Hargreaves Lansdown has warned that ongoing speculation around changes to pensions ahead of this month’s Budget is proving “hugely damaging” to pension savers.
With just two weeks to go until Labour’s first Budget, there is growing expectation that Chancellor Rachel Reeves will make changes to pensions, with a reduction or abolition of the £268,275 tax-free lump sum widely touted.
However, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said this rumour is causing concern among savers, with people potentially making decisions “they may come to regret.”
Morrissey said taking money out of a pension now potentially deprives it of future investment growth and could leave it subject to a host of taxes that it otherwise might not be, such as inheritance, capital gains, dividend and income tax.
“This ongoing speculation about potential changes to such a fundamental part of the system is hugely damaging. People need certainty to make long-term plans and they just don’t have that right now. The sooner changes such as raiding tax-free cash can be ruled out, the more people can focus on the long term again,” she said.
There is also speculation that Reeves may charge National Insurance on employer contributions to workers’ pension pots. However, such a move does not come without drawbacks, warns Morrissey, amid concern that employers could look to recoup this cash either in the form of smaller pay rises or a refusal to increase their pension contributions.
Another potential target for Labour is the inheritance tax treatment of pensions.
“Making pensions subject to inheritance tax could potentially raise a decent chunk of money for the government and incentivise people to spend their pot during their lifetime. We could see people opting to give away more gifts in their lifetime to family as a means of mitigating this tax, which could play a huge role in helping younger people get onto the property ladder,” said Morrissey.
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