Fear and loathing have triumphed, I have capitulated; I am taking my lump sum tax-free cash ahead of the November budget.<\/p>\n
For the avoidance of doubt, I\u2019m not advising you to do the same. Everyone\u2019s situation is unique: take advice, make your own decision. But here\u2019s how I arrived at mine.<\/p>\n
First, a few quick relevant facts. I\u2019m 59, I\u2019m already only working part-time, my pension has exceeded the old lifetime allowance and hit the maximum tax-free limit of \u00a3268,275. Yes, I have been fortunate in life, but what kind of a pension expert would I be if I hadn\u2019t hit these limits? I\u2019m also not expecting to save much more into pensions in the future and within a few years I\u2019ll be drawing on my savings.<\/p>\n
The context is a government painfully short of money and ideologically disposed towards taxing wealth. <\/p>\n
There are few other places they can go to find the money they need (other than cutting spending, but that\u2019s another story). And they have also explicitly talked about reducing the tax-free pension allowance. <\/p>\n
In short, if ever there were a time when the government might choose to reduce the allowance, it is now, this year, this budget. I know of others in the pensions industry in a similar situation to myself who have come to the same conclusion.<\/p>\n
Let\u2019s say the government reduces the tax-free cash allowance from \u00a3268,275 to \u00a3100,000, as the Institute for Fiscal Studies (IFS) has recommended (although the pensions secretary and Treasury minister Torsten Bell has advocated cutting it down to just \u00a340,000). That would cost me between \u00a333,655 and \u00a367,310, depending on how much of my income gets taxed at 40 per cent.<\/p>\n
\u2022 Why a tax panic is sweeping through the middle class<\/a><\/p>\n Because my tax-free cash is now capped at \u00a3268,275, any future growth in my pension is already going to be taxed when it is withdrawn and that allowance is very unlikely to increase. <\/p>\n What\u2019s more, by 2027 my pension fund will also become liable for inheritance tax, so that\u2019s another incentive for keeping money in the pension system that will be gone.<\/p>\n By taking the tax-free lump sum now, I could reinvest the money in Isas for myself and my wife over the next few years. Initially this will result in a loss in gains, relative to leaving the money in a pension to grow. <\/p>\n But both the growth and the subsequent income withdrawals from the Isas will be entirely tax-free. This means that within a few years, I\u2019ll be better off than I would have been just leaving the money in my pension, even if the government doesn\u2019t reduce the tax-free allowance. <\/p>\n If the allowance is slashed, and it turns out that I have slipped through the door before it closes, then I\u2019m quids-in from day one.<\/p>\n