Will ‘Budget anxiety’ fuel non-advised pension withdrawals?

The upcoming Labour Budget, scheduled for 30 October, marks the party's first in 15 years. 

At the Labour Party Conference in late September, both Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves sought to reassure the public by promising that there would be “no return to austerity.” However, with the well-known £22 billion deficit that Reeves attributed to the previous government, it was also made clear that reducing this shortfall would involve sharing the burden “fairly,” with those “who have the broadest shoulders bearing the largest load.”

No return to austerity, but who will shoulder the burden?

It may be difficult to reconcile this statement with the proposed means-testing of the winter fuel allowance, especially given the relatively low threshold set for pensioners. Nevertheless, the Labour Party’s manifesto commitment to avoid raising Income Tax, National Insurance, VAT, or Corporation Tax suggests that other forms of taxation are likely to be targeted. Capital Gains Tax, Inheritance Tax reforms, and changes to pensions tax relief and tax-free cash are widely speculated as possible areas for adjustment.

With these potential tax changes looming, and Starmer's recent remarks warning that the Budget will bring “painful” measures, there’s a growing sense of uncertainty. This atmosphere of apprehension, particularly stirred by right-leaning media outlets, is already causing concern among pension holders.

FCA data shows rise in non-advised pension withdrawals

"The number of pension arrangements accessed for the first time rose by 19.7% year on year, from 739,652 in 2022/23 to 885,455 in 2023/24."

Coinciding with this pre-Budget speculation, the Financial Conduct Authority (FCA) recently released its latest data on the retirement income market, covering April 2023 to March 2024. The findings are striking: the number of pension arrangements accessed for the first time rose by 19.7% year on year, from 739,652 in 2022/23 to 885,455 in 2023/24.

What stands out is that cash lump sums were the most common way people accessed their pensions for the first time. In just the first quarter of 2024, 231,976 out of 450,851 individuals chose to take their pension in one lump sum. Even more concerning, 70% of these decisions were made without any professional financial advice.

Fear of the unknown: could budget worries lead to rash decisions?

With the Budget just around the corner and uncertainty hanging in the air, there’s a risk that fear of unknown policy changes could lead to even more people rushing to withdraw their pension funds. Many may act simply out of concern that if they don’t, they’ll regret it later.

We’ve seen this kind of fear-driven behaviour before. During my time as a financial adviser, I recall the lead-up to a coalition government Budget where rumours spread that tax-free pension withdrawals might be scrapped. One of my clients, who held Fixed Protection 2012, was anxious to withdraw the maximum tax-free cash available “while they still could.” After a lengthy conversation, I was able to explain the tax consequences that such a decision might trigger, and they ultimately decided not to act. When the Budget arrived, the tax-free cash rules remained unchanged.

Why advice is crucial in times of uncertainty

"As we approach Budget Day, it’s becoming increasingly clear that pensions will face significant changes."

This is precisely why professional advice is so crucial. It can stop individuals from making rash, irreversible decisions based on unregulated, fear-mongering sources. Without proper guidance, many risk making choices that may not be in their best interest, especially in times of uncertainty.

Yet, if there ever was a politically strategic moment to implement difficult policies, it is early in a government’s tenure, especially with a solid parliamentary majority. The Labour Party is currently in such a position. While many Budgets allow the Chancellor to highlight their party’s achievements, this one may well chart a different course.

As we approach Budget Day, it’s becoming increasingly clear that pensions will face significant changes. For those nearing retirement or considering withdrawals, seeking advice will be more critical than ever to navigate what could be a pivotal moment for the future of pensions policy.