Tax & Accounting News

Change to ‘lump sum’ taxation?

19/04/2010

It is currently rumoured that changes may be afoot to the taxation of lump sums taken at the commencement of a private pension.

Currently, when an individual reaches retirement, it is possible to take a tax-free lump sum from their pension pot, by reducing the amount they will subsequently receive each year.

There were no changes announced in the Budget, but there remains speculation that changes could be made after the election.

As long as these rumours remain just that, there is no one course of action that can be universally recommended, and it will be down to individuals to determine how they wish to move forward.

Anyone who is due to draw lump sum benefits in the near future anyway, may choose to bring this forward in order to ensure their tax-free position is safeguarded. However, for everyone else, premature drawing of lump sums would bring about significant disadvantages.

Withdrawing lump sums would destroy the Inheritance planning advantages of undrawn benefits and would also transfer assets from a tax exempt medium to a potentially much higher tax regime on income arising. The lump sum would also increase the size of an individual’s total estate, which would have potential consequences for Inheritance Tax (IHT).

If the tax position of lump sums is not changed after all, the current favourable tax position would have been lost unnecessarily. Of course, we will keep our clients up to date with any further information as we have it, but in the meantime, for further information or advice please contact us.

 

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