Steve Webb, the former Liberal Democrat Pensions Minister, has claimed that George Osborne is set to axe the 25% tax-free lump sum from pensions in the Budget in March. It would join a host of pensions and tax changes that could leave some people considerably worse off.
The tax-free lump sum has long-been one of the biggest attractions of saving for a pension. On reaching the age of 55, you are taxed on everything you take out of your pension - but the first 25% can be accessed without paying a penny of tax. Bringing an end to this particular perk would be devastating for millions of people.
Webb claims, however, that its set to go as part of a radical overhaul of pensions announced in the Budget. Those who have already build up pension pots would be safe - he wrote in the Sunday Times - but it would stop people building up any more entitlement to tax free cash, so those with as little as ten years to retirement will face major cuts in the sums they can take out of their pension tax-free.
Instead of the pension as we know it, we would have an ISA-style savings vehicle, where all contributions would be made out of taxed income. It would mean that none of the income taken at the end could be tax free.
Webb's claims carry some weight because he worked so closely with Osborne in the coalition government. He said in the Times that when Osborne announced that a radical overhaul of pensions was being considered, this ISA-style investment was his first choice. Axing the tax-free cash allowance would mean saving the Treasury £4 billion - which is a major attraction for the Chancellor.
However, the Treasury insists that no decisions have been made at this stage. It's also worth bearing in mind that throughout the consultation period, the vast majority of those in the industry have been arguing for a flat-rate tax relief system instead. This would be a major blow to the tax-efficiency of pensions for those on higher incomes - but would retain the tax-free cash benefit for everyone.
What else is coming?
While we can speculate about tax changes to pensions, there are some things we already know about which are set to hit in the next tax year in April. There is some good news, and some bad news.
First, the personal allowance is rising (the amount you are allowed to earn before paying tax). This is currently £10,600, and is set to rise to £11,000 in the next tax year, and £11,200 the year after that. This will mean that the threshold for paying higher rate tax will rise to £43,000 in the next tax year.
The other bit of good news is that there will be a new personal saving allowance, which means the first £1,000 that basic rate taxpayers make on savings income (£500 if you are a higher-rate taxpayer) is tax free. If you make more than this in interest, you'll have to pay tax on everything over the allowance.
There's mixed news for anyone getting dividends. At the moment basic-rate taxpayers don't pay tax on dividend income, while higher-rate taxpayers pay 25%. From April, the first £5,000 you get will be tax free - and above that will be taxed at 7.5% for basic-rate taxpayers and 32.5% for higher -rate taxpayers. If you have plenty of money invested in shares (especially those producing dividends) this is likely to be bad news - especially if you are a basic-rate taxpayer.
There's more bad news for those with large pensions, because the lifetime allowance will be cut from £1.25 million to £1 million.
And there's bad news for buy-to-let investors, who will pay an extra 3% stamp duty when buying a second property (with the knowledge that a year later they will see tax relief on mortgage interest cut).
But what do you think? Are you dreading the Budget - or are you hopeful that you'll end up paying less tax? Let us know in the comments.
Dream retirement destinations
Osborne said to be ready to axe tax-free pensions cash
A study by MGM Advantage discovered that Portugal is the 10th most popular dream retirement destination among Brits.
You get the attractions of the sun, a more relaxed way of life, lower living costs and cheaper property. You can also benefit from pension arrangements that mean your pension rises with inflation.
And if you choose to, you can spend your time with the enormous expat population, feeling like you never left.
In the tradition of the Best Exotic Marigold Hotel, there’s a large number of people keen to move to India, partly in order to enjoy a much higher standard of living than they would be able to afford in the UK.
If course it’s important to consider that your state pension will not rise in line with inflation - so will halve in real terms during your retirement.
This part of Europe offers a great combination of some of the lowest living and housing costs on the continent, along with a more forgiving climate than the UK.
For that reason Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Greece and Turkey are a big draw for retirees.
However, state pension provision varies across the region, so you will need to check whether retiring to these locations will mean your pension continues to rise in line with increases in the UK, or will be frozen when you move overseas.
Italy is a country of contrasts, so anyone planing a retirement there needs to think carefully about whether they want to call a bustling city home, or whether they would be happiest in the mountains or by the sea.
Housing tends to cost less than in the UK, and in some regions it's incredibly cheap. Living costs are also lower than in Britain, and your pension will rise in line with increases in the UK.
Canada is a big draw for British expats of all ages. This spectacular country is known for being welcoming to people from all over the world, and in many cases has no language barrier for Brits. The quality of life is high, and the cost of housing lower than in the UK.
However, you will need to factor in the fact that your UK state pension will be frozen on the day you leave, and you will need some health insurance if you want to replicate the sorts of things that are available for free on the NHS.
As with India, the Far East offers an exciting and dramatic change from life in the UK, with much lower costs, which can buy you a higher standard of living (although bear in mind your state pension will be frozen).
You will need to consider the cultural and practical differences associated with the move, but you will have the opportunity to live in one of the most exciting places in the world.
The weather, lifestyle, space, and lower cost of living means that British expats of all ages are keen to move to Australia.
Property can be a bit of a stumbling block in some areas, as prices have gone up so much. The currency is also strong, which has posed some issues for those who receive their income in pounds, and there’s the fact that the UK state pension will be frozen if you move. However, if you can overcome these things, then a new life in the sun awaits.
The US offers much more affordable housing, and in many respects a lower cost of living than in the UK.
It appeals to those who don’t want to live with a language barrier, but want more space, possibly more sun, and an American Dream of their own.
There are some important things to factor in before you move, such as the additional cost of healthcare, and the exchange rate. However, one bonus is that your state pension will rise at the same rate it does in the UK.
France is close to home, and yet offers cheaper accommodation than the UK, a lower cost of living, and in many regions there’s better weather too.
Your pension will rise at the same rate it would in the UK, and at any time friends and family are just a short boat or plane ride away. It’s no wonder France is the second most popular dream destination for retirees.
It will come as little surprise that Spain tops the list - largely because it’s already the most common overseas retirement destination for Brits.
Millions of us have experienced the delights of the sun, sea, and the lower cost of living while we were on holiday in the country, so it’s hardly a shock that so many want to experience it on a full-time basis in retirement.
Huge falls in the price of property has made this a cheap place to buy, and the fact that your state pension will keep pace with rises in the UK means you’ll be able to maintain your standard of living throughout your retirement.