Savers drain pension pots ahead of Labour tax raid

Sir Keir Starmer's commitment to reverse elements of Jeremy Hunt's lifetime saving allowance changes have increased uncertainty - Alastair Grant/AP Photo

Savers are draining their pots to avoid Labour taxes ahead of the general election, advisers have said.

In withdrawing their pensions before they need them savers are incurring income tax charges in order to avoid a looming Labour raid.

Pensions used to be subject to the Lifetime Allowance (LTA) of £1,073,100, with pensioners hit by a 55pc tax charge on lump sums or a 25pc charge on other withdrawals when their pot exceeded that amount.

Chancellor Jeremy Hunt removed the charge in the 2023 Budget and abolished it altogether from April this year, but Labour quickly pledged to reintroduce the measure if it wins power.

With Labour polling well ahead of the Conservatives, industry professionals say the prospect of a change of government was already leading savers to stash money away or draw their entire pension early, incurring income tax charges as they go.

After yesterday’s election announcement, the situation has escalated, with more and more people starting to act.

Ian Cook, of Quilter, said: “I’ve just left a clients’ house and they said they’re really worried about Labour coming in, reducing the LTA and taking away their tax-free cash. Both of them categorically said, ‘do you think we should take our money out of our pensions now before the general election?’

“What’s been really difficult is to advise clients with high levels of pension as to whether they should continue to contribute due to a change in potential limits. Clients that could have benefited and should have contributed haven’t.

“I have a person in mind where he’s retiring next month. Potentially he could have put more in and got tax relief, but could have ended up paying 55pc in the future. It was safer to not contribute. It’s made it a torrid time.”

Marco Malagoni, of investment managers Waverton, said: “The whole Labour approach saying we’re going to reintroduce is definitely causing concern. Clients are moving money into their Sipps [self-invested personal pensions], but they’re also probably making decisions based on speculation and you can’t really advise people on speculation. Some of this uncertainty is going to result in unwise decisions.

“Clients are panicking into taking tax-free cash when they don’t need it and it could remain in their pension, missing out on growth. If it just sits in their estate, it’s also subject to 40pc tax on death.”

Tom Selby, of pension providers AJ Bell, said: “We’ve seen some evidence of more people accessing their pensions. Some people might decide they want to withdraw their pension altogether so it’s not vulnerable to the tax charge. You’d pay unnecessary income tax and if you end up spending it earlier than you were planning to there’s a risk you might run out of money.”

Advisers also say that Labour’s lack of clarity on who the LTA will apply to and how much it will be is also causing problems.

Labour has suggested the reimposition of the lifetime tax-free savings cap would not apply to “public sector leaders” such as NHS doctors.

Michael Ambery, of Standard Life, said: “I think people could make knee jerk reactions now based upon uncertainty. There isn’t clarity over whether the LTA would be reintroduced and for who. This could fuel a divide between public and private sector pension and pay equality.”

Mr Bell added: “The key message is focus on your long-term priorities and deal with the tax rules as they are, rather than trying to second guess what may or not happen at a general election. It’s fraught with danger and you may end up making the wrong call.

“I think Labour should rethink its approach. We’ve seen Labour rethink proposals under Keir Starmer. The hope is it’ll be quietly removed.”

Labour has previously said it is committed to reintroducing a lifetime allowance in a “fair and reasonable way and is conscious of the need to retain senior NHS doctors and other public service leaders after 14 years of Tory chaos has left public services on their knees”.

A spokesman previously said: “We are looking at different options for how to do this in a fair way through our ongoing manifesto development work and will have more to say in due course.”

Play The Telegraph’s brilliant range of Puzzles - and feel brighter every day. Train your brain and boost your mood with PlusWord, the Mini Crossword, the fearsome Killer Sudoku and even the classic Cryptic Crossword.