The Garrulous Jay – For Whom The Bell Tolls

The recent appointment of Torsten Bell, erstwhile CEO of The Resolution Foundation, as Pensions Minister has caused a flurry of concerned speculation about the future of the tax benefits associated with private pensions. More specifically, fears have been expressed that this may sound the death knell for the current tax-free cash available on pension drawdown.

During his tenure as CEO, the thinktank was unequivocal in its views on this particular feature of the current pensions regime, which usually permits 25% to be taken from a money purchase pension pot tax-free up to a maximum of £268,275…

In its 2018 report, A New Generational Contract, the Foundation wrote, “the government should cap tax-relieved lump sums at £42,000, leaving three-quarters of such drawdowns unaffected and raising over £2 billion in revenue”.

This was followed up in 2023 in the Post-Pandemic Participation report, with the recommendation that “policy makers consider capping these tax-free lump sums”, arguing that the existing tax-free cash benefit is “highly regressive”.

Four months later the Foundation argued that the tax-free cash feature of pensions is “not well-designed to achieve any worthwhile economic or social pensions objective” in their Economy 2030 Inquiry series.

In this report they argued that a “cap of £100,000 would affect only around one-in-five new retirees”, claiming this would save the same £2 billion that the £42,000 cap would have saved five years earlier.

One could be forgiven, therefore, for thinking it’s game over for the £268,275 tax-free cash allowance. But the risk remains that those who act in haste on this presumption may repent at leisure: we’ve been here before in the run-up to the October 2024 Budget.

The Economy 2030 Inquiry report itself states that “any cut in the cap would need some grandparenting-in”, and that the current arrangement should be “gradually lowered”.

The report also acknowledges that “there is a risk of any reform here being controversial while raising little short-term revenue”. Is that really what Rachel Reeves wants to hear?

And let’s not forget that pension funds are key to the Chancellor’s own growth ambitions. Only this week she reminded us that, “In my Mansion House speech, I announced a series of reforms to our pensions system…including the creation of larger, consolidated funds…which have much greater capacity to invest in high growth British companies at the scale that we need them to”.

Taking further steps that might serve to undermine trust in the pensions system and thereby disincentivise pensions saving whilst also encouraging withdrawals, therefore run counter to the Government’s over-riding mission.

Unusually, I agree with the guidance given in a piece in The Daily Mail last week: “For the time being, there is no need to take tax-free cash just because a reduction might be around the corner. But if you are at a stage of your life where having access to tax-free cash is towards the top of your financial agenda…it will pay to take quality financial advice.” (Source: Money Mail, 23rd January 2025)