Pensions minister Steve Webb has said the 25% tax free cash lump sum from pensions will not be scrapped.
The government has recently faced calls to abolish the 25% tax free cash lump sum to make up for lost taxes resulting from this year’s Budget announcement that post retirement pension fund withdrawals would be taxed at a person’s income tax rate.
Labour leader Ed Miliband then called for the pension commencement lump sum (to give it it’s proper name) to be limited to £36,000.
However, Webb said he would not reduce the lump sum. ‘Yes there is money to be had there, but it would take forever to do it in a fair way and I think it would take away one of the most attractive features of pensions savings’. ‘There would be one heck of a transitional period,’ he added.
From April 2015 people will be able to drawdown their pension savings subject to payment of income tax rather than the current 55% penalty charge.
Hunter Aitkenhead reckons that the exchequer will be a net beneficiary of the new rules, as many people with small pension pots will simply liquidate them, rather than buying a modest income with an annuity. This would bring forward the payment of income tax dramatically, so the Government doesn’t really have a “tax gap” to make up.
It remains to be seen what the next government will do regarding pensions taxation, but of course, the outcome depending largely on who wins the election next May.
