Tax-free pensions – After the Lord Mayor’s show ….

There is a downside to the encashment of the whole of a pension fund, especially if that fund represents the main source of your retirement income.  One of the benefits of having to buy an annuity is its certainty.  The guarantee of a known amount of income for as long as you live (just a shame about the level of income the annuity provides).  This certainty is lost when the entire pension fund is converted to cash, when the cash can be spent at will.  There is no guarantee that the fund will last as long as you.  The money may run out, meaning loss of independence and potential poverty after a period of apparent affluence. (But – way to go grandad)

The cash arising from the pension fund is immediately part of your assets, which may affect entitlement to benefits, such as help with care home fees.  The cash fund will add to the value of your estate subject to Inheritance tax.  The substantial cash fund may cause you to be more generous than is sensible to the next generation(s) – and there may be more pressure to be more generous!

In my view, it is also inevitable that the more relaxed approach to the use of pension funds on retirement will be accompanied (very soon) by a less generous tax regime for making pension contributions – but that is for the future and for younger generations to face and deal with.  In the meantime – YIPPEE!