Rachel Reeves says ‘we will turn our attention to pensions’
Rachel Reeves has been warned against slashing the tax free lump available to workers from their pension pots.
Currently, workers can take up to 25 percent of their pension pot free of tax with the total capped at £268,275.
However, Treasury officials are understood to have raised the possibility of slashing the figure to £100,000 in the October budget with any lump sum withdrawals above this figure subject to tax.
Any such change would come as a hammer blow to retirees who rely on the larger lump sum to clear debts, such as paying off a mortgage, fund home improvements or give cash to adult children to help them onto the property ladder.
Finance experts immediately hit out at any move to cut the tax free lump sum, arguing it would be extremely complex and unlikely to raise meaningful sums of money for Treasury coffers for some time.
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Workers can take up to 25 percent of their pension pot free of tax (Image: Getty)
Investment experts Hargreaves Lansdown warned: “The impact risks costing people tens of thousands of pounds in tax over the course of their retirement.”
Its Head of Retirement Analysis, Helen Morrissey, said: “Changes to the tax-free lump sum would do irreparable damage to the pension system. This risks undermining confidence and impacting people’s retirement savings.”
She added: “We would strongly advocate for pension tax-free cash to be kept as sacrosanct in the system.
“People need confidence to save for the future or they will simply not have the kind of spending levels that they require to maintain their lifestyle in retirement. This will not only prove challenging for households individually but the collective impact will also be a weakening of the economy as a whole.”
The firm said changes to the tax free lump sum would drive people to use their pension pot to buy an annuity, which provides an income for life, as an alternative. But it said the incomes available via annuities are relatively modest.
For example, it said someone with a £400,000 pension purchasing an annuity at the age of 67 would get an income of around £20,000 a year. Ms Morrisey said: “So, while this group may have enough income to meet their needs in retirement, they are hardly living a lavish lifestyle.”
HL said that if someone still wanted to take £268,275 as a lump sum after the tax free element was reduced to £100,000, this would leave them open to paying income tax on £168,275, which is the gap between these two figures.
It said this would generate a tax bill of £67,310 if taxed at higher rates or £33,655 if taxed at the basic rate.
Former Lib-Dem MP and Pensions Minister in the coalition government, Sir Steve Webb, said cutting the tax free lump sum would not be sensible.
He told the BBC Radio 4 Today programme the policy will be on a long list of tax raising measures that the Chancellor is looking at, but he doubted she would implement it.
Sir Steve, who is now a partner at pension experts LCP, said: “One of the problems is there is a bunch of people who have planned on the basis that they will be able to take these lump sums and quite a few people will be over these limits already.
“If you brought in a change like this, you would have to have lots of complicated transitional rules and that in turn means you would not raise very much money for quite a long time
I am sure it is being looked at, but I would be very surprised if it went ahead.”
Both the Institute for Fiscal Studies (IFS) and the Fabian Society have argued that the lump sum should be cut from £268,275 to £100,000 because the current cap favours the wealthy. The IFS has estimated it could affect one in five retirees.
Steven Cameron, of the pension company Aegon, said: “Many individuals will have planned their retirement finances on the assumption they could take 25 per cent of their full fund as a tax-free lump sum. Being stopped from doing so would cause a major outcry.”
Mike Ambery, of the pension firm Standard Life, said: “Operationally, it would be complicated. That’s because pension funds are normally written under trust and also you can’t really retrospectively make changes to benefits that people have already built up. It could be subject to a legal challenge.”
Fears that the Chancellor will make changes to taxes around pension savings and the lump sum have led a number of people to change their retirement plans.
The Chancellor was last week urged to reassure pensioners after it emerged savers were pulling money out of their retirement pots early owing to fears of an Oct 30 tax raid.
In a letter to the Treasury, Quilter, a wealth manager, warned that Budget fears had prompted clients to take “knee-jerk decisions” that could jeopardise their financial security.
Steven Levin, Quilter’s chief executive, said: “We are witnessing more clients considering whether to withdraw their pension tax-free cash prematurely.
“The knock-on uncertainty around changes to pension tax reliefs, tax-free cash and possible amendments to pension contributions is causing anxiety and confusion for those trying to plan their financial futures.”
The letter added: “A prompt statement from the Treasury, advising against changes to pension arrangements pre-Budget, would be highly beneficial.”
Jason Hollands, of wealth manager Evelyn Partner, said: “More customers are getting in touch to ask about withdrawing money early. This has been fuelled by think tanks, such as the IFS, saying the lump sum should be slashed to £100,000.
“This has petrified some people who might have been banking on tax-free cash to clear mortgages or reduce debt in the next few years.
A Government spokesman said: “We do not comment on speculation around tax changes outside of fiscal events.”
