Retirees urged to be cautious over pension tax changes

Wealthy retirement savers are being urged to avoid hastily withdrawing large sums of money from their pension pots in a “knee jerk” reaction to speculation over a potential tax raid if Labour wins the election.

The call for caution comes from financial advisers who say political uncertainty over significant changes to tax rules, particularly in relation to the pensions lifetime allowance (LTA), is creating concern among wealthier clients, some of whom have taken their retirement cash early.  

Chris Rudden, of digital wealth manager Moneyfarm, said a number of clients taking tax-free cash from their pension pots in May had cited the potential approach of an incoming Labour government as a reason.

In March last year, chancellor Jeremy Hunt announced the abolition of the LTA, which capped the amount that could be saved or grown in a pension over a person’s lifetime without it being subject to tax at £1.073mn. The LTA was formally scrapped this year — a move welcomed by savers with bigger pension pots.

While neither major party has yet published the full details of their manifestos, Labour has pledged to bring back the LTA if elected, but is yet to say at what level or how this would be done.

“As with any election . . . our clients are naturally concerned with the potential for significant changes to pension legislation and broader taxation changes,” said David Little, chartered senior financial planning director at 7IM, a wealth manager.

“What is clear is that the status quo is unlikely to continue, with the lifetime allowance potentially being reinstated to its previous level.” However, he added: “As financial planners, we are forward thinking, but equally we avoid knee-jerk reactions.”  

We would never base any advice purely on political speculation and we would continue to advocate clients utilising the benefits that pensions bring

Little said that for clients with pension funds in excess of the previous LTA threshold that were not covered by “enhanced protection” arrangements, which were introduced in 2006 to ensure those with the largest funds were not unfairly hit by the imposition of new tax rules, the current system does allow savers to withdraw the maximum tax-free cash before charges are potentially reinstated.  

But he cautioned: “This is not a straightforward decision and should be balanced with the downside of removing funds from an IHT-efficient wrapper and placing them into their estate.”

“We would never base any advice purely on political speculation and we would continue to advocate clients utilising the benefits that pensions bring where it is appropriate,” said Justin Blower of Schroders Personal Wealth.

The call for caution comes as the pensions industry called on shadow chancellor Rachel Reeves to avoid any rushed reintroduction of the LTA if elected, saying this could cause disruption and confusion for savers.

“A new lifetime allowance would require another set of transitioning rules for those who have already acted based on the existing legislation,” said the The Investing and Saving Alliance.

“As we have seen with the lifetime allowance abolition this would not only be a lengthy piece of work to undertake but would also add yet another level of complexity.”

The Pensions and Lifetime Savings Association (PLSA), which represents the workplace pension sector, said if Labour were elected into power on July 4, and wanted to reintroduce the LTA, “we believe they should consider carefully the implications before making a decision on what to do”. 

“A formal consultation on the policy change is likely to be the best way forward to avoid the potential for unintended consequences,” said Nigel Peaple, director of policy and advocacy at the PLSA.

“It will be important to also give savers and providers reasonable notice of any change and, as with previous changes to the LTA, give transitional protection to people to avoid unfair retrospective tax treatment.”