Mounting fears of further changes to pension rules in the upcoming Autumn Budget are pushing more savers to withdraw from their retirement pots, figures show.
The investment platform Bestinvest said it saw a 33 per cent rise in withdrawal requests from customers with self-invested personal pensions or Sipps in September.
However, experts have warned that taking the tax-free lump sum without a proper plan can be a disaster for someone’s retirement fund, and even incur more taxes.
Bestinvest said the recent withdrawals were largely made up of those aged over 55 accessing their 25 per cent tax-free cash lump sum, amid concerns that Chancellor Rachel Reeves may slash the tax-free withdrawal allowance.
Currently, pension savers can withdraw 25 per cent of their pots up to a maximum of £268,275, without paying tax on the income.
Alice Haine, personal finance analyst at Bestinvest, said: ‘Rampant speculation that this tax-free cash benefit could be scaled back has prompted some to access their lump sum early, a move that may not always be in their best interests.
‘At Bestinvest, we’ve seen a surge in these requests as we edge closer to the Autumn Budget, echoing the trend seen ahead of the Chancellor’s first fiscal statement last year.’
Knee-jerk: Similar speculation ahead of last years’ Autumn Budget led to massive withdrawals from pension pots, which many came to later regret
The size of pension income withdrawals has also increased, surging by 146 per cent over the same period, Bestinvest said.
At the same time, contributions to Sipp pots have slowed, while contributions to Isas have increased as clients reconsider their retirement approaches.
But Bestinvest said pension investors should consider their options carefully, as taking money out of a pension means they lose out on tax relief and investment returns.
Haine said: ‘Such a move sees savers lose out on pension tax relief – a valuable, upfront benefit, particularly for higher rate taxpayers, as it reduces a person’s taxable income in the short-term and helps to turbo-charge pension savings over the long term.’
Reeves is facing calls to rule out a cut to the tax-free allowance and a cut to pension tax relief, with a parliamentary petition on the matter launched last week having been signed almost 15,000 times.
Similar speculation ahead of last years’ Autumn Budget led to massive withdrawals from pension pots, with many later regretting their decision to do so because they didn’t need the cash and no changes were made.
Pensions Minister Torsten Bell previously advocated for a reduction to the tax-free cash allowance while at thinktank the Resolution Foundation.
What are the risks of taking your lump sum?
Making such a withdrawal without having a plan to use it could cause you to lose out.
Unless you were planning to do so before rumours of Reeves’ potential tax raid surfaced, the general advice is not to withdraw your lump sum or make any other drastic moves.
Haine said: ‘Taking tax-free cash prematurely as a knee-jerk reaction to a possible policy change can undermine retirement plans and prove to be tax inefficient.
Once the money is taken, the decision cannot be undone
And Helen Morrissey, head of retirement analysis at Hargreaves Lansdown told This is Money: ‘Many people will have a plan for their tax-free cash – for instance, paying off a mortgage or home renovations, but taking it without any clear reason could have long term consequences for your retirement plans.
‘Pensions are an extremely tax-efficient way to grow your money and while you can reinvest some of the tax free cash in a stocks and shares Isa and get investment growth alongside tax free income, there is also the potential that if you invest it elsewhere it could become subject to capital gains and dividend tax.’
> Read more: The best stocks and shares Isas
She warns that if you keep the funds in a savings account, they will be exposed to low interest rates meaning your lump sum loses value over the long term.
Haine said: ‘Anyone considering such as move would be wise to take financial advice before they make any decisions. However, 70 per cent of people do not.
‘Without a clear picture of their retirement funding strategy, they cannot assess whether accessing their tax-free pension lump sum now makes sense – or whether it’s better to leave the money invested for longer or only take a portion of the 25 per cent tax-free element.’
Taking your tax-free lump sum is an irreversible process, with the Financial Conduct Authority and His Majesty’s Revenue & Customs having confirmed that providers should not allow savers to put their lump sum back into their pension pot.
‘This means once the money is taken, the decision cannot be undone,’ Haine warns.
Morrissey added: ‘You may also plan to take the tax-free cash pre-Budget and then simply reinvest it back into your Sipp if the change doesn’t happen.
‘However, doing this risks falling foul of pension recycling rules put in place to prevent people from benefiting from artificially high tax relief.
‘The tax charge levied could blow a significant hole in your retirement plans.’
