Labour’s latest pensions bloodbath could slash your tax-free allowance. Financial guru JEFF PRESTRIDGE reveals the tricks to keeping your savings safe… and whether you should withdraw your money now

It’s the financial equivalent of watching Wes Craven’s 1984 horror film A Nightmare On Elm Street over and over again.

Labour, tax-grabbing Labour, bane of the middle class, is after our hard-earned pension funds. And if Chancellor of the Exchequer Rachel Reeves follows the advice of the countless left-wing economic think tanks sitting in the tall grass in recent days, things are going to get bloody.

Prudence, putting money aside for a pension for a time when there is no more work, is going to take a big hit. Shamefully, some of the certainties we thought we were buying when we took our pensions – namely a bit of tax-free money at retirement – ​​are under threat like never before.

Even Mr. Craven, unused to horror, would shift in his director’s chair.

The Resolution Foundation got the anti-pension ball rolling a few days ago by calling for pension pots left by people who die before the age of 75 to potentially be subject to inheritance tax.

It was argued that there was ‘no point in exempting pension pots’ from IHT, allowing them to be used as ‘vehicles for legacies’. Nightmare one.

There were also calls for National Insurance to be levied on employers’ pension contributions. A measure that would at first glance hit employers in the pocket, but which the Resolution Foundation acknowledges would mean workers would pay for it in the long run through ‘lower wages or pension contributions’. Nightmare number two.

As if that wasn’t enough to upset pension savers, the Institute for Fiscal Studies (IFS) has come up with an even more controversial idea: clamping down on the 25% tax-free cash we thought we were entitled to take when we retire (currently allowed from ages 55 to 57 from April 2028). A nightmare to top all nightmares.

Instead of the current tax-free limit of £268,275 (a quarter of the old lifetime allowance of £1,073,100 that Jeremy Hunt abolished), the IFS is proposing a cap of £100,000.

It argues that the measure would affect around one in five pensioners and, music to Reeves’s ears, would raise £2bn a year for the Treasury. Not enough to address the alleged £22bn black hole that Mrs Reeves keeps harping on about, but a start.

The IFS defends its controversial recommendation by saying the current cap is too generous for those who already have large pension pots to draw on in retirement. It also says the current tax-free component offers a “more generous subsidy” for higher-rate taxpayers than basic-rate taxpayers.

Others, for various reasons, have a very different opinion.

According to Sir Steve Webb, former pensions minister, many people would feel “disadvantaged” by such a draconian change, especially if they had put the money aside for a specific purpose, such as paying off a mortgage.

David Piltz, CEO of the benefits and consulting division of global insurance specialist Gallagher, took a broader view, saying that “endless tinkering” with pensions “discourages saving” and reduces confidence in the system.

He warns that the immediate savings to government from a tougher approach to tax-free money will be offset in the long term by discouraging pension planning – “a key pillar of economic stability”.

Jason Hollands, a tax expert at wealth manager Evelyn Partners, said it would be an “inflammatory” move if Ms Reeves followed the IFS’s recommendation and drastically cut tax-free pensions, especially if it were implemented quickly.

If Chancellor of the Exchequer Rachel Reeves were to follow the IFS recommendation and cut tax-free pensions, critics say it would be an ‘inflammatory’ move

Quick? Don’t rule it out. Anything is possible under this Labour government – ​​just think of the haste shown by Mrs Reeves in scrapping winter fuel payments for 10 million pensioners. This Chancellor of the Exchequer is brutal, absolutely brutal.

As Helen Morrissey, head of pensions analysis at asset manager Hargreaves Lansdown, told me after the IFS report: ‘A move to limit tax-free money would be hugely unpopular and throw many people’s retirement plans into disarray. For example, people approaching retirement often use tax-free money to pay off their mortgage or give money to loved ones.’

She added: ‘But this government has made it clear that difficult decisions have to be made. It is capable of anything.’

WHAT SHOULD YOU DO IF YOU ARE 55 YEARS OR OLDER?

Option 1: Bring your cashless money

Concerns over Labour’s tougher approach to accessing tax-free money have already prompted many people to take defensive measures, pensions experts say.

