The “outright abolition” of the tax-free pension lump sum allowance is “exceptionally unlikely”, former pensions minister, Sir Steve Webb has said.
Webb – who is a partner at consultancy LCP – said due to the huge numbers of people expecting to get tax-free cash, the “political outcry” would be “enormous” if the benefit was scrapped overnight.
Under the current LSA, Britons can withdraw lump sums of up to 25 per cent tax-free, and to the same amount of £268,275.
However, the tax-free sum could be capped at a lower amount or the proportion pensioners can take could be reduced.
Discussing the possible pension raid, Webb said: “I would be very, very surprised if they just said ‘we’re not going to have tax-free cash at all’ and the reason I say that is because that wouldn’t just affect high-earners, it would affect everybody.
“You just enrolled ten million people into workplace pensions, quote ‘we’ve all got a DC pension now’ in the private sector.
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“And suddenly that nice little bit of tax-free cash you were expecting, the Government takes it away from you as well – which is people on £10,000 a year, that would be very odd.”
Webb explained that if the Government does change the rules around the tax-free lump sum, he believes it will concern its capped amount.
“If they were going to do something on tax-free cash, I think it would be lowering the cap, so at the moment you can have lifetime of over a quarter of a million, 260 odd thousand, so that could come down,” he told This is Money.
He added: “There’s talk of a £100,000 figure. Perversely, that actually affects public sector workers with DB pensions, because we tend to think about pot of money pensions – like old-style, if you’ve got £400,000, you can take £100,000.
The tax-free sum could be capped at a lower amount or the proportion pensioners can take could be reduced in the Budget
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“But it also applies to the tax-free cash you can take if you’ve got a final salary or a salary rate pension, and we’ve worked out that some people with quite modest wages and long service in the public service could get caught by that kind of thing.
“So I am slightly sceptical that they will go down this route because you’d have to have lots of protections.
“My guess is that you would have to have lots of relief, it would take time to implement so you wouldn’t get a lot of money for some while and you get all the grief on day one.”
