Tax fears prompt pension withdrawals
The UK’s Autumn Budget is almost three months away, but there is already much speculation over how chancellor Rachel Reeves will plug the country’s gaping fiscal hole.
Wealth managers are worried that pensions will be targeted. The amount withdrawn in tax-free lump sums over the past financial year has surged by more than 60 per cent following an announcement that pensions would be subject to inheritance tax from April 2027, write Mary McDougall and Emma Dunkley.
But now there are fears that the government could reduce the size of the tax-free lump sum that retirees can withdraw from their pension after the age of 55. The allowance is currently set at 25 per cent up to a cap of £268,275.
A response to a freedom of information request submitted by wealth manager Evelyn Partners to the Financial Conduct Authority revealed that individuals withdrew £18.1bn in the year to end of March, up from £11.25bn the previous year. Most of the money taken out was in the second half of the year.
The FCA’s FOI response also revealed that more than 211,000 individuals withdrew a tax-free lump sum from their pension savings, up from about 163,500 the previous year.
“These are quite startling figures showing that the country’s pension savers have been in an unprecedented rush to take their tax-free lump sums,” said Emma Sterland, chief financial planning officer at Evelyn Partners. “You can’t help feeling that much of this increase is a slightly panicked dive into pensions sparked by uncertainty over policy change.”
Pensions minister Torsten Bell, who has been handed a key role in preparing the Budget for chancellor Rachel Reeves, described the tax-free lump sum as “very generous, very regressive, and a strange incentive not to stagger your retirement income” in a 2019 report when he was chief executive of the Resolution Foundation think-tank.