Advisers are working hard to combat client fears following recent speculation that pension savers may lose their 25% tax-free lump sum following the April 2016 Budget.
The Sunday Times recently quoted ex-pensions minister Steve Webb who said that the tax-free lump sum, accessible after aged 55, could be on the ‘brink of extinction’.
He went on to say that given its cost of £4bn it would be easy to see that the Chancellor might get rid of it in the 2016 budget.
The tax-free lump sum could be removed as part of wider changes to pension tax relief. The government is currently assessing whether to overhaul the current system.
A ‘pension ISA’ system or flat-rate relief between 22% and 33% are being considered.
This speculation has caused a great deal of fear among pension savers, advisers have said.
Portal Financial managing director Jamie Smith-Thompson said: “My clients are very concerned that the tax-free cash will be abolished.
“Webb has softened his stance but it could still happen. The pension freedoms were announced in 2014 without consultation and it was a shock. The government could easily do something similar again.
“I try to reassure my clients by saying that although it may happen, the tax-relief cut is unlikely to be applied to existing policies. The Chancellor would be mad to do this. Providers can’t just flick a switch to make these changes.”
He added: “It would be extremely short-sighted to reduce the appeal of pensions in this way.
“Just think about the costs of long-term care and the debts that pensioners of the future won’t be able to pay off.”
Kingsfleet Wealth managing director Colin Low has changed the conversations he has with clients as a result of these rumours.
“I had one very worried client who was determined to take their tax-free cash before the budget in case they lose that perk. It’s my job to act as a critical friend. I simply don’t want to be on the wrong side of this decision and so I agreed to this.
“I have begun to introduce the possibility of this change as a conversation piece in other client conversations.
“I don’t have any proof either way and want to make them aware of the speculation around this subject. One would hope that if the government does abolish the lump sum, clients would be given a period of grace.”
‘Webb’s comments were very silly’
Sbn wealth management Dan Farrow is more sceptical that any such changes will be made.
“This time of year is always rife with scare stories. I don’t think there is any chance that 25% tax-relief lump sum will be abolished, it would be so radical and punitive.
“I think it would be the death of pensions. I think Webb’s comments were very silly, and I tell my clients exactly this.”
He added: “In my view, the government will be more likely to introduce flat-rate tax relief. It is the most sensible option, but then I would like to see a moratorium on pension changes.
“Although my clients are not particularly unsettled by this scare story, they are fed up with the tinkering and constant change to pensions.”