Speculation around potential tax changes in the Autumn Budget has sparked a shift in pension saving behaviour among DIY investors, says Bestinvest.
The online investment platform said it has seen a 33% surge in SIPP withdrawal requests in September, compared to the previous two-year average, largely driven by those aged 55+ accessing their 25% tax-free cash lump sum.
The size of the pension income withdrawals also surged by 146% over the same period.
One of the biggest concerns around the Autumn Budget is that the Chancellor may reduce the maximum amount pension savers can withdraw tax-free from their retirement pots. Currently, savers can access 25% of their pension tax-free, up to a maximum of £268,275.
Fears are compounded by the fact that pensions minister Torsten Bell had previously advocated reducing tax free cash while running the think tank Resolution Foundation.
Bestinvest said that with pensions set to be brought under the scope of inheritance tax in 2027, many DIY investors have radically changed their approach to pension saving, choosing to withdraw pension funds to spend or gift rather than risk their beneficiaries being hit with a heavy tax bill on their death.
The move away from prioritising pension saving is also evident in broader savings behaviour. While ISA contributions at Bestinvest rose by 38% in September compared to the previous two-year average for the same month, SIPP contributions only saw a 3% uplift.
Looking back over the three months to the end of September, SIPP contributions at Bestinvest are down by 24% compared to the previous two-year average for the same period, as opposed to ISA contributions which rose by 10%.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said pension saving requires a “stable and consistent” approach from the Government.
“This is why incessant speculation around pension changes can have huge repercussions as it can discourage savers from topping up their retirement pots at a time when they’re already being criticised for not contributing enough. This uncertainty can also prevent people from taking full advantage of the many benefits that pensions offer.”
Haine said the current tax-free lump sum offers savers “peace of mind” as they approach retirement, with some people earmarking it to pay down debts, clear a mortgage or bridge the gap between retiring and accessing the State Pension.
“Rampant speculation that this tax-free cash benefit could be scaled back has prompted some to access their lump sum early, a move that has not always been in their best interest. 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.
“This is why anyone considering such a move would be wise to take financial advice before they make any decisions.”
Haine also said pension savers should be wary about gifting too much too soon, warning that retirees risk leaving themselves short in later life, particularly if they face high care costs.
“Finding the right balance between spending, gifting and preserving pension funds is tricky. Ultimately, retirement planning requires careful consideration and making quickfire decisions based on media headlines without the right guidance is rarely a good idea,” she added.
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