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Savers have rushed to pull tax-free lump sums from pensions amid fears over a future Government clampdown.
An unprecedented surge in withdrawals saw the amount pulled from pension pots soar more than 60 per cent to £18.08billion in the last financial year.
The number of savers taking 25 per cent tax free cash jumped by 33 per cent to 111,869, according to figures from the Financial Conduct Authority.
Despite Rachel Reeves opting not to modify pension tax-free lump sums in the latest Budget, and experts cautioning against hasty actions, anxious savers seem to be withdrawing their funds.
Withdrawals are anticipated to persist at the same or an increased pace as anxieties over a potential cap rise, especially with the autumn Budget approaching on 26 November.
Being able to withdraw up to 25% of your pension without tax is a well-liked retirement benefit. Although last year’s fears that the Chancellor might change the rules didn’t come true, the lack of a clear guarantee still bothers savers.
Financial advisors are seeing a surge in questions from worried clients, much like last summer, says Evelyn Partners, who received the withdrawal data via a freedom of information request.
“The 25% tax-free cash is a cherished pension advantage and extremely crucial to savers,” explains Emma Sterland, chief financial planning officer at the firm.
“Many savers plan to use their Pension Commencement Lump Sums for specific reasons, such as settling mortgages, giving gifts to children, or creating a strategic income plan. Although they might prefer to wait, they fear that not taking it now could lead to loss if the rules change,” she adds.
Last year, many people went ahead with withdrawals as a precautionary measure, despite warnings they could miss out on investment growth under the tax protection of a pension in future.
Pension experts have issued similar alerts this summer about making hasty moves if you don’t have a plan for what you would do with the money.
Savers typically use their lump sums to clear mortgages and other debts, and splash out on home renovations, new cars and holidays at retirement.
A Treasury spokesperson said: ‘We do not comment on speculation around changes to future tax outside of fiscal events. We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth.’
> Will the Budget target pension tax-free lump sums? What you need to know
Budget fears: Date is now set for 26 November, when Rachel Reeves will announce her tax plans
How do pension tax-free lump sums work?
Many people nearing retirement age may have a mix of defined contribution and defined benefit pensions, and the rules differ for each type of scheme.
Defined contribution pensions: These take sums from both employers and employees and invest them to provide a pot of money at retirement.
Over-55s can take 25 per cent of their pension pot tax-free upfront, or opt to withdraw it gradually in chunks.
By not withdrawing the whole lump sum out at once, if your pot grows in future you will have more tax-free cash available to take in the longer run.
Defined benefit salary-related pensions: Final salary or career average defined benefit pensions provide a guaranteed income after retirement for the rest of your life.
Your options for a 25 per cent lump sum vary according to the generosity of the terms and conditions of your scheme, so you have to check the specific details.
If you have a large pension pot, there was an important change following the ditching of the lifetime allowance in April 2023 – the £1,073,100 total limit people could have in their pension pot without facing tax penalties.
The 25 per cent tax free lump sum was capped at £268,275 – a quarter of the old lifetime allowance limit.
However, if you have fixed protection relating to a previous, more generous lifetime allowance level your higher 25 per cent lump sum figure can apply, even if you start paying into your pension again.
Fixed protection is a complicated area and it is best to seek financial advice about it.
What to consider before taking your tax-free lump sum
– You do not need to take it all at once, or even at all, if you don’t have a good reason to spend it now.
– Think about whether you will need the money later if you are in good health and all being well could live a long time.
– If you are investing your pension and do so wisely, your pot could continue to grow and boost how much you have available to withdraw in tax-free chunks over the longer term.
– When you take anything over and above your 25 per cent lump sum from a defined contribution pension, from then onwards you can only contribute £10,000 a year and still get tax relief.
– If you take the lump sum and decide to reverse your decision, you may be able to cancel the instruction to your provider but this is not guaranteed – check the rules in advance.
– Be aware that if you reinvest the tax free cash back into your pension you might fall foul of recycling rules, which are aimed at preventing people trying to seek an advantage by getting extra tax relief.
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