Salary sacrifice faces £2k cap but tax-free pension cash stays in budget

After weeks of feverish speculation, we finally found out the chancellor’s plans for our pensions. The good news is that the much-rumoured cut to tax-free cash didn’t happen. This was one of the more damaging rumours in the run up with increased numbers of people looking to take their money before a change could be announced.

It’s a move that had potential to do huge damage to people’s retirement resilience. Removing money from the tax-efficient environment of a SIPP risks exposing it to a host of taxes such as capital gains and dividend tax. There is also the potential of leaving it in a cash account where it is deprived of investment growth.

For those who took their tax-free cash as part of a long-term plan – say to repay their mortgage –the decision may still make sense. However, those who took it without a plan may now be wondering what to do next.

Read more: What the budget means for your finances

HMRC recently confirmed that applications to take tax-free cash cannot be cancelled. However, if your application has not been processed by your provider yet it’s worth checking to see if you can cancel that. If you haven’t used up your ISA allowance, then it may make sense to reinvest some of the money into your stocks and shares ISA to benefit from the potential for more investment growth as well as tax-free income.

It’s really important not to reinvest the money straight back into your SIPP without taking financial advice first. You risk breaching recycling rules that are aimed at preventing people from benefitting from artificially high rates of tax relief by reinvesting their tax-free cash. It’s a move that could see you clobbered with a nasty tax bill, so you need to consider things carefully.

The big pension announcement was the decision to restrict the amount you can contribute to a pension through salary sacrifice and receive national insurance relief. From 2029 this will be reduced to £2,000.

It’s important to say that pensions contributions made under salary sacrifice will still benefit from income tax relief, but we could see people less likely to boost their contributions over and above auto-enrolment minimums.

There will also be increased costs for employers. At a time when there is such focus on adequacy, it seems counter intuitive to make such a change – Hargreaves Lansdown’s Savings and Resilience Barometer shows just 43% of households are on track for an adequate retirement so there is clearly still much that needs to be done.

Read more: Budget: Rachel Reeves raises taxes by £26bn

However, you can still make the most of the current system while it lasts to boost your pension contributions and make national insurance savings. If you have a bit of spare cash, it could be a good move to improve your retirement resilience before the change comes in.

The chancellor confirmed the state pension would rise 4.8% next April in line with the triple lock. This will give someone on the full new state pension £241.30 per week while those on the full basic state pension would see their weekly payment rise to £184.90.

However, not everyone will see the triple lock rise across the whole of their state pension as elements, such as the additional state pension, will only rise in line with inflation which came in at 3.8%.

She also gave some comfort to those wholly reliant on the state pension who could find they receive a tax bill in the coming years. Government will look at how to ease the admin burden for those whose sole income is the basic or new state pension without any increments.

This will hopefully save them from having to pay tax via simple assessment from 2027-28 if the new or basic state pension exceeds the personal allowance from that point. The government is exploring the best way to achieve this and will set out more detail next year.

Helen Morrissey is Yahoo Finance UK’s pensions columnist and is the head of retirement analysis at Hargreaves Lansdown.

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