7 thoughts on “Scrapping the tax-free lump sum for pension withdrawal: not such a terrible idea”

  1. Posted 09/10/2019 at 21:25 | Permalink

    Far better to first level the playing field between final salary, defined benefit and defined contribution schemes. They should all be valued on the same basis i.e. what will that income scheme cost me if purchased from a basket of providers. Most DCS members know a public sector pension scheme would cost well in excess of the lifetime allowance if purchased privately. Before you start fussing about the comparatively minor sums taken tax free from private schemes, look at the costs of the public sector schemes and how much taxation they account for.

  2. Posted 10/10/2019 at 16:07 | Permalink

    Hi Mark,

    Interesting blog – as the person who suggested your idea was “terrible” I should probably respond!

    I think you vastly underestimate the impact scrapping the tax-free lump sum would have on people’s behaviour. I speak to lots of ordinary investors as part of my job and the provision of a tax-free lump sum is one of the biggest factors cited by non-experts in putting money aside for their retirement.

    Given automatic enrolment has just been fully introduced, with opt-out rates relatively low, now would seem an odd time to remove such an important and popular feature of the pension system. To do so would risk undermining the entire programme, potentially driving significant opt-outs and effectively taking us back to square one. If you have evidence suggesting auto-enrolment or average contribution rates more broadly – which are already pitifully low – would not be negatively affected by ditching tax-free cash, i’d be interested in seeing it.

    I share your desire for simplification where possible and agree the taper for higher earners should be done away with. Given this raises around £1bn a year – a very small amount in public sending terms – I suspect there are less damaging ways to find that cash.

    There is also a risk your proposal would make pensions taxation even more unwieldy. People who have built up pension savings to date would, presumably, be entitled to 25% tax-free cash on the money they have saved under your proposal? After all, it is possible for many people the promise of 25% tax-free cash at 55 was a primary reason they contributed.

    Creating a system to account for this would be highly complex, while failing to do so would be grossly unfair.

    Feel free to drop me an email if you want to discuss further.



  3. Posted 11/10/2019 at 15:23 | Permalink

    While I agree in principle, I think a more pragmatic approach would be to limit the TFC to a fixed amount (e.g £50,000), which would limit the costs which hopefully would allow the simplifications elsewhere.

  4. Posted 11/12/2019 at 20:33 | Permalink

    Totally outrageous to dangle a carrot for someone who has paid in for 40yrs then at the flick of a pen remove the promise of a 25% tax free sum in the last year. Fine to start a system for new pensions then people can choose for future what to do with their money

  5. Posted 16/04/2021 at 11:01 | Permalink

    As a person who has just had there 25% after saving for 40 years and getting the so called tax allowance I was then adviced to put it in to a drawdown. As I have a private pension and will be getting my state pension this year 2021 I have found out that anything I draw out if my drawdown will be tax at 20%. When you take 8nto account how much tax relief I got while saving and how much tax I will pay trying to get my money back far out ways what tax relief I got while saving. So I would never advise anyone to invest as I did as you will only get stung when you try to get it back unless you can stay under you tax allowance.

  6. Posted 21/05/2021 at 09:26 | Permalink

    Stuart (saver)
    You got tax relief at the point of contributing, and you used up your 25% tax relief in one hit.
    Did you expect a 3rd round of tax relief?
    You could have had only 75% exposure to income tax, by using it frugally. You could have crystallised at a different rate and paid tax on 50%, or spread it by taking only part of the lump sum. Your knowledge was at fault, not the system.

  7. Posted 14/09/2021 at 20:20 | Permalink

    A far better idea for the simplification of pensions would be to have a single rate of tax relief. At the moment the rules benefit the wealthy so moving to a single rate of 20% would even things out and increase the tax take to fund the NHS.

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