A warning has been issued to older people tempted to withdraw 25% of their pension pot tax-free. Experts say the decision should be treated as « irreversible » and are urging people not to make « knee-jerk » moves.
There is speculation that Chancellor Rachel Reeves could cap or scrap the right to withdraw a lump of a pension tax-free in the upcoming Autumn Budget. Savers are currently able to withdraw 25% of their pension, up to a maximum of £268,275, after reaching the age of 55. However, experts are urging people to think carefully before making decisions based on rumours about what might be in the Budget.
They are also urging the chancellor to rule out the move in order to prevent retirees from harming their finances. It is unclear whether people who have already returned their money will be able to withdraw again without incurring income tax.
As reported by the Daily Mail, AJ Bell head of public policy Rachel Vahey said: « This constant debate about changing pensions tax rules is wearing down people’s trust in the government and putting them in danger of making knee-jerk decisions which may not be the right ones for them.
« The Chancellor needs to publicly rule out changes to tax free cash in order to put an end to speculation. Doing so would alleviate uncertainty and show that the government is on the side of workers saving for the future.
« Failure to provide certainty punishes workers, who will rightly worry that the government may move the goalposts before they take retirement income. »
The FCA said there is no « right to cancel » a tax-free cash withdrawal while the HMRC confirmed any tax consequences cannot be undone if you do cancel. Experts have warned against withdrawing large sums without a plan, with Vahey recommending leaving money in your pension until you really need it.
She said: « Those people who have built up larger pension pots must feel somewhat as if they are caught in the headlights. But they should not be making important decisions about their future retirement wealth by trying to second guess a Chancellor’s Budget speech.
« For those who decide on balance they still wish to do so, because they need it to fund their retirement or for another reason like clearing debts, it’s important to view it as a permanent decision, and understand all the implications, including that it is not reversible. »
Meanwhile, Rebecca Williams, a financial planning expert at Rathbones, advises people to have a « clear plan » before taking out cash.
A recent survey showed that over 600 people with pensions, savings and investments regretted withdrawing a lump sum ahead of last year’s Budget.
She said: « It’s understandable that people are nervous about potential changes to the rules. The ability to withdraw a lump sum free of tax from your pension is hugely beneficial for meeting immediate financial obligations, such as paying off a mortgage, clearing debts, or helping children onto the property ladder.
« But withdrawing without a clear plan can lead to missed growth opportunities and tax exposure. »
