After 14 years of Conservative leadership, Labour’s July 2024 general election victory means that it is the new chancellor, Rachel Reeves, who will deliver the UK’s Autumn Budget next month.
Having already spoken at length about the £22 billion “black hole” in the public finances she says was inherited from the previous government, Reeves has promised to make the “tough decisions”.
The prime minister, Keir Starmer, has already made one tough and unpopular choice: scrapping the winter fuel allowance for all but the poorest pensioners.
But could Labour be about to make sweeping changes for those approaching retirement, too? Some forecasters have speculated that Reeves might be about to change, or even abolish, the pension commencement lump sum (PCLS).
Keep reading to find out how likely this change is, and what it would mean for your retirement plans.
Image from Press Release on government website. Image and article can be found here.
The chancellor has promised a “big bang of reforms to unlock growth”
Keir Starmer’s Labour government was very quick to announce a “landmark pensions review” intended to “boost growth and make every part of Britain better off”. This review – coupled with the heavily publicised overspend of £22 billion – might mean that some money is clawed back via pensions.
Tax relief and the State Pension triple lock are two obvious areas where cuts and savings might be made. More surprisingly, another pension rule has come under threat.
Under current rules, when accessing your pension as an annuity, you are entitled to a 25% tax-free cash payment – a PCLS. Tax-free cash is also available on Pension Freedoms options, like drawdown.
Media speculation ahead of the Budget, though, suggests that this option, first introduced back in 2006, could be altered or removed.
But what would that mean for you?
With the Budget still a month away speculation is rife, but little concrete information is known.
The Autumn Budget will take place on 30 October and the first thing to remember is that media reports are, at this stage, mere speculation.
While some changes have already been made, and others will be leaked in the run-up to the big day, others will be surprise announcements. It’s also impossible to say when any changes that are announced will be implemented.
So what might change?
Some commentators are predicting changes to the PCLS, which applies when you take an annuity. You are entitled to up to 25% of your defined contribution pension pot as a one-off lump sum. Tax-free cash is also available on certain Pension Freedoms options.
One way a change might be implemented is to insist that individuals accessing their pension generate a minimum level of income, and only then take the remainder (up to 25%) as tax-free cash. This would help to ensure that pensioners have sufficient income to last for their retirement, but it would come at a cost of pensioner’s flexibility and choice.
Another option, suggested in some quarters, is for the chancellor to limit the amount of tax-free cash individuals can take, capping it at £100,000, say.
Without a definite answer either way, deciding whether to pre-empt a change or not isn’t easy
Legislative changes occur fairly regularly. Usually, the advice would be to keep calm and carry on.
Your financial plans are long-term, and we can help you factor these changes into your plans as and when they occur. It’s always worth remembering that if your ultimate goal hasn’t changed then your plan needn’t either.
With a possible change to tax-free cash, though, your plans could be affected quite soon.
If you are approaching retirement, you might be tempted to retire now to claim your 25% tax-free cash entitlement before any change arrives. This could be particularly appealing if your post-retirement plans are based around big initial purchases that require readily available cash.
But retirement decisions have long-lasting implications, so making the right choice for you is vital. Rushing into a decision based on what currently amounts to speculation might lock you into a bad choice for decades to come.
If your plan doesn’t involve retiring now, then you’ll need to think about the potential implications of retiring earlier than planned:
Will you have enough money to last for the rest of your retirement?
How will you make up any shortfall and can you afford to?
Might your dream lifestyle be compromised if your pot needs to go further?
These are all important questions to think about and while we can help you to think about your options, there is no one-size-fits-all approach. Ultimately, we will all need to wait to see what the Budget brings.
Get in touch? We can help.
If you would like to discuss the impact of possible Budget changes on your retirement plans, please get in touch. Email info@credencis.co.uk or call 01158 967 538
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.