Rachel Reeves has been lambasted by top figures in finance for failing to quell rumours that she will cut the pension tax-free lump sum in her autumn Budget.
They warn the Chancellor’s refusal to rule it out is causing anxiety and uncertainty, leaving savers to make ‘hasty decisions’ they could come to regret.
Ms Reeves is facing a £50billion cavity in the public finances – more than double last year’s £22billion blackhole. She is planning a raft of tax hikes this autumn to shore up the public purse – with recent suggestions that pensions could be in the line of fire.
Jon Greer, of wealth manager Quilter, said a ‘vacuum of clarity allows rumours to swirl unchecked’, adding: ‘When it comes to pensions, that’s dangerous. Decisions like taking a tax-free lump sum are often irreversible.’
Former pensions minister Steve Webb, now a partner at consultancy LCP, said: ‘If the Government has no plans to change pension tax relief or the tax-free lump sum then it would be helpful if they made a commitment not to do so for the whole of the parliament.
‘That way people could plan for their futures with a degree of certainty, rather than [this] constant uncertainty.’
Rachel Reeves is facing a £50billion cavity in the public finances
Stockbroker AJ Bell is pushing for a ‘pensions tax lock’, which will provide a guarantee of stability on pension taxation for at least this parliament.
Rachel Vahey, head of public policy at the firm, said: ‘We need to put a stop to this speculation by ruling out changes to tax relief or tax-free cash, at least for this parliament.
‘A pensions tax lock would give the stability people desperately need to plan for retirement with confidence.’
She said cutting the tax-free lump sum ‘would cause an outcry, especially amongst public sector workers’, adding: ‘The last thing this Government needs is yet another U-turn.’
Retirees with a private pension can access their money at 55 – rising to 57 from April 2028 – and can withdraw 25 per cent tax free, up to a maximum of £268,275. But experts fear the Chancellor could slap a cap on the amount that can be withdrawn tax free.
Pensions minister Torsten Bell previously called for a £40,000 cap while he was head of Left-wing think-tank the Resolution Foundation. Pension specialists say a more likely figure is £100,000, and this could be phased in.
It would mean pensioners with a pot of just £400,000 would have their tax-free cash entitlement curbed by the Exchequer.
And experts are warning that such a move would topple retirement dreams as many use their tax-free savings to pay off a mortgage or debts.
Any changes to tax-free lump sums would also be another move which is likely to discourage savers from funnelling much-needed money into underfunded pensions.
Cutting the tax-free threshold was seen as a tempting target for Ms Reeves ahead of last year’s Budget, causing scores of savers to prematurely withdraw their tax-free cash only for her to leave it alone.
Fears are once again mounting that unless the Treasury dispels speculation, savers will look to withdraw their lump sums.
This Labour Government has already taken one swipe at pensions as unused pots will be liable for inheritance tax from April 2027.
> Read more: The best self-invested personal pensions to take control of your retirement
Shadow Chancellor Mel Stride said Ms Reeves’ decision to push back the Budget until as late as the end of November ‘means months of more damaging speculation’, adding: ‘It’s clear tax rises are on their way thanks to Labour’s economic mismanagement. Under Labour, nothing is safe – not your pension, your job, your pay packet, your home.’
A Treasury spokesman said: ‘We do not comment on speculation around future changes to tax policy.’
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