Savers are making rash decisions with their money as the spectre of the Budget next month looms, experts warn.
Fears that key personal taxes could be hiked and tax-free benefits slashed are prompting people to take knee-jerk decisions that aren’t in their best interests and that they may come to regret.
Experts warn people are making gifts to loved ones they can’t afford, rashly taking cash from their pensions and needlessly selling assets because they are worried about what the Autumn Budget could contain.
Sarah Coles, head of personal finance at stockbroker Hargreaves Lansdown, says: ‘I’m worried that people could make mistakes that risk leaving them worse off overall in the run up to the Budget. There is a concern that people are taking decisions based on fear of rumours.’
These are the five biggest mistakes people are making with their money ahead of the Budget, as revealed by financial experts – and what you should do instead.
Rumours are swirling that Chancellor Rachel Reeves could cut the maximum amount that you can take from your pension as a tax-free lump sum for next month’s Budget
Taking your pension tax-free lump sum if you don’t need it
Rumours are swirling that Chancellor Rachel Reeves could cut the maximum amount that you can take from your pension as a tax-free lump sum.
Currently if you have a private pension you can access your money at 55 – rising to 57 from April 2028 – and can withdraw 25 per cent tax free, up to a maximum of £268,275. But experts fear the Chancellor could curb the tax-free amount.
Pensions minister Torsten Bell previously called for a £40,000 cap while he was head of Left-wing think-tank the Resolution Foundation. Pension specialists say a more likely figure is £100,000, although this could be phased in rather than introduced overnight.
It would mean pensioners with a pot of around £400,000 would have their tax-free cash entitlement cut.
Sarah Coles, at Hargreaves Lansdown, says: ‘I’m worried that people could make mistakes that risk leaving them worse off overall in the run up to the Budget’
As a result, fuelled by panic, savers have been rushing to take out their pension’s tax-free lump sum.
Andy Gillett, director and head of wealth management advice at BRI Wealth Management, told Money Mail: ‘Just this morning we’ve had two or three enquiries about taking the pension tax-free lump sum and generally we get two or three a week.’
However, it could be a mistake to take your pension tax-free lump sum if you do not yet need the money, and are acting purely on the basis of speculation about what will happen. The decision is irreversible.
If you take money out of your pension and invest it elsewhere, it could become subject to taxes such as capital gains and dividend tax, from which it was previously protected. If you put your money into a current or savings account, you deny yourself the opportunity of further growth from investing as you would enjoy in a pension. And if you keep it in cash savings the interest could incur tax.
Jason Hollands, a director of wealth manager BestInvest, says: ‘We’re coming across plenty of people who are wanting to take their tax-free money based on pure speculation.
‘Some clients who had intended to leave their pension are now looking into taking their money.’
‘Of course, there are some perfectly good cases for taking your pension tax-free lump sum, such as if you are over 75 and need to draw down money in the short term.
‘Or if you had planned to spend it soon anyway, for example to clear remaining mortgages and other debts, move house or carry out home renovations, buy a new car, or a long-anticipated holiday.
‘However, it is not a decision to make in a hurry. Taking advice first can be invaluable, and it is rarely a good idea to act based on Budget speculation if there are no other reasons for cashing in.
Some people have stopped paying into their pensions because they are worried the tax-free lump sum could become less generous
Being put off paying into a pension
Fears that pensions could come under fire in the Budget are discouraging savers from funnelling much-needed money into these valuable savings vehicles, according to financial experts.
Some have stopped paying in because they are worried the tax-free lump sum could become less generous. Others are put off paying into a pension because they fear pension tax relief could be watered down.
Pension tax relief allows you to save into a pension free of income tax. That means for every £80 that a basic rate taxpayer pays in from their post-tax income, it is topped up to £100.
Higher and additional rate taxpayers need only pay in £60 and £55 respectively to have a total of £100 go into their pension.
There are fears the Chancellor could create a flat rate of tax relief at 30…
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