As the Autumn budget grows nearer, reports circulate that Chancellor Rachel Reeves is preparing to cut the tax-free allowance.
A recent survey from wealth manager, Rathbones has found that speculation over changes to pension tax is prompting savers to take premature withdrawals of their 25% tax-free lump sum, a decision some people now regret.
What did the survey of investors find?
The survey found that accessing the lump sum topped the list of regrets in the run-up to last year’s (Autumn) budget, when similar rumours circulated.
While there can be good reasons to access the funds, such as supporting family members or paying off a mortgage, impulsive withdrawals can jeopardise long-term financial goals.
For example, £100,000 invested at 5% could grow to £128,000 over five years, compared to just £110,000 in a savings account earning 2% interest. Over the course of ten years, that difference widens to £41,000.
What happens when funds are withdrawn?
Once funds are withdrawn, they lose the tax benefits of the pension wrapper, which may leave future growth subject to income tax, capital gains tax, and inheritance tax.
Efforts to recycle withdrawn tax-free cash back in to pensions could breach HMRC (His Majesty’s Revenue and Customs) regulations, potentially leading to penalties of up to 55%.
The warning comes amid growing speculation about possible changes in the upcoming Budget taking place on 26th November.
In the lead-up to last year’s Budget, rumours circulated about cutting the tax-free lump sum, reducing pension tax relief, extending income tax freezes, and scrapping inheritance tax breaks on AIM (Alternative Investment Market) shares though none of these proposals materialised.
The survey also found that 27% of people regretted withdrawing a lump sum (from their pension), with 27% saying they regretted selling investments to avoid higher CGT (capital gains tax) rates with 5% saying they regretted selling a business ahead of potential relief changes.
Andrew Haley, Chartered Financial Planners says “It is completely natural for people to have concerns about potential changes to the tax-free cash lump sum entitlement. The 25% tax-free lump sum is one of the most valued and well-understood aspects of pension planning. However, we strongly encourage our clients to plan to what we know, rather than act on speculation. If the rules change, your financial plan may need to adapt, but action based on rumours can lead to regrets.
In the run up to the October Budget last year, many chose to withdraw tax-free lump sums and were unable to return this, often leading to missed growth opportunities and increased tax liabilities as the money has left the tax-efficient pension wrapper. If unsure, talking the options through with a professional adviser can help bring much needed clarity.”
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Stats provided by Rathbones
