Jeremy Hunt’s tax-free lump sum freeze will cost wealthy pensioners £28,000 over 10 years, analysis shows.
Inflation will erode the real value of withdrawable tax-free cash for a million-pound pension by £70,000 over a decade, because the £268,275 tax-free cap will no longer track the rising value of the pension pot, figures suggest.
For higher rate taxpayers taxed at 40pc, this equates to a £28,000 loss.
In his March budget, the Chancellor announced he would abolish the pensions lifetime allowance, which capped the amount savers could hold in their pension pots without being taxed at £1,073,100. Mr Hunt abolished the lifetime allowance to coax doctors into retiring later in order to boost the NHS workforce.
However, he froze the amount you can withdraw as a tax-free lump sum at £268,275. Previously, the tax-free lump sum cap rose in line with your pension pot. People could take 25pc of their pension fund or 25pc of the lifetime allowance, whichever was lower.
Mr Hunt’s new £268,275 limit currently has no provision for future increases, meaning the amount of tax-free cash available to wealthy pensioners will be eaten away by inflation over time as their pension pots grow.
A £1,073,100 pension pot today will be worth £1,921,759 in 10 years’ time, assuming annual investment growth of 6pc, according to analysis by wealth management group Quilter.
But assuming annual inflation of 3pc, the real value of the tax-free lump sum you could take out will fall from £268,275 to £199,622 over the same period – a loss of nearly £70,000 in tax-free cash.
