‘It’s like déjà vu all over again’ is a quote attributed to legendary baseball player, Yogi Berra. This seems particularly apt for today given the speculation around changes to pension tax-free cash in the run up to November’s Budget, following the same conversations this time last year.
While speculation about tax-free lump sums pops up most years as we near fiscal events, this time around it feels different.
There are a number of reasons why over the last 12 months people are more likely to believe change is possible.
First, there has been an extended period between the announcement of each Budget and it taking place, giving time for rumours to grow and circulate.
In both years, financial experts have made clear that the government needs to significantly reduce spending or increase taxes to meet its fiscal rules.
And, the government made a manifesto commitment not to increase income tax, national insurance (NI) or VAT – which, taken together, account for around two-thirds of tax revenues.
Some governments have in the past breached manifesto commitments, but both last year and this year the government has largely doubled down and confirmed it intends to stick to its tax promise (we’ll set aside the fact some commentators felt the decision last year to increase employer NI fell outside this commitment.)
The government could take steps to make its views known and lay much of this speculation to rest – and we would encourage it to do so
That then leads to the likelihood of increases to other taxes, which is why the spotlight has fallen on pensions, and specifically on tax-free lump sums.
This is perhaps exacerbated by the fact that the current pensions minister has advocated a cut to tax-free cash in a previous role.
But is change likely? Logic would suggest changing the taxation of lump sums may not meet the government’s aims.
It’s a hugely popular and well understood benefit, and another quote – this time from the wonderful Yes Minister – seems relevant: ‘That would be a very courageous decision, minister’.
Beyond the visuals, it’s also unlikely to greatly help the government’s fiscal objectives.
Any change to pension tax policy in the past has incorporated a protection regime and if that was included, tax raised in the near future would be minimal.
Choosing not to protect existing entitlements – which would be controversial – is still unlikely to raise significant amounts any time soon.
People would likely take a smaller (tax-free) lump sum and a higher taxable income over their retirement. More tax for Government but stretched many years into the future, which doesn’t help meet its fiscal rules in 2030.
Research which Nucleus carried out in September confirms the widespread anxiety people have, with three in five saying they are concerned by the speculation around tax-free cash. And people aren’t just saying they are worried – they are taking action.
When savers can’t trust the stability of the system, they disengage, and this is the biggest threat to good retirement outcomes
Recent FCA data shows the overall value of money withdrawn from pension pots increased to nearly £71bn in 2024/25 from £52bn in 2023/24, a massive 36% increase.
And if we focus in on people taking only tax-free cash from their pension, that increased 29% year on year.
While some of this behaviour may be attributable to the proposals to include pensions within IHT from 2027, it seems clear that much was driven by last year’s Budget speculation on reducing tax-free cash.
There is perhaps an argument that this behaviour shouldn’t cause concern. People are taking their money as they wish. However, we do need to help people make the best decisions for their long-term future.
It may be understandable for some wealthier clients to bring forward taking tax-free cash by a few months, which they then invest in other wrappers.
But it’s much more concerning if people with small pots are taking tax-free lump sums at relatively young ages, then storing this in a bank account, as anecdotal evidence suggests.
The government could, of course, take steps to make its views known – either directly or via ‘official sources’ – and lay much of this speculation to rest. And we would encourage it to make the position clear, not just for this Budget but further into the future.
Long-term planning needs certainty. Speculation can harm confidence and lead to potentially self-destructive behaviours, as some of the FCA numbers suggest.
Ultimately, when savers can’t trust the stability of the system, they disengage, and disengagement is the biggest threat to good retirement outcomes.
Andrew Tully is technical services director at Nucleus
