A personal finance expert has explained how you can mitigate the damage
Anyone with a pension or savings needs to take action now to protect their future finances after a Rachel Reeves ‘ U-turn, a personal finance expert has said. People who feared the Government was about to launch a raid on pension tax-free sums took a large chunk of money out of their pension pots ahead of the Budget coming this month.
But the Treasury has ruled out the move, leaving people with thousands of ppunds in cash and a hole in their pension funds., Laura Purkess, a personal finance expert, has warned that it is too late for thousands who have already withdrawn their money – but there are steps you can take.
Laura Purkess, at financial education specialists Investing Insiders, said: “It’s great to hear the government confirm it won’t touch tax-free cash at the Budget. It would have been hugely unpopular and would not have raised nearly enough revenue to justify the outrage.”
She continued: “However, it comes as too little too late for the many thousands of people who have already reacted to speculation around this subject, which the government has thus far failed to quash with any urgency.”
She added: “Taking your tax-free cash out is likely to damage your finances more than help them long-term. Once you take this money out of your pension, it stops growing in a tax-free environment, and you have significantly dented your pension pot, meaning lower compound growth in the future.”
Laura also explained that for anyone who has already taken their tax-free lump sum out, there are a few important steps they can take with that money. She said: “First, it’s important to know that you can potentially put some money back into your pension. However, the tax implications of future contributions or withdrawals will change.
“If you have taken out any more than your 25 per cent tax-free lump sum, you will only be able to put £10,000 back into your pension per year (down from £60,000) while benefitting from pensions tax relief.”
She continued: “This is called the Money Purchase Annual Allowance, and means anyone who is basically drawing on their pension sees their future tax-free contributions capped significantly lower than other savers.”
Laura pointed out the issues that savers need to be aware of if they have taken their lump sum. She said: “If you have only taken your tax-free cash, you may be able to put more than this back in, but beware of falling foul of HMRC’s pension recycling rules (where you take cash out of your pension then put it back to generate double tax relief). You would need to be able to demonstrate that you were not putting the money into your pension to benefit from extra tax relief, which may be difficult to prove.”
She added: “Also, be aware that putting the cash back will not mean that you can take it back out again tax-free. Any future withdrawals will be taxed at your marginal rate of income tax.”
For those who want to maximise their returns on the withdrawn money, Laura explained the options they have available to them, and how they should consider investing the money in an ISA. She said: “It’s a good idea to focus on spending your tax-free cash before taking any more money out of your pension. In the meantime, put as much of the cash as possible into an ISA so that the returns or interest are tax-free. You can currently put £20,000 a year into either a cash ISA, a stocks and shares ISA, or a mixture of both.”
She continued: “For the remaining savings, make sure you’re getting the best interest rate possible or, if you don’t need the money imminently, consider investing it. The stock market has historically outperformed money held in cash long-term.
“However, for those approaching retirement in the next few years, consider opting for lower-risk investments and keeping some money in cash. Some stocks and shares ISAs or investment platforms will offer lower-risk portfolios tailored for people nearing retirement.”