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Gov't Budget pension reform could cause £24bn black hole

by Jun Merrett on May 29, 2014 at 08:05

Gov't Budget pension reform could cause £24bn black hole

The government has been warned that its Budget pension reform could create a £24 billion black hole.

Pension experts have warned the Treasury that the government could miss out on £24 billion because of its pension shake-up, which included cutting the 55% tax charge for people accessing their entire pension at retirement from 2015, according to the Telegraph.

Under the plans, savers who take their pension as cash will get the first 25% tax free with the remaining 75% taxed at their marginal rate.

According to the Telegraph, experts told the Treasury this may lead to a drop in the tax taken from pension savings and there is a concern that people will pay large sums of money into their pensions and receive generous tax relief top-ups but will find a way of withdrawing their pension savings without paying tax.

The Telegraph reported that the Treasury is currently discussing reining in the 25% tax-free lump sum so individuals only withdraw 25% of the growth in their pension pots or levying National Insurance on pension contributions.

However a Treasury spokesman said: 'We are not going to get rid of the 25% tax-free lump sum. It is a key part of the pensions system.'

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12 comments so far. Why not have your say?

Should Know Better

May 29, 2014 at 08:37

But haven't we figured all this out already?

Keep the tax free lump sum? Its a Pension Commencement Lump Sum and has been for many years now giving whatever Government the way to remove its current tax fee status...perhaps,

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Tim Page

May 29, 2014 at 09:03

I see the "If that's what you want, that's what'll happen..." brigade are gearing up to full steam now.

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Charles Rickards

May 29, 2014 at 09:12

Out of interest, how many people accessed their whole pension fund at retirement and paid the 55% tax charge? In 18 years, I have never met anyone or spoken to anyone who met someone!

I viewed the access to all funds from next year as a cynical ploy to get a short term increase in tax receipts to help reduce the deficit. The reality is that consumers with pensions are likely to continue to want to try and ensure their funds/incomes will last for their lifetimes.

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Man of Kent

May 29, 2014 at 09:32

@ Charles Rickards - you're quite right. Choosing to take a whole pension fund and paying a 55% charge, as far as I know, has never been allowed by any mainstream provider. Why it was bigged up in the Budget, beyond making the new flexibility look even more flexible, is beyond me.

I note that the £24bn black hole is predicted by 'experts', based on the fact that people will put more money into pensions and get tax relief (surely not?) and "they will then find ways of withdrawing their pension savings without paying tax." So, how is the £24bn calculated, and over what period, and what are these methods of getting money out of pension funds without paying tax, that don't seem to be available currently? Is it the silly season already?

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Charles Dickson

May 29, 2014 at 09:49

The definition of "expert" - Ex is a has been and spert is a drip under pressure.

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Neil Walker Mk II

May 29, 2014 at 09:52

The main concern seems to be that people will elect to have their full salary paid into their pension under salary sacrifice, avoiding any tax or NICs, then withdraw the full amount with 25% tax free. Their employer would also save on the Employer NICs.

I can't help but think that there are far better ways to stop this than simply penalising everyone by removing the tax-free cash.

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Bruce Johnson

May 29, 2014 at 11:36

"However a Treasury spokesman said: 'We are not going to get rid of the 25% tax-free lump sum. It is a key part of the pensions system.'"

Did he then say, "But I am retiring in 2016, so it will be abolished in the 2017 budget.

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Bruce Johnson

May 29, 2014 at 11:36

"However a Treasury spokesman said: 'We are not going to get rid of the 25% tax-free lump sum. It is a key part of the pensions system.'"

Did he then say, "But I am retiring in 2016, so it will be abolished in the 2017 budget.

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Man of Kent

May 29, 2014 at 12:15

@ Neil Walker Mk II - I don't want to pick holes but what would someone live on if they'd sacrificed their full salary and had it paid into a pension?

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Neil Walker Mk II

May 29, 2014 at 12:29

@ManofKent - The theory is that it would only be people over the age of 55 doing this. The salary would be sacrificed into their pesnion each month and they would immediately draw it back out with 25% tax free and no NI paid.

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Charles Rickards

May 29, 2014 at 12:44

Full salary sacrifice would breach national minimum wage legislation.

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Lee from Liverpool

May 29, 2014 at 17:11

@ Neil Walker I assume they will just mirror Flexible Drawdown rules whereby you cannot drawdown in a year you have made contributions and once you have done it you won't get any more tax relief on contributions. That would stop any abuse.

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