Pension savers urged against ‘knee-jerk’ move that cannot be reversed | Personal Finance | Finance

Speculation around the tax changes Chancellor Rachel Reeves might unveil in her Autumn Budget on November 26 has had a noticeable impact on pension saving behaviour among Do-It-Yourself (DIY) investors. Officials at Bestinvest, the online investment platform, said one of the biggest concerns centres on rumours the Chancellor may reduce the maximum amount pension savers, aged 55 can over, 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 – a ceiling introduced by former Conservative Chancellor Jeremy Hunt. Similar speculation ahead of last year’s Autumn Budget triggered a wave of withdrawals from pensions, with some savers later regretting their decision after realising they did not need the cash immediately, and no changes were made.

Rumours this year of further pension tax changes appear to be having a similar effect on people’s behaviour, spurring more people to access their pensions. This has been compounded by the fact that pensions minister Torsten Bell had previously advocated reducing tax-free cash while running the think tank Resolution Foundation.

However, people have been urged not to act in haste and consider their options thoroughly – including any potential implications that could occur as a result of their choices.

At Bestinvest, pension withdrawal requests surged by a third in September compared to the average for the same month over the past two years – driven largely by those aged 55 and over accessing their 25% tax-free cash lump sum.

The size of those withdrawals has also increased dramatically. Bestinvest saw a 146% surge in the size of (Self-Invested Personal Pension) SIPP withdrawals in September compared to the two-year average for the same month in 2023 and 2024.

With pensions brought under the scope of Inheritance Tax (IHT) in the Chancellor’s maiden fiscal statement last year, it was reported that many DIY investors have radically changed their approach to pension saving. According to reports, some are choosing to withdraw pension funds to spend or gift rather than risk their beneficiaries being hit with a heavy tax bill on their death.

Add to that speculation around potential changes to gifting rules – including the possibility the seven-year rule may be extended, or a lifetime gifting cap introduced, and it’s no surprise to see a significant behavioural shift.

Meanwhile, the experts at Bestinvest said 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 modest 3% uplift. A look back over the three months to the end of September and 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: “Remember, decisions made in haste cannot always be reversed.”

“Saving into a pension is a long-term financial goal that requires commitment from a saver but also 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 – such as tax relief at their marginal rate of tax when they contribute and the opportunity to grow their wealth free from tax on income and capital gains while the money remains invested.

“While pension income is taxable on the way out, being able to access 25% of your pot tax-free – known as the Pension Commencement Lump Sum (PCLS) – offers peace of mind for many as they approach retirement. Some earmark this money to pay down debts, clear a large mortgage or bridge the gap between retiring and accessing the state pension. Others may use it to fund school fees, support children through university, or even to fund a bucket-list trip.

“Rampant speculation that this tax-free cash benefit could be scaled back has prompted some to access their lump sum early, a move that may not always be in their best interests. At Bestinvest, we’ve seen a surge in PCLS requests as we edge closer to the Autumn Budget, echoing the trend seen ahead of the Chancellor’s first fiscal statement last year.

“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. Moving a large sum out of a tax-protected wrapper, like a pension, into a taxable environment, such as a bank or building society savings account, can counteract the gain someone makes from making the tax-free withdrawal in the first place. From that point, interest, income, or capital gains could be liable for tax unless the money falls within an existing tax-free allowance, such as the Personal Savings Allowance, or is transferred into another tax-efficient vehicle such as an ISA.”

She added: “This is why anyone considering such a move would be wise to take financial advice before they make any decisions.”