Reeves raged about the pension tax panic: budget rumors led to withdrawals from pension pots
Rachel Reeves has been accused of failing to stop panicked savers from making damaging decisions about their pensions in the run-up to the Budget.
In a sharp rebuke to the chancellor, the Institute for Fiscal Studies said she was allowing speculation about a possible raid on pension pots to swirl as she finalized her tax and spending plans.
Rumors that she planned to cut the amount savers can withdraw tax-free proved particularly damaging – with many rushing to withdraw cash before changes came into effect.
It turned out that she did not reduce the tax-free lump sum, meaning that everyone who took action did so unnecessarily.
Careless: The Institute for Fiscal Studies said the Chancellor was swirling speculation about a possible raid on pension pots as she finalized her tax and spending plans
Pension experts believe that many savers who have withdrawn money from their pensions early for fear of a tax attack will have made irreversible decisions that will leave them worse off in retirement.
Many will fall into a little-known tax trap called the ‘annual money purchase allowance’, which will reduce their ability to save for retirement if they take a penny more than their tax-free lump sum.
IFS director Paul Johnson said: ‘Reeves may want to reflect on the damage done by allowing various rumors to circulate for so long.
‘If there had never been any intention to change the income tax treatment of pensions, then – my goodness – she should have said so, rather than allowing so many to cash out a lump sum early.’
Former Pensions Secretary Steve Webb, now a partner at pensions consultant LCP, urged the Chancellor to ‘set out a long-term blueprint for pensions and then stick to it’ to avoid a repeat in the run-up to future budgets. He said, “At least that way there should be less annual speculation.”
Ahead of the Budget, Reeves was rumored to be plotting a tax attack on pensions as she struggled to add up the numbers.
One of the options on the table was a reduction in the tax-free lump sum that allows savers to withdraw 25 per cent of pension pots – up to a maximum of £268,275 – when they reach 55. Lowering that limit to £100,000 would raise £2 billion a year.
Reeves decided against such a move and instead introduced a new inheritance tax by including pension pots in inheritance tax for the first time.
She is now under pressure to rule out further changes, giving savers the certainty they need to plan their retirement.
Dan Olley, head of Hargreaves Lansdown, said: ‘Investing in later life is a long-term business, so policy stability is crucial if we want more people to take advantage of the power of compound pensions to create a to guarantee a comfortable retirement.’
Noel Butwell, CEO of Abrdn Adviser, urged the Chancellor to ‘create a platform for longer-term stability’, saying: ‘That is what is desperately needed if we are to give people the confidence to act for the long term to save and invest.’
AJ Bell’s Tom Selby warned that the Treasury’s inability to commit to a so-called Pensions Tax Lock, which would rule out future raids on pension pots, means ‘there is a good chance instability will resurface next year’ .
He said: “We have seen how destabilizing this speculation can be. Especially when it comes to tax-free cash, any decision to take your money could be irreversible and lead to long-term losses.
“Given the commitment people make when contributing to a pension, they can at least expect that the goalposts won’t move once they make that decision.
‘A Pension Tax Lock would increase confidence in pensions, giving people more confidence to save for their pension.’
DIY INVESTMENT PLATFORMS
A.J. Bell
A.J. Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund trading and investment ideas
interactive investor
interactive investor
Invest for a fixed amount from € 4.99 per month
Sax
Sax
Get £200 back in trading fees
Trade 212
Trade 212
Free trading and no account fees
Affiliate links: If you purchase a product, This is Money may earn a commission. These deals have been chosen by our editors because we believe they are worth highlighting. This does not affect our editorial independence.