More savers maxing out annual allowance and taking tax-free cash

• The number of ii SIPP customers contributing the maximum £60,000 into their SIPP is up 64% since the start of the tax year to 23 September 2024, compared to the same period in 2023
• ii has also seen 58% and 31% year-on-year increases in the volume of tax-free cash withdrawals from SIPP accounts and one-off contributions in September (to 16 September), respectively.

interactive investor, the UK’s second-largest DIY investment platform, has seen a marked increase in the number of savers maxing out the annual pension allowance, withdrawing tax-free cash from SIPP accounts, and making one-off contributions amid speculation of changes to the pension regime in the October Budget.

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The number of ii customers contributing the maximum £60,000 into their SIPP is up 64% since the start of the tax year to 23 September, compared to the same period in 2023.

ii has also seen a 58% increase in the volume of cash withdrawals from SIPP accounts that make up part or all of the 25% tax-free lump sum allowance in September (to 16 September), compared to the same period in 2023. Meanwhile, the volume of one-off contributions - excluding regular monthly contributions - jumped by 31% over the same period.

The government has warned that ‘tough decisions’ will be made in the upcoming Budget as part of efforts to plug a £22 billion black hole in the public finances. While the government has pledged not to increase income tax, VAT, and national insurance, it has notably not ruled out changes to the pension regime. This has led to speculation that changes to pension tax relief and private pension contributions could feature in the Budget.

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Against this backdrop, ii has also seen a significant increase in queries relating to pension benefits and tax-free contributions allowance, most with a sense of urgency and direct references to fears of a change in the pension regime after the Budget.

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “With the swirling rumours of changes to the UK pension regime, it’s understandable that many might feel a bit jittery about the future of their retirement savings. However, it’s crucial not to let speculation drive hasty and irreversible decisions when it comes to your pension.

“Pensions are inherently long-term investments, and their benefits, like tax relief on contributions and potential employer matches, are designed to grow over time. Knee-jerk reactions to unverified rumours can lead to costly mistakes, such as unnecessary charges or missed growth opportunities.

“Remember, any significant policy shifts typically go through extensive consultations and legislative processes. This means you'll likely have ample time to understand and adapt to any confirmed changes.

“It’s wise to keep an ear to the ground, staying informed about potential changes. But more importantly, base your decisions on solid financial advice and verified information.”

Focus on fundamentals, not speculation

“Avoid making rash decisions based on speculation and focus on the fundamentals. The need to ensure you have enough money in your retirement nest egg remains crucial whether or not changes to the pension regime are announced in the upcoming Budget. 

“It remains important to ensure you’re making adequate contributions to your pension to meet your long-term retirement goals. As ever, portfolio diversification and spreading your investments across different asset classes can help manage risk and improve potential returns.”

Potential impact of making use of 25% tax-free lump sum too soon

“Taking a tax-free lump sum, of up to 25%, reduces the amount of money in your pension pot, which will decrease the amount available for your retirement income. The remaining 75% of your pension pot, when accessed, would be subject to income tax at your marginal rate, meaning any withdrawals or annuities purchased with the remaining pension could be taxed as regular income.

“By taking out a big lump sum, you also reduce the amount that could potentially grow with investment returns, which could have a profound impact on the total value of your pension pot over time.

“It is worth consulting a qualified financial adviser before making any decisions about taking a lump sum to help you understand the long-term implications for your retirement planning.

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"Once you start drawing a pension income, you need to be careful because your pension allowance may be reduced. Usually, the maximum amount you can pay into a pension each year and get tax relief is £60,000, but if you start taking taxable income, the Money Purchase Annual Allowance (MPAA) is triggered, which lowers your annual allowance to £10,000, including employer contributions. This could have a big impact as you won’t get any tax relief on payments over this amount.

“However, the MPAA isn’t triggered if you only draw tax-free cash or buy a lifetime annuity. So if you plan to continue beefing up your pension savings, the choices you make here are crucial.

“Remember, pensions are a marathon, not a sprint, and a well-considered strategy will serve you better than reactionary moves.”