Former UK pensions minister Steve Webb says chancellor George Osborne is considering abolishing the so-called pension-commencement lump sum, in an effort to add an extra £4bn to government coffers.
The abolition of the lump sum would be part of a larger move towards a more “ISA-type” of pension product, which would see individuals make their pension contributions out of their their take-home – and thus post tax – pay.
International pension industry executives interviewed today, though, are sceptical Osborne would go ahead with what the Sunday Times – where Webb disclosed his thoughts on the matter in an online column – yesterday called a planned “£4bn raid on retirement incomes”.
“The odds that George Osborne would, with an EU referendum literally days away, cause electoral suicide for David Cameron and the Tory Party [by abolishing the tax-free lump sum] would have to be zero,” said Geraint Davies, managing director of Montfort International, a UK pensions adviser, echoing the comments of others in the industry.
However, Davies added, “a phasing-in of the lump sum removal, based upon accumulation after a set date, has to be the best bet in the long run.
“For now, though, hundreds of thousands of British investors have included the prospect of this lump sum at retirement in their investment strategy, so an immediate abolition is a hot potato that few voters would willingly accept.”
Currently, Britons with private UK pensions are allowed to access 25% of their pension pots tax-free in a single lump sum when they reach age 55, even though the money they placed in these schemes and all subsequent earnings were amassed tax-free.
According to the Times, Webb, who now works for the pensions firm Royal London, said he believed the lump-sum perk was “heading for extinction” as part of plans to revolutionise pension saving that are due to be outlined in the budget next month.
“Having worked closely with the chancellor, Webb said he believed Osborne would like to scrap all tax relief on pension contributions, and replace it with an ISA-style system,” the Times added.
It noted that although speculation about pension reforms in recent months has “focused on proposals to equalise the rates of pension tax relief, so that all taxpayers receive the same benefits, Webb believes that Osborne “would like to take the more radical course”.
In his column for The Sunday Times, Webb said he believed the appeal of an ISA-type of system for Osborne always was that, because under such a system individuals make all their contributions out of their take-home pay, the Treasury would “suddenly gets a tax windfall”, as today’s workers begin paying tax on income they formerly would have been deferring tax on.
“It is true that they will pay no tax when they retire, but that is the problem of a future chancellor,” Webb noted.
“In a sense, Osborne would be double dipping: benefiting both from the tax due on the pensions of today’s retired population, as well as the tax due on the earnings of today’s workers, even though the latter are locking their money away in a pension.
“It is not hard to see why the chancellor floated this idea [last] summer, and why, I believe, his heart still makes him want to go down this route.”
‘Would it be extended to ROPS?’
If the chancellor were to change the rules on tax-commencement lump sums, meanwhile, some experts in the international pensions space say he might also be tempted to ensure that the same rule would apply to pensions being transferred abroad — if only to prevent an exodus of pension assets.
Said Chris Lean, an international pensions expert with AisaProfessional, a UK-based advisory firm: “The question from an expat point of view would be: Would HMRC extend such a change to ROPS [registered overseas pension schemes]?
“Typically, the popular ROPS jurisdictions – IOM, Gibraltar and Malta – allow a non-taxable lump sum of 25% to 30% after the age of 55, although in some other jurisdictions, such as Spain, all lump sums are taxable.”
Were the change only to apply to UK pensions, Lean added, for those individuals for whom a “tax free lump sum” is important, “it is possible that QROPS may become more of a consideration”.