- Chancellor John Healey sets Budget date for 28 October
- Healey urged to commit to pension tax stability to avoid speculation saga that plagued predecessor Rachel Reeves’ two Budgets
- Costly uncertainty triggered £10bn of excess pension withdrawals in 2024/25 alone
- Healey should also review simpler alternatives to ill-considered IHT plans on pensions
AJ Bell public policy director, Tom Selby, says:
"Recently appointed chancellor John Healey has wasted no time. It speaks volumes that he started June as defence secretary and ends July announcing his first Budget in a new government led by Prime Minister, Andy Burnham.
"Healey will likely spend a chunk of his time leafing through the thesaurus looking for new ways to rephrase the ‘tough choices’ message of his predecessor. Although he doesn’t have the luxury of pointing the finger of blame at the last administration and will be looking to strike a more optimistic tone about the future, rather than dwelling on the past.
"With a couple of crowd-pleasing spending plans already announced, Healey will undoubtedly be hoping to find a few more to keep the Burnam bounce going, despite turgid economic growth and ongoing global uncertainty.
"One policy commitment that would reassure voters without costing a penny in new Treasury spending is a long-lasting commitment to pension tax stability. The last two Budgets were dogged by constant rumour and speculation over a potential raid on pensions tax-free cash. Those rumours were allowed to fester, creating uncertainty over whether the government was committed to the long-term pension tax pact it enters into when people set money aside for retirement. A pledge not to meddle with people’s savings would show this government supports savers and retirees, and avoid a repeat of the last two fiscal events where billions exited long-term investments, starving the UK of valuable investment capital and damaging people’s retirement prospects in the process."
Commit to Pension Tax Lock to avoid repeat of £10bn speculation saga
"Ahead of both the 2024 and 2025 Budgets, widespread speculation about possible reform to Pension Commencement Lump Sum (PCLS) entitlements, more commonly known as ‘tax-free cash’, led to heightened withdrawals from pension pots.
"Pension providers, including AJ Bell, warned that the absence of clarity over the future of pension tax incentives was creating instability.
"Data from the Financial Conduct Authority (FCA) shows this is a nationwide phenomenon, with tax-free cash withdrawals rising 40% in 2023/24 ahead of the last General Election, and by a further 63% in 2024/25, when the first Budget under the Labour government took place.
"To put these figures in context, in the five tax years before the General Election (2018/19 to 2022/23), tax-free cash withdrawals across FCA-regulated firms averaged £7.9 billion a year and never exceeded £8.7 billion, even following the post-Covid increase.
"In 2024/25, the value of withdrawals rose to £18.3 billion, suggesting excess withdrawals from pensions in the region of £10 billion. Without clarity from government well ahead of the Budget, the figure this time round will inevitably be higher still.
"Given how complex and politically toxic a tax-free cash raid would be, it is unlikely to be an appealing option for the new chancellor. If this is indeed Healey’s conclusion, he should announce it as soon as possible, give certainty to savers and bank an easy political win.
"AJ Bell has laid out the case for a Pension Tax Lock in a letter to the chancellor’s office and the message should have been heard loud and clear given the volume of protestation from pension savers over the last two years. Healey can quickly differentiate himself from his tone-deaf predecessor by listening to those valid concerns and acting quickly to nip the issue in the bud."
Review pragmatic alternatives to bringing pensions into IHT
"Another sensible move would be to review the insanely complex Pensions IHT rules set out under Rachel Reeves. The crackpot plans are borderline impossible to deliver and will heap mountains on pain on already-grieving families.
"Tax neutral options are on the table which would still deliver the revenue the government wants, without imposing such an ill-considered tax policy on families.
"Allowing people to pass on their pension completely tax-free (if they die before age 75) at death was always very generous, at least in comparison to the way other assets are treated. That created the slightly odd situation where spending your pension last of all your assets was often the most sensible course of action.
"It is understandable government is looking at ways to address this through the tax system – but bringing pensions into IHT is the worst way to do it.
"AJ Bell, along with other providers, has put forward simpler alternatives – such as applying a flat tax or using the income tax system – that would raise the same revenue for the Exchequer but without adding to the complexity and delays associated with probate.”
"It may be too late in the day to get a full U-turn before the changes are in place from April next year, but the new chancellor should be prepared for some pretty negative ‘pensions death tax nightmare’ headlines in 2027 if he presses ahead with the plans."
