Ever since “tax-free cash” changed its official name to “pension commencement lump sum” back in 2006 there have been pre-Budget rumours that it was going to change – and not for the better.
After all the “tax-free” bit was removed from the name.
Of course, we still have tax-free lump sums, and the cuts that were made (as part of the lifetime allowance reduction) were accompanied by protection.
Since A-day nearly 20 years ago we have had 22 Budgets. Not a single one has resulted in an immediate cut to PCLS. The lifetime allowance reductions in 2012, 2014 and 2016 not only came with protection but we also had more than a year’s notice for each of them.
Despite this, the rumour mill churns on, and last year reached fever pitch with unprecedented numbers of people taking their PCLS in the run up to the Budget. Some of whom returned it under cancellation rights when the Budget came and went with no change in this area.
As we now know, thanks to HMRC’s surprise announcement in their newsletter last December, cancelling PCLS is no longer an option in most circumstances.
PCLS withdrawals are up again as we enter the run-in to Budget 2025. In fact, in September this year, we saw the number of withdrawals being made significantly higher than September last year – which itself was markedly up on “normal” Budget run-ins.
Last year’s spike was largely fuelled by the rumours of cuts to the lump sum allowance - with £100,000 touted as the most likely cap.
This year we have the double-whammy of not only the usual rumours on cuts to the allowance, but also the near-certainty that pensions will be included in the estate for inheritance tax (IHT) for deaths from 6 April 2027.
Some of the current increase in withdrawals will undoubtedly be down to those who have built up large pots with the intention of passing them on. If they have funds beyond the needs of themselves and their spouse, then taking PCLS and gifting it to the next generation now can be appealing as it starts the seven-year clock for it to be outside the estate. This is especially the case for those approaching age 75, the age at which the double-taxation of IHT and income tax kicks in for beneficiaries.
For younger clients the decision isn’t straightforward.
Take money out too early and miss out on tax-free compound growth in the pension, plus run the risk of leaving yourself with too little to comfortably live on. Leave it later and you may not survive the seven years for the gift to be IHT-free.
What’s clear in all this is that the need for advice is greater than ever. Although I am of the opinion an immediate cut to PCLS is unlikely, the decision for those with IHT issues is more nuanced.
Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster