Are Labour about to scrap your pension tax-free cash?
The real answer is that no-one knows but one thing is certain, such a move would be hugely unpopular; not a good look for a new Labour government after a long time in opposition.
For Labour to remove tax-free cash, it would have to be based on savings going forward. Those who have already built-up entitlements cannot have it taken away and the government would almost certainly have to create protections (in the same way they did when the Lifetime Allowance was reduced!).
It is important people remember to only make decisions based on policy that is here and now.
I must urge people not to make knee jerk reactions with their pensions. Once you have taken that tax-free cash, there is no going back. Here’s a small reminder of 4 main reasons taking tax-free cash might be the wrong thing for you:
- Inheritance Tax. Pension savings are not assessed for IHT purposes. Thresholds have been frozen for years whilst the values of our homes have skyrocketed. Is adding a lump sum into your estate the right thing for you? At worst you expose the full amount to IHT @ 40%.
- Interest rates. Whilst savers are enjoying better rates now than they have been for many a year, we have already seen the first rate cut this year. I don’t expect to see interest rates back to the lows of before 2022, but aim our the Bank of England is to get back to 2%, however long that may take. Therefore, you may want to think twice before moving from investment assets to cash.
- Tax free growth. Any growth, interest or dividends received on your pension assets are free from any tax. Interest received on savings in the bank will (at best) receive a £1,000 savings allowance. Anything above that figure with be taxed at your marginal rate.
- Once it’s spent, it’s spent. Pension freedoms have allowed people to flexibly access their pensions funds to suit their wants and needs. The negative effect of this is there a growing number of retirees simply running out of money. Having your tax-free cash sat in your bank account is likely to lead to people using it more freely without thought of the longer-term impact.
I am reminded at this time of a client in 2016 who decided he wanted to cash in ALL of his investments because he was convinced the UK would vote the leave the EU and the stock market would crash. He was right about one part at least.
We managed to talk him down slightly, but he still insisted 33% of all his investments were moved to cash, against our advice. As you know, the referendum result was to leave the EU. The value of the pound plummeted. As a result, FTSE 100 stocks shot up as circa 80% of FTSE100 companies earnings come from overseas. So their earnings shot up over night by luck of a currency fluctuation.
Where was this client heavily invested? You guessed it – FTSE100.
This maybe be a story about an investment decision but the lesson of the story remains; do not make short-term decisions with your savings.