After weeks of feverish speculation, we have finally learned of the Chancellor's plans for our pensions. The good news is that the much-talked about reduction in tax-exempt cash has not happened. This was one of the most damaging rumors in the lead up to an increase in the number of people wanting to withdraw their money before the change can be announced.
This is a move that could potentially cause huge damage to people's retirement security. Removing money from the tax-efficient environment of a SIPP risks exposing it to a host of taxes such as capital gains and dividend tax. There is also the possibility of leaving it in a cash account, where it will be deprived of investment growth.
For those who took out their tax-free cash as part of a long-term plan – say, to pay off a mortgage – the decision may still make sense. However, those who accepted it without a plan may now be wondering what to do next.
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HMRC recently confirmed that applications for tax-free cash cannot be cancelled. However, if your application has not yet been processed by your provider, it is worth checking whether you can cancel it. If you haven't used up your ISA allowance yet, then it may make sense to reinvest some of the money into your stocks and shares ISA to take advantage of the potential for greater investment growth, as well as tax-free income.
It is very important not to reinvest money back into a SIPP without taking financial advice first. You risk breaking recycling rules, which are designed to prevent people from benefiting from artificially high tax credit rates by reinvesting their tax-free cash. This is a step that could leave you with a nasty tax bill, so you'll need to think it through carefully.
The big pension announcement was the decision to limit the amount you can contribute to your pension via sacrifice your salary and get exemption from national insurance. From 2029 this amount will be reduced to £2,000.
It's important to say that pension contributions made through salary sacrifice will still receive income tax relief, but we can see that people are less likely to increase their contributions beyond the automatic enrollment minimum.
Costs will also increase for employers. At a time when there is such a focus on adequacy, it seems counter-intuitive to make such changes: the Hargreaves Lansdowne Savings and Resilience Barometer shows that only 43% of households are on track to retire adequately, so clearly there is still a lot to be done.
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