Potential changes to tax on pensions in the Autumn Budget could have “unintended consequences” for the mortgage market.
There have been rumours Labour could change the 25 per cent tax free lump sum by making it less generous or scrapping the policy altogether.
Under the current rules, a person can take up to 25% of their pension, or up to £268,275, as a lump sum.
Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, warned changing the policy could have a ripple effect on other areas.
He explained: “If there’s going to be a change in that, I think that would be quite knee jerk and would have unintended consequences.
“People tend to use the tax-free cash to pay off mortgages, to make purchases or otherwise. If it’s not going to all be tax free, you’ve got to fund for that difference.
“That could perversely impact mortgages. You could see an increase in lifetime mortgages, or in equity release mortgages, as a different way of passing on money to the next generation.”
Although there could be big changes in the Budget, Chancellor Rachel Reeves has reportedly shelved plans for a flat tax relief on pensions, which would reduce tax relief for high earners.
Mr Ambery said: “Changes to income tax relief are a potentially significant revenue raiser but come with two major challenges.
“Firstly, they would by highly complex to implement and secondly, they come with political downsides given their knock on implications for public sector workers in particular.
“The Chancellor will be assessing many ways of raising revenues and whether pensions will feature prominently in the Budget remains to be seen but there are other aspects of the system that would pose fewer logistical issues and come with fewer strings attached.”
Although major changes could come in on October 30, Mr Ambery cautioned people not to be too hasty to move their cash around ahead of the Budget.
He explained: “I would be very surprised if any fundamental change is implemented overnight and with speed. It would be pretty hard to do operationally, administratively.
“Therefore don’t rush would be my suggestion and see what comes through. However, clearly nobody knows what’s going to come through in the Budget.”
