UK pensioners may face major changes in their pension withdrawals, as the Chancellor Rachel Reeves reportedly considers reducing the tax-free lump sum.
Two major think tanks have recommended that the limit be reduced from PS268,275 (currently) to PS100,000.
Savings pots are currently tax-free up to a maximum of 25 percent after 55. The new proposal, which aims to generate PS2 billion of additional revenue, would reduce this cap by 2/3. The move is being reviewed as part of the preparations for the autumn budget. However, it has already caused concern among industry experts and retirees alike.
Think tanks like the Institute for Fiscal Studies and the Fabian Society claim that the current limit benefits wealthy individuals disproportionately. IFS estimates that a reduction in the cap will affect one out of five retirees. However, advocates believe the change would help to address inequalities within the pension system. Pension experts warn that the reduction could result in legal challenges for those who planned their retirement according to the current rules.
Steven Cameron, Aegon’s CEO, said: “Many people will have planned retirement finances based on the assumption that they could receive 25 percent of their total fund in a lump-sum tax-free. Stopping them from doing this would create a huge outcry.
What are the risks?
Other industry professionals, such as Mike Ambery of Standard Life, have highlighted the challenges in implementing a change. They noted that pension funds were often held on trust, and any retroactive changes to benefit may face legal obstacles.
The government is being pressed to find a way to deal with a projected PS22-billion shortfall in the public finances. Reeves was already criticized for reducing the winter fuel allowance to most pensioners. This latest policy change could fuel allegations that Reeves is targeting retirees.
As pension reform fears grow, it is reported that more savers rush to withdraw their tax-free lump sums and increase their pension contributions in anticipation of possible fiscal reforms. Bestinvest, a wealth management firm, reported a tenfold rise in Sipp contributions (Self Invested Personal pension) in September. Requests for pension withdrawals also doubled compared with the previous year.
Pension advisers have urged the Chancellor to clarify his position to avoid rash financial decisions. In a letter to the Treasury, wealth manager quilter warned that uncertainty is causing savers withdraw their pension funds too early and could jeopardize their financial security.
A spokesperson for the government stated that “We don’t comment on speculation about tax changes outside fiscal events.”
Savers and financial analysts will be closely watching the fall budget to see if the proposal of reducing the tax-free lumpsum becomes a reality.
