Don’t let Budget speculation derail your retirement plans
The countdown to the Budget is on, with rumours flying that pensions could be in the Chancellor’s firing line on November 26.
Under current rules, you can usually take up to 25% from your pension tax-free once you reach the age of 55 (rising to 57 in 2028), up to a maximum of £268,275, known as your lump sum allowance.
However, some commentators claim that Rachel Reeves might look to reduce the amount you can take tax-free from your pension, which has prompted many people to consider raiding their savings ahead of the Budget. According to investment platform Bestinvest, it saw a 33% surge in pension withdrawal requests in September, compared to the previous two-year average, driven largely by those aged 55 and over accessing tax-free cash lump sums.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “‘Taking tax-free cash prematurely as a knee-jerk reaction to a possible policy change can undermine retirement plans and prove to be tax inefficient. Moving a large sum out of a tax-protected wrapper, like a pension, into a taxable environment such as a bank or building society savings account can counteract the gain someone makes from making the tax-free withdrawal in the first place.
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“This is why anyone considering such a move would be wise to take financial advice before they make any decisions. However, 70% of people do not. Without a clear picture of their retirement funding strategy, they cannot assess whether accessing their tax-free pension lump sum now makes sense - or whether it’s better to leave the money invested for longer or only take a portion of the 25% tax-free element.”
There is also speculation that the Chancellor could target pension tax relief which can significantly boost your retirement savings. UK taxpayers are entitled to tax relief on their pension contributions based on the rate of income tax they pay, with most receiving a 20% top-up from the government. Higher-rate taxpayers can reclaim an additional 20%, while additional-rate taxpayers can claim up to 25% extra, giving them a total of 40% or 45% tax relief respectively.
Some claim that Rachel Reeves could scrap the current system and instead introduce a flat rate of tax relief in this year’s Budget. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “This could potentially be good news for basic rate taxpayers as if the flat rate were set at say 30%, this would mean a £100 contribution would cost just £70 rather than the current £80. However, it would be bad news for higher and additional rate taxpayers, who currently enjoy tax relief at 40% and 45% respectively.
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“If you are worried about potential reductions in pension tax relief, then if you have some spare cash, you could consider making the most of the system as it currently stands with an extra contribution to your pension. The annual allowance allows people to contribute up to whichever is lowest of their annual earnings or £60,000 every year and benefit from tax relief though these allowances will be lower if you have already flexibly accessed your pension or are a high earner.”
It’s important to remember however, that no changes have actually been announced yet, and making significant changes to your pension could end up costing you dear in the long run - especially if rumours prove to be unfounded. With just over a month to go until the Budget takes place, staying calm and informed could make all the difference to your retirement income.
Ms Haine said: “Ultimately, retirement planning requires careful consideration and making quickfire decisions based on media headlines without the right guidance is rarely a good idea.”