Another Tax Raid on Pensions? Could Tax Free Cash Limit be Reduced Again?

It is commonly known that the UK must make some difficult choices over the coming months and years.  NHS and Social care is underfunded.  We are no where near to developing a coordinated plan for net zero transport and home heating systems.  War seems to be constantly on the horizon and ouir armed forces are massively under resourced and under funded.

The Chancellor has also committed to breaking one of her fiscal rules i.e. not borrowing more to fund any additional government projects or spending.  This means more tax via a growing economy or more higher taxes elsewhere. The economy is barely growing and with US tariffs looming ove the World, recession is clearly a risk.  Rachel Reeves only option given the requirement to boost defence spending as well as ever increasing interest payments on government debt is to collect even more tax.

We have already suggested capital gains taxes could be increased as well as cash ISA allowances being reduced or even a Lifetime Cash ISA allowance.  We have also speculated that the Tax Free Lump Sum Allowance of £268,275 could be reduced but we discounted that as pensions have taken anough hits with the reduction to £268,275 by the Conservative Government and the inclusion of unused pension funds in your estate on death being subject to inheritance tax from April 2027.

Rumours are now starting to ‘fly’ around the finance industry that Mrs Reeves may indeed consider the reduction of tax free cash to a maximum of £100,000.

Comment

This is a dangerous move. 

Tax relief when you pay in only to have the majority of your pension fund taxed when you take it out (apart from £100,000) would efectively kill the pensions industry.

Why would you tie up up money until age 55, going up to 57 in 2028 for very little gain.

Perhaps a simpler move would be to lower tax relief for all to just say 15% but with a minimum ‘legal’ contribution requirement of 5% employers, 5% employees but when you come to draw on your pension funds, they are tax free.  Pension funds themselves to then pay 10% tax on fund gains.  This will save the government £billions overnight and hopefully, pensioners in years to come will be less of a burden on the state, have built up substantiual pension savings and also be in a position to fund care in later life.

We clearly have not ‘done the numbers’ or tested feedback with consumers but it seems to work in Australia.