New British Chancellor John Healey is facing increasing pressure to publicly dismiss the possibility of increasing taxes on pensions, as the government seeks funds for various spending initiatives. The calls come from former pensions ministers and financial firms concerned that speculation could lead to damaging financial decisions by savers.
Healey is reportedly seeking to raise money for increased defense spending and to fund pledges made by figures like Andy Burnham, which include addressing rough sleeping and building council housing. This has led to fears that the government might target middle-class savings, with pensions being a potential area for tax hikes.
Two former pensions ministers have urged Healey to rule out any changes to pension tax benefits immediately, arguing that this would prevent a prolonged period of damaging uncertainty leading up to the autumn Budget. The savings and investment firm AJ Bell has also sent a letter to Healey, requesting a guarantee that tax-free lump sums and other saving incentives will remain unchanged in his first Budget.
AJ Bell chief executive Michael Summersgill stated that such a commitment would quell speculation and signal the government's support for individuals saving for their financial future. He noted that past rumors of changes to tax-free lump sums, particularly during Rachel Reeves's tenure as Chancellor, led to savers withdrawing money prematurely, only for the feared changes to not materialize, leaving those individuals worse off.
Under current rules, pension savers can withdraw up to 25 percent of their retirement savings as a tax-free lump sum from age 55, up to a maximum of £268,275. The concern is that if these incentives are altered, individuals might access their funds out of fear, negatively impacting their long-term financial security.
Steve Webb, a former pensions minister and now a partner at pension consultants LCP, advised that pre-Budget speculation can be particularly disruptive. He suggested that the most effective action for the new Chancellor to ensure financial stability would be to rule out any changes to pension tax breaks for the remainder of the current parliamentary term. He pointed to evidence from the run-up to the last Budget, where a rush to withdraw tax-free cash occurred due to fears of a cut that did not happen.
Ros Altmann, another former pensions minister, emphasized the importance of Healey making it clear that the tax-free lump sum will remain untouched. She warned that uncertainty could prompt more people in their 50s and 60s to withdraw their tax-free cash, thereby reducing their pension pot size and potentially disinvesting funds intended for long-term financial well-being.
Beyond the tax-free lump sum, the amount higher earners can save tax-free annually into their pensions is also considered a potential target for revenue generation. Currently, workers can save up to £60,000 per year tax-free, with tax relief varying based on income tax bracket. Any reduction in these tax reliefs could be seen as taxing pension savings twice—once before they are contributed and again upon withdrawal—potentially discouraging retirement saving.