Savers are making rash decisions with their money as the spectre of the Budget next month looms, experts warn.
Fears that key personal taxes could be hiked and tax-free benefits slashed are prompting people to take knee-jerk decisions that aren’t in their best interests and that they may come to regret.
Experts warn people are making gifts to loved ones they can’t afford, rashly taking cash from their pensions and needlessly selling assets because they are worried about what the Autumn Budget could contain.
Sarah Coles, head of personal finance at stockbroker Hargreaves Lansdown, says: ‘I’m worried that people could make mistakes that risk leaving them worse off overall in the run up to the Budget. There is a concern that people are taking decisions based on fear of rumours.’
These are the five biggest mistakes people are making with their money ahead of the Budget, as revealed by financial experts – and what you should do instead.
Rumours are swirling that Chancellor Rachel Reeves could cut the maximum amount that you can take from your pension as a tax-free lump sum for next month’s Budget
Taking your pension tax-free lump sum if you don’t need it
Rumours are swirling that Chancellor Rachel Reeves could cut the maximum amount that you can take from your pension as a tax-free lump sum.
Currently if you have a private pension you can access your money at 55 – rising to 57 from April 2028 – and can withdraw 25 per cent tax free, up to a maximum of £268,275. But experts fear the Chancellor could curb the tax-free amount.
Pensions minister Torsten Bell previously called for a £40,000 cap while he was head of Left-wing think-tank the Resolution Foundation. Pension specialists say a more likely figure is £100,000, although this could be phased in rather than introduced overnight.
It would mean pensioners with a pot of around £400,000 would have their tax-free cash entitlement cut.
Sarah Coles, at Hargreaves Lansdown, says: ‘I’m worried that people could make mistakes that risk leaving them worse off overall in the run up to the Budget’
As a result, fuelled by panic, savers have been rushing to take out their pension’s tax-free lump sum.
Andy Gillett, director and head of wealth management advice at BRI Wealth Management, told Money Mail: ‘Just this morning we’ve had two or three enquiries about taking the pension tax-free lump sum and generally we get two or three a week.’
However, it could be a mistake to take your pension tax-free lump sum if you do not yet need the money, and are acting purely on the basis of speculation about what will happen. The decision is irreversible.
If you take money out of your pension and invest it elsewhere, it could become subject to taxes such as capital gains and dividend tax, from which it was previously protected. If you put your money into a current or savings account, you deny yourself the opportunity of further growth from investing as you would enjoy in a pension. And if you keep it in cash savings the interest could incur tax.
Jason Hollands, a director of wealth manager BestInvest, says: ‘We’re coming across plenty of people who are wanting to take their tax-free money based on pure speculation.
‘Some clients who had intended to leave their pension are now looking into taking their money.’
‘Of course, there are some perfectly good cases for taking your pension tax-free lump sum, such as if you are over 75 and need to draw down money in the short term.
‘Or if you had planned to spend it soon anyway, for example to clear remaining mortgages and other debts, move house or carry out home renovations, buy a new car, or a long-anticipated holiday.
‘However, it is not a decision to make in a hurry. Taking advice first can be invaluable, and it is rarely a good idea to act based on Budget speculation if there are no other reasons for cashing in.
Some people have stopped paying into their pensions because they are worried the tax-free lump sum could become less generous
Being put off paying into a pension
Fears that pensions could come under fire in the Budget are discouraging savers from funnelling much-needed money into these valuable savings vehicles, according to financial experts.
Some have stopped paying in because they are worried the tax-free lump sum could become less generous. Others are put off paying into a pension because they fear pension tax relief could be watered down.
Pension tax relief allows you to save into a pension free of income tax. That means for every £80 that a basic rate taxpayer pays in from their post-tax income, it is topped up to £100.
Higher and additional rate taxpayers need only pay in £60 and £55 respectively to have a total of £100 go into their pension.
There are fears the Chancellor could create a flat rate of tax relief at 30 pc. This would hit higher earners.
