JEFF PRESTRIDGE: How to maintain your pension lump sum secure from Labour

It’s the financial equivalent of watching on repeat Wes Craven’s 1984 horror film A Nightmare On Elm Street.

Labour, tax-grabbing Labour, curse of the middle classes, is gunning for our hard-earned pension funds. And if Chancellor of the Exchequer Rachel Reeves takes advice proffered in recent days from the numerous left-leaning economic think tanks out there in the long grass, it’s going to get horribly bloody.

Prudence, putting money away inside a pension for a time when work is no more, is going to take a battering. Scandalously, some of the givens we thought we were buying into when taking out our pension – namely a slice of tax-free cash at retirement – are under threat like never before.

Even Mr Craven, inured to horror, would squirm in his director’s seat.

The Resolution Foundation started the anti-pension ball rolling a few days ago by calling for pension pots left by those who die before age 75 to be potentially liable for inheritance tax.

It argued that it made ‘no sense to exempt’ pension pots from IHT, enabling them to be used as ‘vehicles for bequests’. Nightmare One.

It also called for National Insurance to be levied on employer pension contributions. A move that on the surface would hit employers in the pocket, but which the Resolution Foundation acknowledges workers would pay for long-term through ‘lower wages or pension contributions’. Nightmare Two.

As if that wasn’t enough to unsettle pension savers, the Institute for Fiscal Studies (IFS) then weighed in with an even more controversial idea – clamping down on the 25 per cent of tax-free cash that we thought we were allowed to take when we access our pension (currently, permitted from age 55 – 57 from April 2028). A nightmare to end all nightmares.

Instead of the current tax-free cash limit of £268,275 (a quarter of the old £1,073,100 lifetime allowance that Jeremy Hunt scrapped), the IFS proposes a maximum of £100,000.

It argues that this measure would impact about one in five retirees and, music to Reeves’ ears, would raise the Treasury £2billion a year. Not enough to address the alleged £22billion black hole that Ms Reeves keeps waffling on about, but a start nevertheless.

The IFS defends its controversial recommendation by saying that the current cap is too generous for those who already have large pension pots to feast on when they come to retire. It also says the current tax-free component provides a more ‘generous subsidy’ for higher rate over basic rate taxpayers.

Others take an altogether different view for various reasons.

Sir Steve Webb, a former pensions minister, says such a draconian change would leave many people feeling ‘aggrieved’ – especially if they had earmarked the money for a specific purpose such as paying off a mortgage.

David Piltz, chief executive of the benefits and consulting division of global insurance specialist Gallagher, took a wider view. He says ‘endless tinkering’ with pensions ‘disincentivises saving’ and diminishes trust in the system.

He warns that any immediate savings to the government resulting from a clamp down on tax-free cash would be outweighed in the long-term by discouraging retirement planning – ‘a key pillar of economic stability’.

Jason Hollands, a tax expert at wealth manager Evelyn Partners, says that if Ms Reeves was to act on the IFS’s recommendation and slash pension tax-free cash, it would prove an ‘incendiary’ move, especially if introduced quickly.

Quickly? Don’t rule it out. Anything under this Labour government is possible – just think about the haste displayed by Ms Reeves in removing the winter fuel payment from 10 million pensioners. This Chancellor is brutal, absolutely brutal.

As Helen Morrissey, head of retirement analysis at wealth manager Hargreaves Lansdown, told me in the wake of the IFS report: ‘A move to restrict tax-free cash would be hugely unpopular and throw many people’s retirement plans into chaos. For example, people coming up to retirement often use the tax-free cash to pay off their mortgage or give money to loved ones.’

She added: ‘But this government has made it clear that there are tough decisions to make. It’s capable of doing anything.’

SO WHAT SHOULD YOU DO IF YOU ARE 55 OR OVER?

Option 1: Take your cash-free cash 

According to pension experts, concerns over a Labour clampdown on access to tax-free cash have already prompted many people to take defensive action.

In the run up to the election, digital wealth manager Moneyfarm said that many clients were taking tax-free cash from their pension ahead of an anticipated Labour government.

