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BeeHive  >  BeeLines  >  Tax-free lump sums

Tax-free lump sums

More problems on the horizon?

Well, it’s simply astounding isn’t it? Just when we finally get to the point where we get strong reassurances from the Inland Revenue that tax-free lump sums are here to stay, and that they serve a very real purpose as a reward to people for committing themselves to long-term savings, they come under attack from yet another source.

I was very pleased to read in the Inland Revenue consultative document that tax-free cash sums are as valued by them as they are by pension savers. It’s only a few months ago, in the run-up to the publication of the consultative paper, that the press was full once more of rumours of the death of tax-free lump sums. All this doom and gloom was not only unfounded, it was completely confounded when the actual paper came out and said;

“Generous as tax relief is, the Government recognises that people do need encouragement to lock away their money, perhaps for decades, until they are ready to begin to draw benefits from their pension savings in their later years. The tax-free lump sum provides that encouragement. It can provide a substantial capital sum, perhaps allowing people to put their financial affairs into good order when they retire. It may even offer once in a lifetime opportunities such as visiting family members in other countries or paying for home improvements to make retirement more comfortable.”

I emboldened the sentence in the middle of that excerpt from the IR paper so that it jumps off the page or screen at you. To be honest it should jump up at you anyway. It’s one of the most amazing things you’d have expected to see in a document from the Revenue in my opinion. Especially given the perennial rumours of tax-free lump sums being on the way out any time soon.

It was good to see such an endorsement for the continuation of the lump sums as a central plank of UK pensions policy going forward. When I first read that paragraph above, I immediately thought, ”Good. That’s the end of all these scare stories we keep getting about tax-free cash”. Well, actually, when I speak to myself in my head I don’t usually use such long sentences. I probably just said something like “Blimey!”, or something like that. But you know what I mean. It marks some kind of turning point, a point of closure. And it augurs well for the future.

The trouble is, being involved in pensions at the moment is a bit like being involved in defending the Alamo. You never know where the next attack’s coming from. Just when we think everything has begun to look secure, Wham!, in comes an amendment to a European OPD and we’re back to square one worry-wise on the tax-free cash front. Hang on a minute. A European OPD? What’s that when it’s at home then? I’ll bet you’re thinking that, or something like it. Right?

Well, I’ll tell you what it is. There’s a fair bit going on all the time over in Brussels on the Pan-European pensions front. It’s not the sort of stuff that makes the papers over here too much, but loads of important issues are being hammered out almost daily that will one day shape the European pensions environment we’ll all eventually end up in. Scary. It’s certainly something we need to keep a close eye on. This time the euro-spotlight has fallen on tax-free lump sums, which when I first heard of it was enough for me to construct an internal discussion with myself along the lines of “Oo-err!”, or something similar.

A few days ago, the European Parliament’s economic and monetary affairs committee had a vote on some proposed amendments to the Occupational Pensions Directive (OPD) which is a far-reaching piece of embryonic legislation that will eventually pave the way to cross-border pension schemes. One of the amendments that was voted through in this session effectively says that the purpose of pension schemes is to provide annuities, not tax-free cash sums. So, here we go again. If this gets the go-ahead at it’s second reading on March the 13th this year, then it could be we would have to adopt it into British law as early as 2005. So, if like me you thought we’d finally heard the last of the scaremongering around tax-free cash, think again. Let’s hope the lobbying by the ABI and others on this important issue for UK pensions is successful.

What this issue also does, I think, is remind us that there is more to focus our attention on in the pensions field than just the Green Paper and Inland Revenue consultations that are consuming so much of our time and effort right now. If you’re interested in keeping abreast of these things too, please keep popping in to the BeeHive. I think I’ll start a new series of EuroBeeLines and make this the first one. Au revoir, for now.

Steve Bee
28 February 2003