Savers are racing to top up their pensions and gain valuable tax relief, while retirees are grabbing their 25% tax-free lump sums amid fears that the chancellor could slash popular pension perks in the Autumn Budget.
The government has repeatedly warned that it will have to make “difficult decisions” in a bid to raise revenue, and that the Budget will be “painful”. Two days before the Budget - which takes place on 30 October - Keir Starmer confirmed that there would be tax rises, and said that Britain "must embrace the harsh light of fiscal reality".
Speculation has been mounting that Labour could change the rules on pension tax relief, with high earners losing out - however, chancellor Rachel Reeves is now believed to have abandoned these plans, according to media reports.
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The government could also cut the 25% tax-free cash that pension savers are allowed to withdraw from age 55. Reeves is understood to be considering reducing the maximum to £100,000.
Investment platforms have told MoneyWeek that they have seen a change in customer behaviour in the run-up to Reeves’ maiden Budget on Wednesday.
Bestinvest saw a tenfold increase in self-invested personal pension (Sipp) contributions in September, compared to the same month in 2023, with payments also quadrupling compared to August this year.
Alice Haine, personal finance analyst at Bestinvest, says that while the chancellor is now rumoured to be reconsidering plans to cut pension tax relief, "a summer of speculation prompted nervous savers to funnel large sums into their Sipps to get ahead of any changes".
Hargreaves Lansdown has seen a 69% rise in the number of clients contributing the maximum amount to their pension pots between 6 April and 18 October, compared to a year earlier.
Savers can pay in up to £60,000 into a pension each tax year and gain tax relief at their highest marginal rate, thanks to the annual allowance.
Interactive Investor reports a similar picture, with the number of Sipp customers contributing the full £60,000 increasing by 64% since the start of the tax year, compared to the same period in 2023.
AJ Bell said it had also seen signs of savers boosting their contributions.
Meanwhile, Bestinvest said the number of pension withdrawal requests more than doubled in September this year compared to the same month in 2023 – a surge primarily driven by those aged 55 and over accessing their 25% tax-free lump sum as uncertainty prompted people to drastically alter their pension saving behaviour.
Interactive Investor saw a 58% uptick in the volume of cash withdrawals from Sipps that make up part or all of the 25% tax-free lump sum allowance in the first two weeks of September, compared to the same period last year.
Myron Jobson, senior personal finance analyst at Interactive Investor, comments: “With the swirling rumours of changes to the UK pension regime, it’s understandable that many might feel a bit jittery about the future of their retirement savings.”
AJ Bell also saw a rise in people taking their tax-free lump sum in recent months, which “may be due to fears about a possible Budget raid on tax-free cash”.
So, should you also take action ahead of the Budget? While no one knows for sure what the chancellor’s red box will contain, we look at whether there are moves you could make now to prepare.
Consider increasing your pension contributions…
Pensions are a popular area for governments to play with when considering how to raise funds and plug deficits.
The £60,000 annual allowance could be reduced, while Labour may choose to look at pension tax relief too. Higher and additional-rate tax relief could potentially be scrapped, with a flat rate of say 25% or 30% introduced.
However, meddling with pension tax relief would be complicated, and if the government was planning such a move it’s unlikely it would happen straight away. In addition, The Times has reported that Labour is expected to abandon its plans to change pension tax relief after senior Treasury officials told the chancellor the policy would hit public sector workers on "relatively modest incomes".
Having said that, if you have spare cash and are thinking of boosting your retirement nest egg anyway, it could make sense to pay it into a pension now before Budget day.
Hargreaves Lansdown has also seen a 19% jump in those who chose to contribute exactly £3,600 to a pension, which is the maximum that can be paid into the Sipp of a non-working spouse or child.
According to Helen Morrissey, head of retirement analysis at the investment platform, this could indicate that people are taking the opportunity to not just bolster their own pensions, but those of their loved ones too - so you may wish to consider doing this too.
…but don’t rush into taking your tax-free cash
Labour may also look at changing the 25% tax-free cash that pension savers can withdraw from age 55 (the other 75% of their pension pot is liable for income tax). Possible changes include lowering it to 20% - or even axing it altogether - and/or slashing the maximum tax-free amount (£268,275) that savers can take.
Last month, the Fabian Society, a think tank, called for the tax-free cash allowance to be cut to £100,000. And the Telegraph has reported that Reeves is considering the idea.
A poll of advice professionals conducted by abrdn reveals that cutting the pension tax-free lump sum would be the most disruptive out of any mooted Budget measures.
However, experts caution against taking your tax-free cash now simply because of Budget rumours.
Morrissey notes: “The 25% tax-free cash has been around since the late 80s and Labour said it was a 'a permanent feature of the tax system' in the election campaign.
“[However, there are] suggestions that the chancellor might look to trim back the amount of tax-free cash people can take from their pension. Ripping this out of your pension now to avoid a tax grab may seem like a good idea, but it’s something you may come to regret.”
She says savers need to have a plan for what they do with their tax-free cash. “Simply taking it and putting it in a bank account paying a low interest rate means that money misses the potential for further investment growth in the pension. Investments within a pension also grow free of tax, and unless you’re taking £20,000 or less, and putting it in an ISA, you'll lose that protection against tax,” she explains.
Morrissey adds that under current rules, money in a pension is usually free of inheritance tax – “this is not the case with money in ISAs or bank accounts so there’s also the chance that taking your tax-free cash now could land your family with a nasty tax bill in future”.
Do a “Bed and Pension” to escape a potential capital gains tax hike
Experts say it is highly likely that capital gains tax will get a mention in Reeves’s Budget. Potential changes include raising the rates (possibly in line with income tax), cutting the tax-free allowance, changing how and when CGT is levied, and removing reliefs.
Some investors and pension savers are trying to get ahead of this by doing a “Bed and ISA” or “Bed and Pension” transaction now before 30 October.
Bestinvest says Bed and ISA instructions are up by a quarter since Labour came into power in July, compared to the same period in 2023, “as investors consider the tax efficiency of their investments under the new government”. The digital wealth manager Moneyfarm has also seen “a sharp increase in clients liquidating their positions” and rebuying the investments in tax-efficient wrappers, so they can lock in gains at the current CGT rates.
The transaction allows savers to sell investments held in a taxable environment and repurchase them within an ISA or pension – a move that effectively shields those assets from a potential CGT hike provided they don’t breach their CGT exemption of £3,000. “It also serves to protect any future income or gains from tax, making a savers’ investment portfolio more tax-efficient over the short and long term,” comments Haine at Bestinvest.
If you have investments held outside an ISA or pension, it could be a good idea to act now and do a Bed and ISA or Bed and Pension.
By doing a Bed and Pension, in particular, you can take advantage of today’s CGT rates and pension tax relief and shield yourself from any Budget changes.
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