Pension companies are being overwhelmed with calls and emails as the over-55s withdraw money from their pension plans in case Reeves curbs one of the most popular pension benefits all.
As we know, Reeves loves a freebie as much as any member of Labour’s front bench. But she isn’t so keen if ordinary people are the beneficiaries. Targeting the tax-free pension lump sum would spark fury.
We don’t know whether she’ll do it yet, but pension savers aren’t taking any chances as rumours swirl.
It’s another example of how PM Keir Starmer‘s warnings about the misery Labour will inflict on taxpayers in its Halloween Budget on October 30 is causing chaos.
Pension providers including Standard Life, AJ Bell and Royal London are now struggling to process a “stampede” of withdrawals ahead of the Budget, according to The Daily Telegraph.
Tom McPhail, of pensions consultancy the Lang Cat, warned of a“bottleneck” as savers overwhelm customer service teams with questions.
He said Labour has “created a context of uncertainty, discomfort and fear”, triggering the panic.
Worryingly, McPhail said curbing tax-free cash is “quite an easy lever to pull”, which means it could top Labour’s tax hit list.
So what’s Labour planning?
Tens of millions who have saved into a company or personal pension are free to take 25% of their pot entirely free off income tax, from age 55.
People plan their lives around it. Many earmark the money to clear their mortgage and other debts, treat themselves to the holiday of a lifetime, or help younger family members get on in life.
Now that vital source of funding is under threat.
Left-wing think tanks have been urging PM Keir Starmer and Reeves to cap the amount of tax-free cash savers can withdraw.
They claim this will reduce wealth inequality and should form part of a wider tax raid on pensioner wealth. Millions will be furious if Labour listens.
Many don’t even realise there’s already a lifetime cap on how much tax-free cash you can take. It’s set at £268,275, so most don’t go anywhere near it. Reeves has been urged to slash that to £100,000.
That still sounds a lot but anybody with more than £400,000 in their pension will be affected.
If a couple used a £400k pension to buy a joint life index-linked annuity at age 65, they’d get income of just £18,296 a year. Which is hardly riches after a lifetime of saving.
So this isn’t just a tax on the super-rich, as Reeves will pretend if she does it.
Once that £100,000 cap is introduced, we can be sure that it won’t rise for years and years. If it ever does.
This means that every year, more pensioners will fall over the threshold, and lose their tax-free cash.
Once you have taken your tax-free cash, the remaining 75% of your pension withdrawals will be added to your total earnings for that year, and subject to income tax.
No wonder pension savers are in a panic. But they need to tread carefully.
Planning your pension carefully is essential if you are to make the money last for the rest of your life.
Too many already risk drawdown disaster after taking too much money from their pension, too soon.
Panicking and grabbing your tax-free cash in a hurry before October 30 could easily backfire.
I was warning about the dangers only last week.
First, you have to decide what to do with it. If you just stick it in the bank on a low rate of interest, then its value might erode in real terms after inflation.
Worse, the interest you earn could quickly become taxable. Whereas money compound free of tax inside a pension.
These are big decisions, and shouldn’t be made in a rush based on speculation of what a chancellor may do in an upcoming Budget. We never know for sure until the day.
However, as Labour’s tax threats spread panic, people are taking rapid evasive action. This could end badly.
