It has been reported that the Chancellor Rachel Reeves will cut the maximum tax-free cash that can be taken from DC plans to £100,000 in this month’s Budget, in a bid to raise additional funds from the Treasury.
Pension consultants have said that more than halving the current limit (of £268,275) risks derailing many people’s retirement plans.
Calculations by Hargreaves Lansdown show that reducing the tax-free cash limit to £100,000 will impact all savers with a pension pot of more than £400,000, with these savers potentially paying an additional £33,655 in income tax, if they are basic rate taxpayers in retirement, or £67,310 if they remain higher rate taxpayers. This is the tax paid on the difference between the current tax free limit and the proposed £100,000 lump sum.
This latest speculation comes as a number of pension providers have reported a significant increase in the number of people making cash withdrawals from pension plans in September, as speculation rose that the government may reduce the tax free cash available or change the rules on tax relief on inheritance. However reports now suggest that the Chancellor has stepped back from plans to radically reform pensions tax relief.
In the retail market Interactive investors said it had seen a 58 per cent increase in the volume of cash withdrawals from Sipp accounts, and has also seen a 64 per cent increase in the number of customers maximising the annual allowance (of £60,000) in the 12 months to the end of September, when compared to the same period last year.
Hargreaves Lansdown head of retirement analysis Helen Morrissey says: “The Chancellor may have said rumoured changes are designed to hit ‘those with the broadest shoulders’ but changes to the tax-free lump sum would do irreparable damage to the pension system. This risks undermining confidence and impacting people’s retirement savings.”
“We would strongly advocate for pension tax-free cash to be kept as sacrosanct in the system. People need confidence to save for the future or they will simply not have the kind of spending levels that they require to maintain their lifestyle in retirement. This will not only prove challenging for households individually but the collective impact will also be a weakening of the economy as a whole.”
Myron Jobson, senior personal finance analyst at Interactive Investor adds: “The pension tax-free lump sum is one of the best-loved and most well-understood parts of the pension system. Significant changes to it could risk undermining confidence in pensions, which is the last thing we need as many people aren’t saving enough for a comfortable retirement.”
He adds: ““Planning for retirement is difficult when key pension policy has seemingly become a political football. We need a public confidence boost in state and private pensions, rather than erosion.”