to raise money. However it doesn’t mean they won´t be considering it and could decide to reduce the amount available or freeze the current maximum that is allowed. During the election campaign Labour said:

“The ability to withdraw 25% of your pension as tax free lump sum is a permanent feature of the tax system and Labour are not planning to change this”

But of course it doesn´t mean they won´t. We will keep this on our watching brief over the next couple of weeks. I also feel certain, for the reasons mentioned above they would need to have some sort of transitional arrangements in place. Labour has committed to a “landmark pensions review” but this hasn’t happened yet and it will take time to implement any findings. They are looking at ways to encourage investment into UK smaller companies via pension savings. Removing TFC will disincentivise saving into pensions and constrain their plans in this regard. 

It’s safe to say that we will be keeping a close eye on this over the coming weeks but as always if you have any questions please feel free to get in touch in the usual ways.

• This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

• The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.

• The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.

• Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.

• A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.