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Reeves blasted over pensions tax panic: Budget rumours sparked withdrawals from retirement pots

Rachel Reeves has been accused of failing to stop panicked savers from making damaging decisions about their retirement in the run up to the Budget.

In a stinging rebuke to the Chancellor, the Institute for Fiscal Studies said she allowed speculation about a possible raid on pensions pots to swirl as she finalised her tax and spending plans.

Rumours that she was planning to cut the amount savers can withdraw tax-free proved particularly damaging –with many rushing to take out cash before any changes came into force.

As it turned out, she did not reduce the tax-free lump sum, meaning anyone who took action did so unnecessarily.

Careless: The Institute for Fiscal Studies said the Chancellor allowed speculation about a possible raid on pensions pots to swirl as she finalised her tax and spending plans

Careless: The Institute for Fiscal Studies said the Chancellor allowed speculation about a possible raid on pensions pots to swirl as she finalised her tax and spending plans

Pensions experts believe many savers who did withdraw cash from their pensions early amid fears of a tax raid will have made irreversible decisions that will leave them worse off in retirement.

Many will fall into a little-known tax trap called the ‘money purchase annual allowance’, slashing their ability to save into a pension if they took a penny more than their tax-free lump sum.

IFS director Paul Johnson said: ‘Reeves may want to reflect on the damage done by having allowed various rumours to circulate for so long.

‘If there was never any intention to change the income tax treatment of pensions then – my goodness – she should have said so, rather than allow so many to cash in lump sums early.’

Former pensions minister Steve Webb, now a partner at pension consultants LCP, urged the Chancellor to ‘set out a long-term blueprint for pensions then stick to it’ to stop a rerun ahead of future Budgets. He said: ‘At least that way there should be less annual speculation.’

Ahead of the Budget, Reeves was rumoured to be plotting a tax raid on pensions as she struggled to make the numbers add up. 

Among options thought to be on the table was a cut to the tax-free lump sum that allows savers to withdraw 25 per cent of pension pots – up to a maximum of £268,275 – when they reach 55. Cutting that limit to £100,000 would raise £2billion a year.

Reeves decided against such a move instead introducing a new death duty by dragging pension pots into inheritance tax for the first time. 

She is now under pressure to rule out further changes – giving savers the certainty they need to plan for their retirement.

Dan Olley, head of Hargreaves Lansdown, said: ‘Investing for later life is a long-term endeavour, so stability of policy is key if we want more people to benefit from the power of compounding to deliver a comfortable retirement.’

Noel Butwell, chief executive of Abrdn Adviser, urged the Chancellor to ‘set a platform for longer terms stability’, saying: ‘That’s what is desperately needed if we want to give people the confidence to save and invest for the long-term.’

Tom Selby, of AJ Bell, warned the Treasury’s failure to commit to a so-called Pensions Tax Lock, ruling out future raids on retirement pots, means ‘there is every chance instability will rear its ugly head again next year’.

He said: ‘We have seen just how destabilising this speculation can be. When it comes to tax-free cash in particular, any decision to take your money can be irreversible and could result in losing out in the long term.

‘Given the commitment people make when they contribute to a pension, the least they should expect in return is that the goalposts won’t be moved once they have made that decision.

‘A Pensions Tax Lock would engender greater trust in pensions, giving people more confidence to save for retirement.’

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