Savers max out pension pots as tax raid looms

Savers are maxing out their pension contributions amid fears Rachel Reeves could slash the amount they can pay in tax-free.

Currently, most people can pay the lower of £60,000 or their full salary into their retirement pot every year while still benefiting from pension tax relief.

However, the Chancellor is expected to target retirees in her inaugural Budget on October 30, with cuts to pension tax relief believed to be one policy under consideration.

Interactive Investor, an investment platform, said customers contributing the £60,000 maximum into their self-managed pension pots had jumped by 64pc since the start of the current tax year in April, compared to the same period in 2023.

It also recorded a 58pc increase in the volume of tax-free cash withdrawals from self-invested personal pensions (SIPPs) since September 1 compared to the same period last year.

These withdrawals contribute towards the 25pc “lump sum” a retiree is entitled to take from their pension pot tax-free, up to a maximum of £268,275. Ms Reeves has been urged to cut this allowance to £100,000.

Interactive Investor said “pre-Budget pension jitters” were behind the figures.

Former chancellor Jeremy Hunt boosted the tax-free “annual allowance” from £40,000 to £60,000 for most earners last April.

There are different annual allowance rules for higher earners. The annual pensions allowance reduces by £1 for every £2 earned over £260,000. This “tapered” allowance keeps falling until it hits £10,000 a year.

The self-employed are entitled to all the same tax reliefs on pension contributions as employed people.

Ms Reeves is also understood to be reviewing plans to introduce a flat 30pc rate of pension tax relief. This would act as an effective 10pc tax on a higher-rate taxpayer’s pension contributions.

Jason Hollands, of wealth manager Evelyn Partners, said middle-class savers would be hardest hit if Labour cuts the annual allowance.

He added: “There’s been a lot of talk about getting rid of different rates of tax relief, which would be complicated to implement.

“Perhaps a quicker way of reducing tax relief on contributions could be to reduce the gross annual allowance, which was significantly increased recently. This can’t be ruled out.

“Some clients are making big pension contributions either because they fear the annual allowance will come down or tax reliefs might be pared back.

“If you’re in a position to make a £60k contribution, you may well have a large salary. But you have to remember that the very wealthy are subject to the annual allowance taper.

“Very often the people making big contributions are approaching retirement in their mid-50s who have underfunded pension contributions for years - like small business owners playing catch-up.”

David Gibb, of wealth manager Quilter Cheviot, said the number of conversations about pension relief he was having with clients had “massively increased” over the last two months.

He told The Telegraph: “There’s a potential double-whammy going forward – cutting the lump sum and trimming pension tax relief.

“We don’t know if any changes to the annual allowance would be effective from Budget day or from the next tax year, so it’s best to get it in before. If you put £60,000 before the Budget, then you’re locked in.

“It will be the well-off, but not the very wealthy, who lose out – people with salaries of £150,000 to 250,000.

“The big earners can only pay in £10,000 a year anyway, and the man on the street would not be able to contribute £60,000.”

The Treasury was approached for comment.