Simon Harrington, Head of Public Affairs at PIMFA, the trade association representing wealth managers and financial advisers across the UK, has shared his thoughts on pension reforms speculation.
Endless speculation about changes to pension rules – particularly the future of the 25% tax-free lump sum – is already having a real and detrimental impact on consumer behaviour. While we recognise that managing speculation is outside the Government’s direct control, every Budget season brings a slew of articles predicting changes to pensions taxation, but in the last two years this has become more acute than ever.
Last year, many people made decisions to unnecessarily access their tax-free cash based solely on headlines. This decision has proved irreversible for them and will impact their future pension saving ability.
The latest FCA data shows that in 2024/25, the number of pension plans entering drawdown where only the tax-free lump sum was taken surged to 111,878 – up 13% in just six months, 33% compared to last year, and almost double the levels seen five years ago. At the same time, the overall value of withdrawals jumped by 35.9% year-on-year to £70.9bn. This shows a clear trend, that people are pulling money out earlier, and in greater sums, than they otherwise might – behaviour that could have serious long-term consequences.
Taking the 25% reduces the invested balance, depriving the consumer of much needed investment growth in the ten years or more up to their State Pension age. This could be equivalent of up to five years of the average state pension income.
Persistent uncertainty around pension reforms undermines confidence and prompts behaviour that risks impacting people’s financial futures. What’s more, even if reforms were decided upon, changes would likely not take effect immediately, giving savers time to adjust. But speculation alone is already driving short-term decisions that could leave people worse off in retirement.
This uncertainty, coupled with actual policy interventions such as the plan to levy IHT on pension funds runs the risk of further discouraging people from in investing in pensions. Pensions are long-term savings vehicles, and we urge the Government to do what it can to encourage long-term certainty.
Investors need certainty about how wealth can be treated in accumulation and decumulation and the Government should set out a clear taxation roadmap in pursuit of its mission to drive economic growth. But we are also mindful of the responsibility which lies with industry and the wider ecosystem. We would also caution against continued unfounded speculation – before further detriment is caused to the financial futures of millions.
