By Evelyn Partners,Maisie Grice
Copyright cityam
Investors are being urged not to make any kneejerk pension decisions which could lead to irreversible consequences, as the Budget rumour mill begins to stir up financial worries.
Wealth manager Rathbones has warned that fears over pension tax changes have caused another surge of premature withdrawals of the 25 per cent tax free lump sum.
This follows speculation that Chancellor Rachel Reeves is set to scrap the tax free allowance in the looming Autumn Budget.
However, according to Rathbones, the decision to withdraw was the biggest regret of those who opted to do so in the run up to Reeves’ maiden Budget last year.
Nearly 30 per cent regretted their withdrawal, after speculation that capital gains tax (CGT) rates could be raised to match income tax rates.
Over a quarter condemned their choice to sell investments to avoid higher CGT rates, while 5 per cent wished they had not sold their business to avoid changes to business relief.
A freedom of information request submitted by Evelyn Partners to the FCA also uncovered that the amount withdrawn from UK pensions in tax-free lump sums rose more than 60 per cent in the 2024/25 financial year to £18.1bn, up from £11.25bn the prior year.
Rebecca Williams, divisional lead of financial planning at Rathbones said: “Investors have been warned not to make any kneejerk pension decisions, as the Budget rumour mill begins to churn up financial fears.”
Other speculation includes cutting pension tax relief, extending income tax threshold freezes and scrapping the IHT tax break on AIM shares.
Losing tax exposure
While a withdrawal can be beneficial for those needing to meet immediate financial obligations, a quick reaction driven by uncertainty can cause savers to miss out on substantial investment growth and long term tax advantages.
Once withdrawn, any future growth on the lump sum typically occurs outside of the tax-efficient pension wrapper, exposing savers’ finances to the widely disliked income tax, CGT or inheritance tax.
Williams said: “Taking tax free cash is an irreversible decision. It’s vital to think carefully before acting.”
She also urged savers who were considering taking out their money to seek financial advice in order to get a ‘full understanding of the risks and benefits” of the move.
Be aware of contributions
Rathbones also advised savers to be aware of the Money Purchase Annual Allowance, which can create significant challenges for those looking to rebuild their savings by investing the money back into their pension.
Williams said: “Those thinking they can simply recycle their tax-free cash back into a pension could be in for a nasty shock,”
“If the move appears pre-planned and contributions spike significantly, HMRC may treat it as an unauthorised payment – potentially landing you with a tax bill of up to 55%.”
Also, the rule drastically cuts annual tax-relivable contributions, dropping it from £60,000 to £10,000 following a taxable withdrawal.
