Concerns Rise as Pension Savers Withdraw Funds Amid Tax-Free Limit Speculation

Pension savers are increasingly withdrawing lump sums from their retirement accounts amidst growing concerns that Chancellor Rachel Reeves may significantly reduce the tax-free withdrawal limit.

Financial advisory and wealth management firms have reported a surge in inquiries from clients as the budget announcement on October 30 approaches. Bestinvest, a prominent wealth manager, noted a doubling in withdrawal applications compared to September 2023, while Interactive Investor reported a staggering 137 percent increase in requests.

Sean McCann from NFU Mutual commented, «Typically, we see a rise in customer inquiries before every budget, but this year’s speculation regarding potential changes to the tax-free withdrawal limit has resulted in an unprecedented increase in activity.»

Currently, individuals can withdraw up to 25 percent of their pension savings, capped at £268,275, tax-free once they reach the age of 55.

Reports suggest that Reeves is contemplating a drastic cut, reducing the maximum withdrawal limit to £100,000, which could be part of measures to address a £22 billion fiscal shortfall attributed to the previous Conservative government.

A £100,000 cap could impact approximately 20 percent of pension savers, specifically those with pots exceeding £400,000, according to the Institute for Fiscal Studies. This adjustment could generate about £2 billion annually for the Treasury, considering only 4 percent of savers currently possess enough capital to be affected by the existing £268,275 limit.

Many calls to financial advisors are coming from individuals with savings below £600,000, who would only be impacted if the limit dropped below £150,000. Justin Fitzsimmons, who recently turned 55, has already requested his 25 percent tax-free lump sum from his Bestinvest SIPP.

Fitzsimmons, residing in Hammersmith, West London, expressed that the rumors of a potential limit cut to £100,000 made him «doubly sure» about taking the withdrawal at the earliest opportunity. He stated, «It was always my plan to withdraw at 55 due to the uncertainty ahead. Risk management becomes critical as we age; capital preservation is a priority.»

He elaborated on the fiscal challenges the chancellor faces, noting that if taxes cannot be increased, alternative measures must be considered.

Dominic Clark from Holden & Partners mentioned that this uncertainty has altered some clients’ strategies. He shared an example of a client who initially planned to use his lump sum to pay off a mortgage in 2030 but has now opted to withdraw it earlier to reduce his interest payments.

Clark advised that unless a specific reason exists for taking a lump sum, it may not be wise to act based solely on speculation. Some clients are proceeding with withdrawals despite lacking a concrete rationale.

Reasons to Consider Delaying Withdrawals

Olly Cheng of Rathbones cautioned that withdrawing a lump sum may not be in the best interest of most clients. «Historically, changes in pension benefits since 2006 have provided opportunities for protection of existing benefits. It would be unusual for the government to reduce or eliminate the tax-free lump sum without accommodating those who are no longer contributing,» he explained.

Additionally, any cash withdrawn will contribute to the total value of an estate when measuring for inheritance tax (IHT). If a person’s total estate, combined with accessed pension funds, exceeds the IHT allowance of £325,000 (£500,000 when passing on the main home to descendants), the excess could be subject to a 40 percent tax following their death.

McCann warned against making irrevocable decisions based on conjectures regarding potential government plans.

Steps to Access Your Tax-Free Cash

To access your tax-free lump sum, contact the pension management firm. Withdrawals can be requested online, over the phone, or via a specific form. Expect a waiting period of several weeks to receive the funds.

The 25 percent tax-free lump sum can either be taken in a single payment or gradually over retirement, provided that each withdrawal respects the £268,275 limit.

A survey conducted by Standard Life last year indicated that common uses of tax-free pension cash include home improvements, purchasing vehicles, and debt repayment, such as mortgages.

Clark remarked, «Some retirees are reconsidering their strategy concerning tax-free cash and questioning if taking it all at once makes sense. It is essential to understand the rationale behind any changes to financial plans.»

Understanding the Tax-Free Lump Sum

• The limit for tax-free pension withdrawals originates from the lifetime allowance, which previously capped the tax-exempt total savings at £1,073,100 before it was entirely removed in April. The current cap of £268,275 represents 25 percent of this limit; exceeding it incurs a tax charge of 55 percent.

• Between 2010 and 2012, the tax-free lump sum limit stood at £450,000, decreasing to £1 million by 2016, with minor revisions since to account for inflation. Had it adjusted solely for inflation, the tax-free lump sum would now be £326,555.

• The simplicity and popularity of the tax-free lump sum rule make it a significant concern for many savers; any amendments could lead to widespread impact. Past alterations have largely facilitated the protection of anticipated benefits.

• Ross Lacey of Fairview Financial Management highlighted that substantial changes to pensions typically include transition periods or protective measures for involved individuals.