Rachel Reeves, the Chancellor, has sparked a rush of savers trying to withdraw tax-free lump sums from their pensions. This is due to fears of a potential tax raid on pensions. Under current rules, people aged 55 and over can take up to 25% of their pension savings tax-free.
This is capped at £268,275. However, there are concerns that changes could reduce or cap this tax-free sum at a lower amount. Sir Steve Webb, a former pensions minister, warns that this surge in withdrawals will likely put pressure on pension schemes.
“Those who are aged 55 or over are tempted to ‘crystallise’ their pensions now to obtain their 25 percent tax-free cash,” he said. Webb, now a partner at LCP, added that some pension providers may struggle to handle the increased requests due to lack of staff. Tom McPhail, from the Lang Cat pensions consultancy, agreed.
He suggested pension providers could face an operational bottleneck. “The Government’s created a context of uncertainty and fear around pensions. Restricting the tax-free lump sum is an obvious potential tax raid.
Savers withdraw to avoid tax cap
It’s quite an easy lever to pull,” he remarked. The Government is under pressure to reduce the tax-free cash savers can withdraw.
This could generate an extra £2 billion for the Treasury. The Institute for Fiscal Studies has advised the Chancellor to cap the tax-free lump sum at £100,000. This would affect one in five pension savers.
Experts warn this change could destabilize the financial plans of people in their late 50s and early 60s. Helen Morrissey, from Hargreaves Lansdown, cautions that hastily withdrawing pension funds may not be the best decision. Especially if the money is moved to a low-return bank account.
“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,” she noted. Adding to pensioners’ worries, Downing Street has already announced plans to cut winter fuel payments for millions. This raises fears of more stringent measures.
A Treasury spokesperson said, “We do not comment on speculation around tax changes outside of fiscal events.”
As the Government considers potential changes, savers continue to seek clarity. Many are trying to secure their retirement funds before any new regulations take effect.
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