In the run-up to the election, digital asset manager Moneyfarm reported that many clients are withdrawing tax-free money from their pensions in anticipation of an expected Labour government.

Asset manager Interactive Investor has also seen more clients withdraw their full 25 percent tax-free allowance in recent months, rather than taking it in stages (as some pension plans now allow).

For those aged 55 and over – and with pension pots of more than £400,000 allowing them to spend more than £100,000 in tax-free cash – it seems like a no-brainer: grab the maximum tax-free money while you can, and the sooner the better (preferably before the pesky Budget Day on October 30).

According to experts, such a strategy makes sense in some cases, but not in all.

According to Evelyn’s Mr Hollands, it is now a clear option to withdraw as much tax-free money as possible for people who need it urgently. As Ms Morrissey pointed out, she can use it to pay off a remaining mortgage balance or other debts, for example.

However, he adds: ‘I would strongly urge people in this situation to seek professional advice before doing so.’

Andrew Titmus, partner and head of estate planning at Parfitt Cresswell, agrees. He says: ‘Many people may want to consider whether it is appropriate to take their lump sum as early as possible.’ Like Mr Hollands, he urges such people to ‘seek advice from a financial or pensions adviser’.

Although you can withdraw money tax-free from the age of 55, not all pension plans (especially those provided by your employer) make life easy.

For example, some employers will only let you withdraw your money on the condition that you then withdraw your pension income. This may not be a smart move, especially if you continue to work, as you will be hit hard on your income tax.

Option 2: Wait a moment

There are pension advisors who passionately believe that people should not panic about the potential reduction in tax-free money.

One of them is Tom McPhail, an experienced pensions expert who works for Edinburgh-based financial advisory firm The Lang Cat.

Following the IFS report, he said on social media that it would be unwise for Labour to mess with tax-free pension funds.

His argument is multifaceted. He says that tax-free money is one of the few aspects of pensions that people understand (I agree with him on that point).

He goes on to say that it would be conspicuous if it were to be bitten (too much right) and that it would go down like a lead balloon with cautious pension savers who would see it as ‘another attack on pensions’. He also said that the media (like me) would ‘make a big deal out of it’. Too much right, Mr McPhail.

He concludes that there are easier pension goals for Mrs Reeves to pursue, such as taxing pension payments on death and abolishing the National Insurance Credit on employer contributions.

His final comment on the matter? ‘I’m not going to take my tax-free money now in case I’m wrong. If I’m wrong, you can remind me of this in a few weeks and forever.’

Tomm Adams, a partner at tax specialists Blick Rothenberg, said a rapid reduction in the maximum amount of tax-free pension benefits people can take would be unfair.

He explains: ‘Many people have based their retirement savings decisions on the idea that a substantial portion of their pension pot could be withdrawn tax-free on retirement. It would be so wrong to hear in the Budget that this is no longer the case.’

Mr Adams says any cuts should be phased in, not rushed in on October 30 or from the start of the next tax year. In defence, the IFS admits some ‘transitional arrangements’ would be needed, although it adds that these ‘need to be weighed against the ongoing costs of providing large tax breaks for individuals with substantial pension pots’.

There are other reasons why most pension savers are reluctant to withdraw tax-free money.

Any tax-free amount you take out now – in case Mrs Reeves follows the IFS advice – means there will be less money left in your pension pot to benefit from future investment growth.

It also increases the risk that you will run out of money before you die. “It’s like taking money out of an ATM,” says Blick Rothenberg’s Mr. Adams. “Once you take it out, it’s gone.”

PARTING THOUGHTS

There is no doubt that the threat of our ability to withdraw tax-free money from our pensions is shrinking is the talk of the town.

Even my urologist, an amazing person, took the time last week to question me about what would happen on October 30th after he told me my PSA score had dropped (yay).

There is no one-size-fits-all solution for people who can take free money out of their pensions before any changes to next month’s budget.

For some it makes sense to do it in the next few weeks, for the vast majority I think it holds the fire.

The best advice comes from Myron Jobson, senior personal finance analyst at wealth manager Interactive Investor. He says: ‘Consult a financial adviser before you make a decision. It will help you understand the long-term implications for your retirement planning.’

A nightmare on Elm Street, 2024.