Are you rushing to take your 25% tax free cash from your pension prior to the budget?

Some potential positives for tax:

1. At present 25% of a pension can be taken tax free upon becoming 55 years of age. There are rumours Reeves might change this to say 15%, or even put a monetary cap on it, e.g £100k. At present a maximum of £268,275 can be taken tax free. Anything not taken out tax free and later withdrawn is taxed at the individual’s marginal tax rate (up to 45%).
2. If the cash is left in a pension, and the individual dies after 6th April 2027, the cash in the pension would form part of the estate and therefore subject to Inheritance Tax at up to 40%. Therefore:
a. If cash is taken from a pension and put into a Business Relief qualifying investment, it qualifies for 100% IHT exemption after two years (subject to a £1m cap).
b. If cash is not needed it can be gifted. This means that if the donor survives for 7 years, the gift is exempt from IHT.
3. There is an element of ‘control’ which is often overlooked. Once the cash is in your bank account, you have full control of it, and it cannot be subject to further changes in pension taxation rules.

On the other side:

1. Cash outside a pension will not grow free from capital gains, dividend and income tax as it does in a pension. Taking 25% of the pension out now might therefore severely reduce the total amount in the pension a few years down the line. For example, cash inside a pension might grow 5% a year, with no tax to pay. However, if the individual is a 40% taxpayer, the 5% might be reduced to 3% (being 5% x (100-40%)). This severely limits the compound growth.
2. If the individual passes away before 6th April 2027, they would have brought into their estate cash which would have otherwise be exempt from IHT.
3. If an individual takes the money out, and nothing changes in the budget, they cannot reverse their decision. HMRC have specifically addressed this.

Please note this is not financial advice. Before acting, seek specialist financial advice.