City warns Chancellor of 'catastrophic' pension tax raid

City officials are warning Rachel Reeves of a damaging tax raid on pensions as she struggles to keep her budget adding up.

Senior officials, including St James's Place directors AJ Bell and Quilter, told the Mail that an attack on pension funds would be “catastrophic” for savers.

They said uncertainty over the Chancellor's plans was already causing “panic” and worried savers were making “knee-jerk decisions that could jeopardize long-term financial security”.

Of particular concern are proposals to reduce the lump sum that workers can withdraw from their pensions tax-free.

Michael Summersgill, chief executive of investment platform AJ Bell, said: “Rumours about potential cuts to tax-free funding are hugely damaging and have the potential to fundamentally undermine the confidence of millions of people saving for their retirement.”

He warned that such a move would be “disastrous”.

Reeves is understood to have abandoned plans to cut tax breaks on pension contributions paid by higher rate taxpayers. But Treasury officials are considering reducing the tax-free allowance, which would devastate the retirement plans of those affected.

Most savers can take 25% of their pension when they turn 55, up to a maximum of £268,275. However, this could be cut in the budget to £100,000 in an attempt to raise around £2 billion for the taxman.

Steven Levin, chief executive of wealth management firm Quilter, said: “We are seeing more clients considering premature withdrawals tax-free in their pensions. This reaction is driven by fears of reduced limits and highlights the urgent need for clarity from the government.

“The current uncertainty is causing knee-jerk decisions that could jeopardize long-term financial security.”

His comments were echoed by Mark FitzPatrick, chief executive of St James's Place, who said: “There is growing concern around this topic. We believe this is a concern for consumers as withdrawing funds from a pension tax-free often means missing out on potential pension benefits.

Other proposals being considered include forcing companies to pay National Insurance on the money they contribute to pensions on behalf of employees – which critics say will result in lower wages and reduced employer pension contributions. The Chancellor also intends to impose an inheritance tax on pension funds as he struggles to raise money to cover his cash-strapped spending promises.

The point was highlighted this week by Jeff Prestridge in the Mail, and last night critics urged Reeves to explain her plans.

FitzPatrick said: “Stability, transparency and clarity are crucial for British consumers as they plan for their future, which is why we urge the Chancellor to deliver a budget on pension taxation.”

Helen Morrissey, director of pensions research at Hargreaves Lansdown, said: “Pensions are a long-term game and people need the certainty of the system if they are to plan safely.”

Noel Butwell, chief executive of Abrdn Adviser, said: “Taking tax on pensions is no way to foster a saving culture, especially when the government is trying to boost investment in pension schemes.”

He warned that reducing the tax-free lump sum “would only undermine consumer confidence in pensions at a time when more people need to take responsibility for their financial future”.

Craig Rickman, pensions expert at Interactive Investor, said: “People save hard for retirement, assuming they can take a certain amount from their pension tax-free. If a decision is made to reduce this number, many people may understandably feel that the rug has been pulled out from under them.”

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