There has been a notable rise in tax-free withdrawals from pension pots, prompting investment firms to call for stability and clarity in pension tax policies.
Surge in Tax-Free Pension Withdrawals as Autumn Budget Fears Mount
By Arezki AMIRI
Published on 18 October 2024 09:20
Pension pots are being raided by clients who are anxious about prospective changes to the autumn budget and have begun to withdraw large sums. Investment firms have said that this trend can be attributed to the summer, as customers shift their approach to retirement savings when changes are expected.
Surge in Tax-Free Pension Withdrawals
The investment platform AJ Bell said its clients are concerned about Chancellor Rachel Reeves’ rumoured expectations to change taxes in the upcoming budget on 30 October, which is why many seem unsettled. Customers are seeking to withdraw cash from their plans during these times of uncertainty, as the firm has reported a significant increase in inquiries or activities regarding pensions.
Quilter, a wealth management company handling over £113 billion in assets, has also reported a rise in calls from clients wanting to access their pension funds. Royal London Asset Management has similarly experienced heightened inquiries about pension withdrawals.
AJ Bell CEO, Michael Summersgill, commented on the situation, stating, “Pensions are the primary retirement savings vehicle in the UK and customers are unsurprisingly sensitive to changes in their tax treatment.” He also stated that there have been a lot of changes in behaviours by the customers towards contributions and tax-free withdrawals.
To mitigate confusion, AJ Bell has urged the Treasury to establish a pension “Tax Lock” in the upcoming budget, which would provide clarity on tax regulations for the years ahead.
Currently, individuals aged 55 and older can withdraw 25% of their pension pot tax-free, up to a limit of £268,275. However, the Fabian Society's recommendations to lower this threshold to £100,000 have raised concerns.
Proposed Changes and Their Implications
There have been discussions suggesting Chancellor Reeves might implement a 30% flat tax relief on pension contributions, moving away from the current system based on individual income tax rates.
However, this proposal has reportedly been reconsidered following warnings from public sector unions that it could adversely affect 1 million members and negate recent public sector pay increases.
Both AJ Bell and Quilter have expressed their apprehensions to the Treasury regarding potential changes. Quilter highlighted that many customers seeking withdrawals might do so without a full understanding of the long-term ramifications. Interestingly, after consulting with financial advisers, many clients opted not to proceed with their withdrawal requests.
Steven Levin, CEO of Quilter, emphasized the need for a clear governmental strategy. He said, “Stability and predictability are crucial for sound financial planning, and a well-informed public is essential for maintaining confidence in the pension system.” He urged the Treasury to issue a prompt statement discouraging changes to pension arrangements prior to the budget.
Market Outlook
Regardless of the uncertainty surrounding the upcoming budget, Summersgill did note that this change in customer behaviour means important decisions for individuals, although it has not had a severe impact on AJ Bell.
The firm continues to thrive, reporting a 45% increase in cash inflows, totalling £6.1 billion for the year ending 30 September, and achieving a record £86.5 billion in total assets under management.
In his comments, he expressed great optimism, saying “While the upcoming budget has introduced unhelpful uncertainty, we remain positive about the outlook for AJ Bell and the platform market more broadly.”
To address these trends, the Financial Conduct Authority has issued further guidance to businesses on the consequences of customers withdrawing tax-free cash, highlighting the risk of adverse financial consequences.