Contingent savers withdrew an estimated £70 billion from pension savings last year, with heightened concerns arising over potential additional taxation measures in the upcoming budget.
In the lead-up to November's Budget, there is growing speculation about potential changes to the UK's pension tax system. Chancellor Rachel Reeves is reportedly considering slashing the tax-free lump sum that can be drawn down from pension pots after bringing retirement savings into inheritance tax from 2027.
This proposed reform is not without support. Torsten Bell, the director of the Resolution Foundation, has also voiced his support for reforming pensions tax relief. He suggests rebalancing this relief towards low-to-middle earners.
The increase in pension withdrawals over the past year is causing concern, with a surge in the overall value of money being withdrawn from pension pots. In 2024/25, this figure reached £70.9 billion, a significant jump from £52.2 billion in the previous year, representing a 36% increase.
Currently, pension savers can withdraw up to a quarter of their pension pots tax-free, with a maximum of £268,275. However, the withdrawal rush from pension pots is linked to the speculation about Reeves reducing the tax-free lump sum that can be drawn down.
Pensions tax relief currently benefits savers at their higher marginal rate, costing taxpayers £48.7 billion in 2023. This has led to calls for a more equitable distribution of the relief.
Claudia Moll, who took over as Minister for Pensions in 2024, is now playing a key role in the preparations for the budget drafts. Her role will be crucial in shaping any potential changes to the pension tax system.
Interestingly, only 30.6pc of pension plans accessed for the first time were held by savers who took regulated advice, a decrease from 30.9 per cent in 2023/24. This suggests that many pension savers may be making decisions without seeking professional advice.
In light of these rumours and potential changes, Andrew King, a retirement specialist at wealth management firm Evelyn Partners, has advised against major withdrawals from pension pots. He warns that policy changes could significantly impact those who have already made large withdrawals.
Torsten Bell, in his support for reform, has proposed a sharp cut in the tax-free withdrawal threshold to just £40,000. This would represent a significant reduction from the current limit and could have far-reaching implications for pension savers.
As we await the Budget, the pension landscape in the UK may undergo significant changes. It is crucial for pension savers to stay informed and seek professional advice where necessary to ensure they make the best decisions for their retirement savings.
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