Stay away from our pensions! Warning to Chancellor over autumn tax hikes

Rachel Reeves was last night urged to rule out a punishing tax raid on pensions having seen half her fiscal headroom wiped out in a matter of days.

Fears are mounting that the Chancellor will target retirement pots in the Autumn Budget as weak economic growth and higher borrowing costs blow a black hole in her plans.

Advisory firm Oxford Economics warned that some £5billion of the £9.9billion buffer Reeves left herself this week to meet her fiscal rules has already disappeared due to rising bond yields.

The Institute for Fiscal Studies (IFS) think-tank said the parlous state of the economy and public finances meant there was a ‘good chance’ she will need to raise taxes later this year.

‘That risks months of speculation over what those tax rises might be,’ said IFS director Paul Johnson, identifying ‘a raid on pensions’ as one option.

He noted that even ‘mere speculation’ about such a move ‘can cause economic harm’ – as it did ahead of the Budget in October last year when savers rushed to withdraw cash from their pensions to avoid paying higher taxes.

Struggle: Fears are mounting that the Chancellor will target retirement pots in the Autumn Budget as weak economic growth and higher borrowing costs blow a black hole in her plans

Speculation mounted that Reeves was planning a tax raid on pension pots as she struggled to make her numbers add up. Among the options were cutting tax relief on the pension contributions of higher earners and slashing the amount savers can withdraw tax-free at the age of 55 from as much as £268,275 to £100,000.

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

It is now feared she could launch a fresh raid in the autumn.

But two former pensions ministers, Sir Steve Webb and Baroness Altmann, told the Mail that Reeves should rule out a tax raid on retirement pots to avoid a repeat. They warned an attack on pensions would make saving for retirement less attractive – leaving people worse off in old age.

Sir Steve, a partner at pension consultants LCP, said: ‘Pensions are a long-term business with money built up over decades and paid out for decades more.

‘This means that savers need stability and certainty to allow them to invest and plan with confidence, rather than the constant risk of sudden and dramatic changes to the tax regime. It would be hugely helpful if the Chancellor acted now to rule out major changes to pension tax relief.’

Baroness Altmann said: ‘Every time there are rumours of pension tax changes, people seem to rush to take money out of their pensions or stop putting as much in.

‘The uncertainty drives fear and is not helpful for boosting retirement income security and long-term growth.’

Tom Selby, director of public policy at broker AJ Bell, said speculation over tax changes last year caused ‘a significant spike in savers making retirement decisions, such as accessing their tax-free cash, due to fears the Chancellor’s axe could be wielded’.

He added: ‘Rather than waiting for that to happen, the Chancellor should commit to a Pensions Tax Lock, ruling out changes to tax-free cash or tax relief for at least the rest of this Parliament.

‘This would allow Reeves to say she is on the side of savers and retirees.’