Act now on your pension pot – before the government does

We’ve written before about the dangers inherent in saving too much into a pension. Our government (like all governments in the West) needs more money, and pensions are pretty easy targets. There’s a lot of money in them, most of which belongs to the better-off part of the population, and they get huge amounts of tax relief. Add up those elements, and it’s easy for governments to make the case that pension benefits accrue disproportionately to the rich, and should therefore be fiddled with until they are of no value to anyone.

That’s why the lifetime limits and annual limits on pension savings have been cut several times (and I suspect will be cut several times more). However, there is one area of pension benefits that the state has not yet really gone for.

Right now, from the age of 55 onwards, anyone with a pension is allowed to withdraw 25% of its value in cash, tax free. Anything else you draw from your pension later as income is taxed (which is why pension-saving should be thought of more as tax deferral than tax avoidance). So that makes this allowance the best bit of having a pension – without it, a good many people would be better off to keep paying all their taxes upfront, skipping the regulatory uncertainty of pensions, and keeping control of their own assets.

We have wondered in the past how long the 25% might last, given that it is not in the nature of the government to leave a taxable penny untaxed. The answer appears to be not very long.

Ian Cowie, now writing in the Sunday Times, is scared. He has been speaking to experts who have been telling him that the Treasury is “actively considering” capping the amount you can take tax-free. Pensions activist Ros Altman is one of the experts. She is convinced that it is not so much a question of whether the tax-free lump sum allowance will be altered as “when and by how much”.

Limiting it to, say, £36,000 a year would bring in an extra £2bn a year for our suffering state, she says. That’s proper money. Should you worry? Probably.

Bringing in a limit wouldn’t look bad to most people (the average pension fund is worth less than £50,000 anyway), it would please those making a big deal about intergenerational conflict at the moment, and it would be very simple to do (something you can’t say for most money-raising measures).

If you are 55 already and have enough in your pension for the government to get away with defining you as rich (perhaps £250,000 upwards), you might as well take your 25% (as Ian Cowie says he plans to) before the Treasury does much more of its active considering.