Speculation over the future of the pension tax-free lump sum is over, at least for a few months!
Savers with a Personal Pension, Stakeholder Pension, SIPP and some work place pension schemes, can take up to 25% of their pot once they reach the age of 55. The tax-free lump sum is important to most retirees and is often used to repay debt, pay for home improvements or simply to create additional income in retirement.
Tax-free cash speculation
In the weeks leading up to each Budget and Autumn Statement, the Personal Finance pages are awash with speculation that the tax-free lump sum will be abolished. However, Steve Webb, the Pensions Minister, has now announced that the tax-free lump sum will not be scrapped.
Speaking to New Model Adviser, a publication for Financial Advisers, Mr Webb said: “Yes there is money to be had there but it would take forever to do it in a fair way and I think it would take away one of the most attractive features of pensions savings.”
He continued: “There would be one heck of a transitional period.”
Pension savers will welcome the announcement, but should also remember that with a General Election due in less than a year, the certainty might be short lived. Ed Milliband, has already called for the amount of tax-free cash to be limited to £36,000 per person and with public finances remaining stretched, the issue is unlikely to be off the political agenda for long.
When should you take the tax-free lump sum from your pension?
Whether you should take the tax-free lump sum is down to your own personal circumstances, but it is certainly a popular option if you want to:
- Repay an interest-only mortgage
- Repay other unsecured debt
- To create an additional, tax-efficient, income
- To boost your savings
- Make large one off purchases or home improvements
Of course there are reasons not to take the tax-free lump sum, for example doing so could reduce your income each month and there may be better alternatives.
We’ve explored the options in more detail in our recent article: When should you take the tax-free lump sum from your pension, click here to read it now.
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