Osborne tipped to take away tax-free lump sum

One of the shiniest personal finance ‘carrots’ that contractors currently look forward to will get the chop in the March Budget, if the reported fears of an ex-pensions minister ring true.

In fact, the ‘tax-free lump sum’ – a windfall from aged 55 that accounts for a quarter of a nest egg – is “heading for extinction,” believes Steve Webb, George Osborne’s old colleague.   

Writing for the Sunday Times, Mr Webb said it was “easy to see why” the chancellor wants to axe an effective tax-waiver on 25% of the money in a pension, as it costs £4billion a year.

An ‘ISA approach’ is thought to be favoured as the replacement, as all the money that gets put into a pensions ISA is taxed already, and leaves no room for a tax-free lump sum.

Mr Webb, who was replaced as pensions minister in 2014, wrote: “The ISA approach would stop people building up any more tax-free lump sums on future pensions savings.”

It is not the first time that the entitlement savers have to release up to 25% of their pension as a tax-free lump sum from their 55th birthday has been seen in the chancellor’s crosshairs.

On the eve of Budget 2013, independent financial adviser ContractorMoney said: “[Osborne] needs to be careful not to remove too many of the incentives to save for retirement.”

Specifically, the IFA said that any adverse “changes to the tax free lump sum that people can look forward to at the end of all [their] saving would have severe implications on the motivation to save”.

Editor's Note: Related Reading -

A nest egg cap by George is April's certainty

Feb 22, 2016