The Chancellor must rule out a pensions raid in the Budget as she faces a re-run of last year’s damaging dash for tax-free cash, it was warned last night.
Speculation about a new lower cap for the lump-sum has prompted a renewed rush of withdrawals following a spike at the same time last year, experts warn.
A survey of people with pensions, savings and investments by wealth management firm Rathbones found withdrawing a lump sum from a retirement fund was one of their top regrets among financial decisions made ahead of last year’s Budget.
Over-55s tempted to take a 25 per cent tax-free lump sum from their pension for fear the limit is slashed in the Budget in November are being warned to treat the decision as ‘irreversible’.
AJ Bell has urged Rachel Reeves to come out against changes now, to discourage people from making hasty decisions that could harm their retirement.
Rachel Vahey, of the investment platform, said: ‘This constant debate about changing pensions tax rules is wearing down people’s trust in the Government and putting them in danger of making knee-jerk decisions.
‘The Chancellor needs to publicly rule out changes to tax-free cash in order to put an end to speculation. Doing so would alleviate uncertainty and show that the Government is on the side of workers saving for the future.
‘Failing to provide certainty is irresponsible and punishes workers, who will rightly worry that the government may move the goalposts before they take retirement income.’
Rathbones’ survey found 27 per cent of people regretted withdrawing a lump sum from a pension.
Taking up to 25 per cent from your pension free of tax is a popular perk at retirement.
People typically use their lump sum to clear remaining mortgages and other debts, splash out on home renovations, new cars and holidays or even help children onto the property ladder.
But a string of retirement experts have warned against making rash moves if you don’t have a plan for what you would do with the money.
Rebecca Williams, of Rathbones, said: ‘The pension tax-free lump sum is one of the best-loved and most well-understood parts of the pensions regime, and it’s understandable that people are nervous about potential changes to the rules.
‘The ability to withdraw a lump sum free of tax from your pension is hugely beneficial for meeting immediate financial obligations..
‘But withdrawing without a clear plan can lead to missed growth opportunities and tax exposure.’
Although Ms Reeves did not tighten the rules in the last Budget, unchecked speculation that she would saw an unprecedented 60 per cent surge in tax-free cash pulled from pensions in the last financial year, amounting to £18billion.
Outflows are likely to have continued at a similar or even greater rate because of the Government’s plan to levy inheritance tax on pensions from April 2027, and ongoing worries a cap might still be imposed.
Pension experts are now issuing a fresh round of alerts in the wake of statements made on tax-free cash cancellation rules by the Financial Conduct Authority (FCA) and HMRC.
The FCA says there is no ‘right to cancel’ a tax-free cash withdrawal, though pension providers might voluntarily offer this option to customers if they wish.
And HMRC has confirmed any tax consequences cannot be undone if you do cancel – so the withdrawal will still count towards someone’s tax-free lump sum limit, which is currently £268,275, even if it is unwound.
Ms Williams said that, following confirmation from the regulator regarding cancellation rights, taking tax free cash is an ‘irreversible decision’.
She added: ‘Those thinking they can simply recycle their tax-free cash back into a pension could be in for a nasty shock.
‘If the move appears pre-planned and contributions spike significantly, HMRC may treat it as an unauthorised payment – potentially landing you with a tax bill of up to 55 per cent.’
