Think tank calls for end to pension perk

RISK

However, the future of the 25% lump sum is coming under attack.

The Institute of Economic Affairs, a right-wing think tank, has floated the idea of ripping up the rule book and scrapping the tax-free perk.

Mark Littlewood, the group’s director-general, said: “There is very little to justify the tax-free lump sum people can withdraw from their pension pot.”

He explains that removing the ability to withdraw 25% tax free from a pension would provide an opportunity to reduce or scrap inheritance tax altogether.

Now this idea might be great for people with posh, fancy estates, but it offers little to the grafters reaching retirement. It deprives them of the last time in their life they may get access to a lump sum of their earnings.

The timing of the idea is bad too – it comes just as millions more people have been persuaded to start putting a bit of cash away for their retirement via auto enrolment into workplace pensions.

This, of course, includes a huge number of young people in their early 20s, beginning saving at the start of their working lives so they have the chance to build up a decent pot.

FRUSTRATION

I don’t want to be alarmist as it is highly unlikely the idea will ever see the light of day, and the reaction from the pensions industry has been less than positive with many calling it out as simply a bad idea.

But my frustration is not only with the constant tinkering with the pensions system, which is already complex enough, but also the fact that ideas like this simply serve to undermine the confidence people have in their longterm savings plans.

Andrew Tully, technical director at insurance giant Canada Life, says: “The ability to withdraw 25% of your pension, tax free, is probably the most valuable perk of pension savings and certainly the best understood.

“You diligently save for many years and are likely to have clear ideas on how you want to use your tax-free cash lump sum. Many people use the money to pay off their mortgage, make home improvements or go on the holiday of a lifetime. No one is planning for this, or expects the rules to change.”

Any suggestions about making changes, however speculative, should be considered very carefully. It would take a very brave government, and would be a spectacularly bold move, to introduce such reforms.

Mr Tully adds: “I don’t see any government perpetrating such an obvious own goal. And certainly not retrospectively.

“But the pensions system is complicated, and over a number of years it has become more complex, which makes it all the easier for any government to make changes which on face value might not affect the typical saver.

“I’m all for simplifying the system, especially the arbitrary and complex annual and lifetime allowances. And perhaps levelling the playing field by introducing a flat rate of tax relief for all.

“That would go a long way to further incentivise the millions of new savers who have been auto enrolled into workplace pensions over the past few years. It might even persuade people to save that little bit more to help bridge the nation’s savings gap.”

People use a lump sum to pay off debt or go on the holiday of a lifetime

DISASTROUS

I know the Government needs to balance the nation’s finances, and that must be a priority. However, changes to the pensions system need to be minimised, and when changes are made, they must be done with the aim of encouraging more people to engage and save for their retirement.

Tom Selby, senior analyst at investment firm AJ Bell, agrees that axing taxfree pensions cash is a terrible idea. He