Table of Contents
Rumors are circulating that one of the biggest benefits of saving for retirement could be threatened in the Chancellor’s Budget at the end of the month.
The ability to withdraw 25 per cent of your pension savings tax-free has been a much-loved feature of pension savings for decades, and is a key feature of the retirement plans of millions of savers.
Savers use tax-free cash to help fulfill their retirement dreams: to supplement their income if they semi-retire, to take a well-deserved vacation, pay off a mortgage, or help loved ones increase their savings or buy a home. It can be taken from age 55, or 57 from 2028.
But as Chancellor Rachel Reeves looks for taxes she can increase and benefits she can cut to boost the Treasury coffers, fears are growing that the beloved tax-free lump sum could be in her sights.
Budget raid: Chancellor Rachel Reeves is looking for taxes she can increase and benefits she can cut to boost the Treasury coffers.
The Chancellor was labeled ‘Thief Reeves’ by protesters against winter fuel subsidy cuts who gathered outside Parliament earlier this week.
Wealth managers, financial advisers and pension providers tell Money Mail their call centers are overcrowded and experts are in high demand from worried savers with two questions on their lips: is the debt-free lump sum under threat? taxes and should I grab mine now while I can? ?
Experts are urging the Government to provide urgent clarity to worried savers. Helen Morrissey, head of retirement research at wealth platform Hargreaves Lansdown, says: ‘The Government has left people to make impossible decisions about their investments and pensions.
“The sooner changes such as the theft of tax-free money are ruled out, the more people can refocus on the long term.”
Wealth managers say they are urging clients not to make rash decisions they may later regret, especially if the tax-free lump sum remains unchanged.
They say savers should think very carefully before taking tax-free cash, as there may be implications for inheritance tax, capital gains tax and how much they have to retire.
But there are some tricks that savvy savers can use to make the most of the situation.
Take only what is tax protected
As long as the money is in your pension, it will grow tax-free. But as soon as you take it out, it’s exposed again.
There may be no income tax due when you withdraw your 25 per cent tax-free lump sum, but it could incur tax later, for example if you put the money into a savings account where you earn more than £1,000 in interest every year. (or £500 if you are a higher rate taxpayer).
It is rarely worth losing the protection of a pension unless you have specific plans for how you will use the cash.
But one trick that allows you to deposit some tax-free cash is to simply carry as much as you can fit into an Isa.
Tax haven: Like pensions, Isas protect your wealth from tax and allow your money to grow without paying a cent in dividends, capital gains or interest earned.
Like pensions, Isas also protect your wealth from tax and allow your money to grow without paying a penny in dividends, capital gains or interest earned.
So you could take tax-free cash from your pension, put it into your Isa tax-free and once there, your wealth can continue to grow tax-free.
Everyone has an Isa allowance of £20,000 each tax year. Therefore, you could receive £20,000 if you still have your full allowance available. Children also have a Junior Isa allowance of up to £9,000.
If you wanted to help your children you could theoretically use your allowance, your spouse or common-law partner could do the same and also contribute to Junior Isas.
For a family of four, that would add up to a total of £58,000 completely protected from tax and any changes made by the Chancellor.
You don’t have to receive your lump sum tax-free; There is nothing stopping you from taking only what you need or can protect from taxes.
Keeping the rest of your allowance in your pension for longer will give it even more time to grow, which could give you an even larger tax-free lump sum in the long term.
Request special protection
If the Chancellor were to make changes to the tax-free lump sum, it is highly unlikely that she would remove it entirely.
It is much more likely to reduce the amount you can withdraw tax-free from the current upper limit of £268,275.
But if it were to lower the limit, there’s a good chance it would implement something for savers who would no longer comply with the new rules.
Retirement benefit: The ability to withdraw 25% of your pension savings tax-free has been a much-loved feature of pension savings for decades.
Clare Moffat, of pensions firm Royal London, says chancellors have always offered this type of lifeline in the past.
“If the Chancellor reduces the limit, I hope she will put in place rules to protect those people who have enough savings to get over the new limit,” he says. “Otherwise the new legislation would be retroactive, which doesn’t seem fair.”
If you don’t comply with the new rules introduced, be prepared to ask for permission to keep your benefits under the old ones.
Don’t worry unless you have a big pot.
Influential think tanks, the Institute for Fiscal Studies and the Fabian Society, recommend that the Chancellor reduce the limit from £268,275 to £100,000.
If this happened, savers would not be affected unless they had more than £400,000 saved in pension wealth. Few retirees have boats this size.
Of course, you could cut it further, or restrict the lump sum in other ways, such as by reducing the percentage that can be taken or imposing stricter rules for taxpayers with higher and additional rates.
Temperature rises: pensioners protest against job cuts in winter fuel payments
But the changes likely won’t affect those with the smallest pots.
And as Jessica Beard explains overleaf, Rachel Reeves may not change the tax-free lump sum rules at all; There are plenty of other assignments you could look into instead.
Act now if you have plans
What you don’t want to do is take a load of tax-free cash just for the sake of it and leave it in a low-paid savings account when your pension could have been growing well.
As Steven Cameron, pensions director at provider Aegon, says: “It’s generally not a good idea to withdraw money from your pension unless you know how you will spend it.”
But, if you plan to receive a tax-free lump sum soon and have a specific purpose for it, you might consider depositing it now to be on the safe side. The key is to think through the decision and work out all the implications.
Timing: If you plan to receive a tax-free lump sum soon and have a specific purpose for it, you might consider depositing it now to be on the safe side.
Dan Boardman-Weston, chief executive of advisers BRI Wealth Management, says: “As a general rule, it is generally unwise to anticipate potential tax changes and we would advise clients not to make knee-jerk decisions about speculation.” .
“However, if you are already planning to withdraw some or all of your cash tax-free in the near future, then it may make sense to accelerate the timing of doing so.”
Remember that you don’t need to withdraw all your cash tax-free at once; You can take it in lump sums as you need.
A good financial advisor can help you plan the most tax-efficient ways to get tax-free and tax-free cash from your pension.
As tempting as it may be to change course and take out more than planned if the rules in the Budget change, the benefits may be far outweighed by the damage it would do to your retirement plans. Talking to an advisor first is key.
Beware of unwanted tax traps
Withdrawing money from your pension may seem simple, but it has all kinds of implications.
For example, pensions can be transferred free of inheritance tax (although loved ones will pay income tax if you die after age 75).
But, if you take a tax-free lump sum, that money may not receive the same protection, should your estate exceed your inheritance tax allowances.
Once you withdraw money from a pension, you are restricted as to how much you can contribute later.
So, for example, if you take your tax-free lump sum and continue working, you will find that you can only pay £10,000 a year into your pension instead of £60,000.
That could be devastating to your retirement planning if you had hoped to increase your pension in your later working years. Some people, for example, will pay larger sums after selling a business or downsizing.
If you work in the public sector, you may even have to stop working if you receive a lump sum.
All of these factors will need to be considered, so it may be worth seeking financial advice. Ask friends and family for personal recommendations or use a directory such as unbiased.co.uk to find a regulated adviser near you.
The Government also offers free guidance through its Pension Wise service. Go to: moneyhelper.org.uk.
Pension guides
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
