With Chancellor John Healey set to deliver his inaugural Budget on October 28, financial experts warn that speculation over tax changes is already prompting savers to make costly mistakes.
Panic Withdrawals Could Cost £10 Billion
AJ Bell says savers should resist knee-jerk decisions, noting that panic over possible pension tax changes before the last two Budgets may have led to an extra £10 billion being withdrawn unnecessarily from retirement pots. The investment platform urges people to take seven practical steps to protect themselves regardless of what the Chancellor announces.
One immediate concern is that the Cash ISA allowance is due to fall to £12,000 for under-65s from the next tax year, while tax on savings interest is also set to increase, making tax shelters even more valuable.
Expert Warns Speculation Can Be Expensive
Sarah Coles, head of personal finance at AJ Bell, said: "Like Christmas, Budget speculation season has kicked off even earlier this year, with everything from wealth taxes to frozen tax thresholds being thrown into the mix. When faced with the threat of higher taxes, people will always want to take steps to protect themselves. But if you do, it's essential to focus on those you'll be grateful for, whatever the Budget delivers."
She warned: "Ahead of both the 2024 and 2025 Budgets, widespread speculation about possible reform to tax-free cash on pensions persuaded people to raid their pots. AJ Bell analysis of FCA data indicates that in 2024/25 an additional £10 billion may have been taken out of pensions for no reason other than panic. If this money is withdrawn without a plan, there's a real risk it comes out of a tax-efficient environment, misses out on investment growth, and is eroded by tax, inflation and incidental spending."
Practical Steps to Prepare
Instead of rushing to withdraw pension cash, Coles suggests moving taxable investments into a Stocks and Shares ISA using the 'Bed and ISA' process, making full use of ISA allowances for new investments, and sheltering cash in a Cash ISA where possible.
Married couples and civil partners are encouraged to review how assets are held, as transferring investments between spouses can allow both partners to use their annual ISA, dividend and capital gains tax allowances. Those concerned about inheritance tax could consider making lifetime gifts, provided they do not give away more than they can comfortably afford.
Workers facing higher tax bills because of frozen income tax thresholds may benefit from increasing pension contributions, particularly where employers will match additional payments. Finally, AJ Bell says anyone already planning to boost pension savings could consider doing so before the Budget while existing pension tax relief rules remain in place.
Seven Steps to Prepare Before the Budget
- Protect existing investments by moving them into a Stocks and Shares ISA where appropriate
- Hold new investments inside an ISA from the outset
- Make use of Cash ISA allowances to shield savings interest from tax
- Review how family assets are owned to maximise both partners' tax allowances
- Consider affordable lifetime gifts to reduce future inheritance tax exposure
- Increase pension contributions to help offset frozen tax thresholds
- Make pension contributions while current tax relief rules remain in force if they fit your long-term retirement plans
