Client Budget fears risk damaging financial planning goals

8 October 2024

Mounting speculation about what changes the Chancellor could unveil in the upcoming Budget risks damaging people’s financial planning goals, as they take decisions based on rumours, warn investment specialists.

With Labour’s first Budget due on 30 October 2024, there have been growing rumours that Chancellor Rachel Reeves could announce changes to pensions as well as other tax exemptions and allowances.

While fundamental pension tax relief reform, including the introduction of a flat rate of pensions tax relief, now seems unlikely, there is growing concern that Reeves could restrict tax free cash.

The lump sum allowance was set at £268,275 by the last Government, when they removed the lifetime allowance. This meant if people built up pensions over and above that previous allowance, they would not have access to the 25% tax free lump sum on monies over the allowance. A further restriction would likely be unpopular with those planning their retirement with higher levels of saving.

Michael Summersgill, chief executive at AJ Bell, called the constant rumour and speculation about the future of retirement tax incentives “hugely damaging.”

According to AJ Bell’s customer data, pension contributions rose by almost 60% in September versus the same month last year and the number of people accessing their tax-free cash was around a third higher than the average during the past year.

He said: “People are taking financial decisions in part based on pre-Budget speculation and it chips away at people’s confidence in pensions generally. The chancellor has an opportunity to nip this in the bud by using her inaugural Budget to publicly commit to a pact on pension taxation. A clear promise to deliver tax stability on pensions for at least a decade would provide much needed certainty to savers across the country.”

Summersgill said rumours about the future of tax-free cash, one of the best understood and most valued benefits of pensions, are “particularly problematic.”

“Taking your tax-free cash is an irreversible decision and, assuming the chancellor doesn’t pursue a disastrous raid on tax-free cash, those people may find they’re in a worse financial position long-term. A concrete pension tax pact would allow hard-working savers and retirees to focus on their long-term goals, rather than being knocked off course by speculation of future changes,” he added.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, echoed the sentiment, pointing out that the “constant moving of the boundaries so soon after the lifetime allowance was removed makes planning impossible.”

Morrissey said: “What we really need is clarity for those with pensions below this limit. Ripping money out of a pension now potentially deprives it of future investment growth and leaves it subject to tax. There’s also the possibility it could be placed in a low interest bank account where its purchasing power gets eaten away by inflation over time.

“This ongoing speculation about changes to tax-free cash is damaging. The Chancellor has recognised that businesses need certainty in the taxation environment to make investment decisions. The same is true of our personal finances. The government has left people to make impossible decisions about their investments and pensions. The sooner changes such as raiding tax-free cash can be ruled out, the more people can focus on the long term again.”

Professional Paraplanner