Wealth manager Interactive Investor has also seen more of its customers access their full 25 per cent tax-free lump sum in recent months – rather than taking it in stages (as some pension plans now allow you to do).

For those who are aged 55 and over – and have pension pots of £400,000 plus that will provide them with tax-free cash in excess of £100,000 – it appears to be a no-brainer: grab the maximum tax-free cash while you can and the sooner the better (ideally before nasty Budget Day on October 30).

Experts say such a strategy makes sense in some cases, but not all.

Evelyn’s Mr Hollands says opting to take maximum tax-free cash now is a clear option for those who have a pressing need for the money – for example, as Ms Morrissey has already indicated, using it to pay off a remaining mortgage balance or clear other debts.

Yet he adds: ‘I would urge people in this position to seek out professional advice before doing so.’

Andrew Titmus, a partner and head of estate planning at solicitor Parfitt Cresswell, agrees. He says: ‘Many people may want to consider whether it is appropriate for them to withdraw their lump sum as early as possible.’ Like Mr Hollands, he urges such people to ‘take some advice from a financial or pensions adviser’.

Although tax-free cash can be taken from age 55, not all pension plans (especially employer-based plans) make life easy.

Some employers, for example, will only allow you to access your cash, provided you then go on to take your pension income. This might not prove a shrewd move, especially if you continue working, because you will get clobbered for income tax.

Option 2: Hold on and wait 

There are pension advisers out there who passionately believe that people should not be panicked by the potential clampdown on tax-free cash.

Among them is Tom McPhail, a long-standing pension expert who works for Edinburgh-based financial consultants The Lang Cat.

He took to social media in the wake of the IFS report to say that Labour would be foolish to mess around with pension tax-free cash.

His argument is multi-faceted. He says that tax-free cash is one of the few aspects of pensions that people understand (I’m with him on that point).

He goes on to say that taking an axe to it would be noticed (too right) and would go down like a lead balloon with prudent pension savers who would view it as ‘another raid on pensions’. He also said that the media (the likes of myself) would ‘go big on it’. Too right, Mr McPhail.

He concludes that there are easier pension targets for Ms Reeves to go after – such as taxing pension death benefits and the removal of National Insurance relief on employer contributions.

His last comment on the issue? ‘I’m not about to pull out my tax-free cash now on the off chance that I am wrong. If I am [wrong], you can all remind me of this in a few weeks’ time and forever more.’

Tomm Adams, a partner at tax specialist Blick Rothenberg, says any swift reduction in the maximum amount of pension tax-free cash that people can draw on would be unfair.

He explains: ‘Many individuals made their pension savings decisions based on an understanding that a substantial amount of their pension pot could be drawn down tax-free at retirement. To be told in the Budget that this is no longer the case would be so wrong.’

Mr Adams says any reduction should be phased in, not rushed in on October 30 or from the start of the next tax year. In the IFS’s defence it concedes that some ‘transitional arrangements’ would be necessary, although it adds that they should be ‘weighed against the ongoing costs of providing large tax subsidies for individuals with sizeable pension pots’.

There are other reasons for most pension savers to hold fire on taking tax-free cash.

Any tax-free cash you take out now – just in case Ms Reeves follows IFS’s advice – means there is less money left in your pension pot to benefit from future investment growth.

It also increases the risk of you running out of money before you die. ‘It’s like withdrawing money from an ATM,’ says Blick Rothenberg’s Mr Adams. ‘Once withdrawn, it’s gone.’

PARTING THOUGHTS

There is no doubt that the threat of reducing our ability to get tax-free cash from our pensions is the talk of the town.

Even my urologist, a wonderful individual, took time out last week in between telling me my PSA score had fallen (yippee) to quiz me on what might happen on October 30.

There is no one-fix-all solution for those who can take free cash from a pension ahead of any changes in next month’s Budget.

For some, taking it in the weeks ahead makes sense. For the vast majority, I imagine it’s holding fire.

The best advice is from Myron Jobson, senior personal finance analyst at wealth manager Interactive Investor. He says: ‘Consult a financial adviser before making any decision. It will help you understand the long-term implications for your retirement planning.’

A Nightmare on Elm Street, 2024.