Pensioners banking on taking a big tax-free lump sum from their pension pot to pay off their mortgage face a crisis amid fears the figure will be capped at £100,000.
The Chancellor Rachel Reeves is rumoured to be planning to cut the figure people can take from their pension nest eggs free of tax from the current maximum of £268,750 to £100,000.
Historically, people have used the tax-free lump sum to pay off any outstanding mortgage debt, carry out needed home improvements or give cash to adult children to help them on to the housing market.
Mortgage brokers say introducing a much lower cap will mean many older people will be locked into paying back a home loan beyond retirement, with the associated interest charges, so hitting their monthly income.
People who take a lump sum above a new lower cap would be hit with income tax at as much as 40 percent on the figure involved. This would be offset to some extent because the income generated from the pension pot would be bigger if people take out a smaller lump sum.
Fears that the change will be announced in the Budget has seen a rush by a number of professionals to consider withdrawing a tax free lump sum earlier than originally planned. However, finance experts say this could be a major mistake.
Gabriel McKeown, Head of Macroeconomics at Sad Rabbit Investments, said: “Chancellor Reeves’ latest pension pot pinch threatens to tarnish retirement prospects for an entire generation.
“With Labour’s commitment not to raise income tax, NI, or VAT, pensions are once again in the crosshairs, with a change that could reduce the appeal of pensions altogether.
“Furthermore, the repercussions of this policy shift could ripple through the mortgage sector, as with less tax-free cash available, retirees may be forced to extend their mortgages considerably.
“The coming weeks may determine whether the dream of a mortgage-free retirement remains within reach for Britain’s future pensioners.”
Iain Swatton, director at Exemplar Financial Services, told Newspage: “Reports that the government may cut the amount of tax-free cash that can be withdrawn from pensions in the upcoming Budget will undoubtedly feel like another blow to pensioners.
“For many, accessing their lump sum is a key part of their retirement strategy, and while this change may primarily impact those with larger pension pots, there are mortgage holders relying on these funds to repay their loans. This could place them in a very difficult position. Even if the numbers are small, it all adds up to yet another attack on those who have diligently saved for their future.”
Patricia McGirr, founder at Repossession Rescue Network, described the proposal as a “shambolic idea”.
She said: “People who save and invest wisely to create a secure retirement must be free to use their capital as they choose at a time when they’re ready to enjoy the fruits of their labours.
“Those reliant on using this cash windfall to pay off a remaining mortgage or other debts to reduce their outgoings will feel this most. This is just another raid on those of pensionable age. Poor form. Poorer economics.”
Ben Perks, Managing Director at Orchard Financial Adviser, said: “If you’re a long-serving Police Officer who’s made plans to utilise their Pension Commencement Lump Sum you’re going to be pretty pee’d off, and rightly so. You cannot just move the goal posts on someone’s retirement provision.
“This will almost definitely see more people taking mortgage debts into retirement, which will leave many feeling uncertain.”
Michelle Lawson, Director at Lawson Financial, warned: “Any changes to pensions and investment retirement planning can have disastrous consequences.”
Harps Garcha, Director at Brooklyns Financial: “The potential changes to the Tax-Free Lump Sum policy could cause undue stress for many who had planned to use it to reduce their mortgage. For those nearing retirement, this sudden shift leaves limited options to adjust their financial plans, potentially forcing some to sell and downsize. This policy risks disproportionately impacting older individuals, who may now face unexpected financial challenges at a crucial time in their lives.”
Jonathan Halberda, Specialist Financial Adviser at Wesleyan Financial Services, said: “We’ve been getting more and more questions from doctors and teachers about whether they should be withdrawing their lump sums early.
“What we’re reminding them is that so far, we’re just seeing reports that this is something under consideration. While it’s natural that people want to try and maximise what they get out of their pension savings, there’s a real risk that – by rushing into something based on speculation – they actually undermine what could be years’ worth of careful retirement planning.
“It’s better to wait until we have more certainty before doing anything. In the meantime, review what different scenarios might mean for your finances so you can be on the front foot if change does happen.”
