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 next month’s 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”. Keir Starmer used his first Labour party conference speech as prime minister yesterday to again warn about “unpopular” and “tough decisions”.
Speculation is mounting that Labour could change the rules on pension tax relief, with high earners losing out. The government could also cut the 25% tax-free cash that pension savers are allowed to withdraw from age 55.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Investment platforms have told MoneyWeek that they have seen a change in customer behaviour in the run-up to Rachel Reeves’ maiden Budget on 30 October.
Hargreaves Lansdown says it has seen a 71% rise in the number of clients contributing the maximum amount to their pension pots so far this tax year, 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 self-invested personal pension (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 and Bestinvest say they have also seen signs of savers boosting their contributions.
Alice Haine, personal finance analyst at Bestinvest, comments: “We have seen increased contributions into Sipps so far this month compared to August as people have been loading up pensions to get ahead of any cuts to pension tax reliefs or the annual allowance.”
Meanwhile, there’s been a 60% increase in the number of people requesting to withdraw funds held in their Bestinvest Sipp so far this month (September) compared to the same month in 2023, which is mainly people accessing their 25% tax-free lump sum.
“That figure is likely to increase further with four days of this month still remaining. Compare September’s data with the same month in 2022, and the number of pension withdrawal requests has doubled, indicating that the uncertainty around chancellor Rachel Reeves’ plans for pensions is prompting people to bring forward a major life decision – namely accessing their retirement pot,” Haine tells MoneyWeek.
Interactive Investor says it 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, says: “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 has also witnessed 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 next month, 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.
Having said that, if you have spare cash, it could make sense to pay it into a pension now before Budget day.
…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.
While it could be a sensible move to stuff more into a pension now if you can afford it, experts caution against taking your tax-free cash now simply because of Budget rumours.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, 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, especially as the transaction can take several weeks.
By doing a Bed and Pension, in particular, you can enjoy today’s CGT rates and pension tax relief and shield yourself from any Budget changes.
-
How to invest in the quiet market monthsHere's how to invest in the quiet market months, since “sell in May” hasn’t paid off this year.
-
TSB did not breach 'mortgage prisoner' contracts, judge rulesNews The preliminary ruling could undermine a class action being brought by 'mortgage prisoners', who claim they have been unfairly tied in to high interest rates.
