Reducing the pension tax-free lump sum is likely to be a “tempting option” for the Treasury to consider as they work to fill the £22bn hole in the public finances.
Currently, savers aged 55 and over can withdraw 25 per cent of their pension pot tax-free, however, a think tank is urging Rachel Reeves to reduce this limit to £100,000, potentially affecting one in five retirees.
This proposal has sparked widespread concern among pension savers, with many rushing to withdraw lump sums before any potential changes.
Standard Life, AJ Bell, and Royal London are reportedly experiencing a surge in inquiries about tax-free withdrawals.
David Kindness, personal finance and tax expert at Best Money spoke exclusively with GB News about potential pension changes that could happen at the Budget and the major impact it could have on the way people start saving for retirement.
He said: “A potential change that could impact retirees is a reduction in the tax-free lump sum that can be withdrawn from pensions.
Looming base rate hike set to reverberate around the bond marketPixabay“Currently set at 25 per cent, there are discussions about lowering this percentage. This could significantly affect those who have based their retirement plans on the existing rules, particularly public sector employees with defined benefit pensions.
“It’s a change that could force many to rethink their retirement income strategies.”
Retirees can take 25 per cent of their pension pot savings tax-free, up to the value of £268,275, but Labour has been urged to make changes to the rule.
The Institute for Fiscal Studies (IFS) has said it could be capped at £100,000 instead. As a result, there has been an increased activity in pension withdrawals which has raised concerns about potential operational challenges for pension providers.
Many have contacted their pension providers and financial planners to query whether it may be best to crystallise their funds now – before they potentially have to pay more tax.
David Gibb, a chartered financial planner at Quilter Cheviot said: “All our colleagues are getting calls and emails daily from people wondering about taking their tax free-lump sum.
“They’re saying things like ‘it feels like all I speak about’. There’s a lot of worry from clients as there’s much confusion and panic.”
However, financial experts are advising against hasty decisions.
Mike Ambery, retirement savings director at Standard Life, said: “Our message to customers looking to act ahead of potential changes is that whatever decision they choose to make, they need to be happy that it will be the right thing for them to have done, whatever the outcome of the Budget.”
Beyond changes to the tax-free lump sum, the Government is also considering alterations to pension tax relief. One proposal is introducing a flat 30 per cent rate of pension tax relief, which could significantly impact higher-rate taxpayers.
Kindness told GB News: “This could be a game-changer for many. If implemented, it would make pension saving more attractive for lower-income earners, potentially encouraging more people to save for retirement. However, it might be less beneficial for higher earners, who could see a reduction in the tax benefits they currently enjoy.”
Ian Cook of Quilter Cheviot explained the potential impact stating: “Currently, if you sacrifice up to £60,000 of your salary into your pension, that amount is contributed pre-tax. As a higher-rate taxpayer, you effectively receive 40 per cent tax relief on those contributions.”
A flat rate could lead to substantial changes in the current system, potentially requiring years of consultation and phased implementation.
Despite the speculation, some experts believe drastic changes to the tax-free lump sum are unlikely.
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Sir Steve Webb, a former pensions minister said: “I would be very, very surprised if they just said ‘we’re not going to have tax-free cash at all’.” He added that such a move would affect everyone, not just high-earners, potentially causing significant political backlash.
Arthur Favier, CEO of Oppizi, cautioned: “If pension relief gets reduced or restructured, it could lead to significant shifts in how people save for retirement.”
Financial advisers are urging savers to avoid knee-jerk reactions.
Helen Morrissey of Hargreaves Lansdown warned: “Ripping this out of your pension now to avoid a tax grab may seem like a good idea, but it’s something you may come to regret.”
A Treasury spokesman stated: “We do not comment on speculation around tax changes outside of fiscal events.”