Pension Tax-Free Cash Raid Could Force Homeowners Out, Experts Warn

Financial experts have issued a stark warning to the UK government regarding potential changes to tax-free pension cash rules. The proposed alterations could have severe consequences for homeowners, potentially forcing them out of their residences.

Currently, UK pension savers can withdraw up to 25% of their pension tax-free at age 55, a threshold set to increase to 57 in 2028. This option, introduced as part of the pension freedoms in 2015, has been a cornerstone of retirement planning for many. However, speculation about possible changes in the upcoming Budget on October 30, 2024, has caused concern among savers and industry professionals alike.

Jason Hollands of Evelyn Partners cautioned that modifying this benefit would be a "very aggressive move." He stated:

"The tax-free cash lump sum is one of the key features of pension investing, so raiding it would be a highly visible and deeply unpopular move and would effectively amount to a moving of the goal posts in the late stages of a football game."

Hollands further explained that such changes could force individuals to reassess their retirement plans, potentially leading to home sales, downsizing, or delayed retirement.

The UK pension system, which has its roots in the 1908 introduction of state pensions and was significantly shaped by the 1942 Beveridge Report, has undergone numerous changes over the years. The current system includes various elements such as the triple lock for state pensions, auto-enrollment in workplace pensions, and the pension protection fund.

Mike Ambery of Standard Life highlighted the potential "unintended consequences" of altering the tax-free cash rules. He emphasized that many individuals rely on this option to clear mortgage debts, and changes could lead to extended working years, increased reliance on other savings, or exploration of alternative financial products like lifetime mortgages or equity release.

The average UK pension pot stands at approximately £61,897, which underscores the importance of careful financial planning for retirement. With over 5,000 occupational pension schemes in the UK and government spending on pensions at about 5.5% of GDP, any changes to the system could have far-reaching effects.

Clare Moffat of Royal London noted an increase in inquiries about tax-free withdrawals, suggesting that some savers are making decisions based on speculation. She advised:

"We would always [tell them to] speak to a financial advisor before making a major decision."

As the UK approaches the Budget announcement, savers are encouraged to utilize resources such as the pension tracing service, pension dashboards, and the Pension Wise service for free guidance. These tools, along with professional advice, can help individuals navigate the complex pension landscape and make informed decisions about their financial futures.

The Treasury has refrained from commenting on tax change speculations outside of fiscal events. As the debate continues, the pension industry and savers alike await clarity on the future of tax-free pension cash and its implications for retirement planning in the UK.