𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

Andy Burnham’s new chancellor has been urged by finance experts to promise not to make changes to the pension tax-free lump sum – and avoid one of Rachel Reeves’ worst mistakes.

When UK adults get to retirement age, they have the option to take tax-free money out of their pension by withdrawing 25 per cent of the total sum in one go, known as lump sum.

For those who opt to take the lump sum withdrawal, they cannot later change their mind and put it back. It takes down by a quarter the overall value of their pension which might otherwise continue to compound for years more – producing greater retirement cover when they really need it most.

As chancellor, Ms Reeves failed to deny rumours that lump sum withdrawals would be taxed in future, prompting Brits to remove a collective £10bn extra from their retirement savings in 2024/25 out of fear of losing money.

John Healey, who has confirmed the date of the Budget for October 28, is now being urged to come clean and confirm if there are no planned changes to pension taxation in a bid to avoid a costly repeat scenario at a times when household finances are already under stresses.

Lisa Picardo, chief business officer at PensionBee, said: “We’ve previously warned that the pension tax-free lump sum is a cornerstone of retirement planning, and previous budgets have shown exactly what happens when a chancellor leaves that in doubt for months on end: some savers panic, withdraw pre-emptively, often to their own detriment, and later regret this when it cannot be reversed.

“With the budget date now confirmed, John Healey has an early opportunity to break that cycle of speculation by ruling out further tinkering with pension tax relief well before 28 October, rather than let uncertainty do the damage a policy never did.”

Data from the Financial Conduct Authority (FCA), shown by AJ Bell, highlights that the average value of lump sum withdrawals each year from 2018 to 2023 was £7.9bn.

But in 24/25, that rocketed to £18.3bn, with AJ Bell’s public policy director Tom Selby pointing out that merely confirming nothing is changing would cost the Treasury nothing, in contrast to some of Healy’s and Burnham’s early moves which are being scrutinised for their funding.

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“One policy commitment that would reassure voters without costing a penny in new Treasury spending is a long-lasting commitment to pension tax stability,” Mr Selby said.

“The last two budgets were dogged by constant rumour and speculation over a potential raid on pensions tax-free cash. Those rumours were allowed to fester, creating uncertainty over whether the government was committed to the long-term pension tax pact it enters into when people set money aside for retirement.

“A pledge not to meddle with people’s savings would show this government supports savers and retirees, and avoid a repeat of the last two fiscal events where billions exited long-term investments, starving the UK of valuable investment capital and damaging people’s retirement prospects in the process.”

Rob Morgan, chief investment analyst at Charles Stanley Direct, added that savers needed to know why they were putting money away for retirement in order to consistently and effectively do so. “Above all, the government should seek to provide consistency for pension savers to maintain the trust in the system that can be hard won and easily lost,” he said. “Regular tinkering that gradually moves the goal posts, or even changes the field of play, is not just unhelpful, it erodes confidence and will only backfire in the long term if people increasingly fail to provide adequately for their later lives.

“Committing to the shape of the regime in its present form, including key elements as tax relief and tax free cash, would be a great first step for the new Chancellor, especially if backed up by cross-party consensus.”

And Lily Megson-Harvey, policy director at My Pension Expert, pointed out that the opposite holds true as well – if changes were to be forthcoming, people should know about them ahead of time in order to properly plan their retirement.

“If the Government has no plans to make changes to pension tax, giving people that reassurance sooner rather than later would help avoid unnecessary speculation. Equally, if changes are being considered, people deserve clear communication and enough notice to understand what those changes could mean for them before making important financial decisions,” she said.

“The Government has an opportunity to draw a line under the ‘will they, won’t they’ speculation that too often surrounds pension policy. Whatever is announced at the Budget, clearly communicated action, alongside the right support to help people understand what any changes mean for them, will be just as important as the policies themselves.”