Chancellor Rachel Reeves recently said she is looking at tax changes in her Autumn Statement
There could be changes to pensions policy in the Autumn Budget (Image: Getty)
Chancellor Rachel Reeves could axe a major pension policy, experts have warned. The Chancellor recently said in an interview she is looking at tax changes in her Autumn Statement. Chris Ball, CEO at wealth managers Hoxton Wealth, warned there could be major changes coming up for the pensions lump sum.
He said: “As things stand, you can take 25 percent tax-free, from two different pensions. There may however be changes made to this rule in the Budget, with it being suggested that under Rachel Reeves, the 25 percent tax-free rate might be reduced, or removed altogether.”
The lump sum allows you to take up to 25 percent from your pension pots as a tax-exempt lump amount, as long as the total is less than £268,275. Nick Nesbitt, head of private client at tax and accountancy firm Forvis Mazars, said any changes to pensions are “unneeded and unwanted”.
He said: “Already pension savers are having to contend with the plans for their pension funds to become subject to inheritance tax from April 2027. Reducing the tax-free allowance, one of the most well-known and understood benefits of pensions, cuts the attractiveness of pensions further still and runs the risk of people neglecting pensions savings.
“We already have a significant issue in incentivising and encouraging long-term saving in the UK and reducing tax-free cash entitlements would be a step in the wrong direction.” Mr Ball said pension savers may want to act now ahead of any changes.
He said: “If you are looking to take your tax-free lump sum, you may want to do so now, before rumoured changes come into force. Currently, if you move your entire pension into drawdown, you will get your entire 25 per cent lump sum in one go.
“It is also possible to drawdown parts of your pension and get 25 per cent of each withdrawal tax-free, rather than all up front.” Labour announced during the Autumn Statement last year that unused pension funds would become liable for inheritance tax from April 2027.
The hefty 40 percent tax applies when passing on assets above certain allowances. Mr Ball said pointed to one way to move your funds around to minimise your inheritance tax liability, through making gifts out of your excess income.
He explained: “This involves you making regular gifts to, for example, a family member from surplus pension income (after income tax) where the value exits your estate immediately as opposed to the regular seven years. Therefore, it is not subject to inheritance tax.
“These gifts can be at a level of your choosing, though you must have enough income to maintain a normal standard of living. The same exemption provides a useful way to fund trusts for the next generation.
“This strategy could be deployed to for instance, help with a grandchild’s school fees or contribute to a family member.” You can also give away certain amounts each tax year and avoid a HMRC bill on the amount.
You can give up to £3,000 in total divided between any number of people. You can also separately give any number of gifts up to £250 to different people, as long as you don’t use your other allowances on the same people.