‘There’s no reason to hold back and people should make the most of their pension,’ says Mr Hollands. ‘I actually don’t think the Government will change the pension tax-relief.’ He adds that wealthy savers are most commonly cutting back their pension savings ahead of the Budget as they would be most adversely affected by any changes to the tax-free lump sum rules.
Jason Hollands, a director of wealth manager BestInvest, says: ‘Don’t hold off from using your Isa allowance. Even if nothing changes in the Budget make as much use of Isas as you can’
Not using your full Isa allowance
Savers with cash that they could put into their Isas could regret not doing so now ahead of any changes to the Isa regime in the Budget.
Ms Reeves was widely expected to announce plans to slash the £20,000 maximum that you can put into a cash Isa every tax year in her Mansion House speech in July to as little as £4,000.
This was put on pause after a furious backlash from MoneyMail and building societies. However, there is every chance that she could revive this plan in November.
Ms Coles says: ‘There’s still the chance we could see tweaks to Isas proposed in the Budget. Cuts to the cash Isa limit have yet to be completely ruled out.’
Therefore savers should take advantage of their allowance while they can. Even if the rules do not change, there is no downside as money stashed in a cash Isa is protected from tax on interest.
Cash savings held outside of Isas attract interest at your marginal income tax rate once you’ve exceeded your allowance. Basic rate taxpayers can earn £1,000 in interest before paying tax, higher rate taxpayers have £500 and additional rate taxpayers have no allowance.
But it is a use-it-or-lose-it allowance as you can’t carry it over into next year if you don’t use the full limit.
Mr Hollands says: ‘Don’t hold off from using your Isa allowance. Even if nothing changes in the Budget make as much use of Isas as you can.’
> The essential guide to Isas: What you need to know about tax-free saving
Inheritance tax gift limits haven’t changed since the 1980s but you should still use them
Not making the most of gifting allowances
One option the Government is thought to be exploring is a cap on the financial gifts you can make during your lifetime without attracting inheritance tax.
At the moment, you can give away whatever you like so long as you survive for seven years after making the gift.
You can also give away up to £3,000 worth of gifts with no risk of attracting an inheritance tax bill even if you do not survive for the seven years.
If you have gifts that you plan to make anyway, it may make sense to consider making them now rather than waiting. Whether or not there are changes in the Budget, you will still have started the clock ticking on the seven-year rule.
However, don’t make gifts that you can’t afford or would not have made anyway that you may come to regret if the rules remain unchanged.
Another inheritance tax allowance to consider is a special exemption that allows you to make unlimited gifts so long as you make them from surplus income rather than capital and you hand them over on a regular basis.
You will need to show that there is a regular pattern behind the gifting and that making the gifts does not impact your standard of living.
If you follow the rules correctly, gifts made in this way should fall out of your estate of inheritance tax purposes immediately and are not bound by the seven-year rule. A financial adviser can help you ensure these gifts are watertight.
Rosie Hooper, a chartered financial planner at wealth manager Quilter Cheviot, says: ‘People who have surplus cash coming in should be thinking about gifting out of surplus income.
‘If you have surplus cash to pass down, this is a way that you can cascade wealth without it being caught in the inheritance tax net.’
Remember that your estate will only attract inheritance tax if it is worth more than £325,000 – or £650,000 for a married couple and up to £1 million for a couple passing down a family home to direct descendants. Any wealth above these allowances is taxed at 40 pc.
Realising gains when you weren’t already planning to
Capital gains tax could be caught in Chancellor Rachel Reeves crosshairs in the Budget.
The tax is levied if you make a profit when selling assets such as shares, second homes or personal possessions.
Everyone has an annual capital gains tax-free allowance of £3,000 and the tax is charged on profits above this.
Currently basic rate taxpayers pay 18 pc tax and for higher and additional rate taxpayers, it’s 24 pc. If an asset is sold on your death, capital gains tax is not charged – but inheritance tax may be payable if you have exceeded your inheritance tax allowances.
There have been suggestions of a potential shake-up to capital gains tax, including an increase to the rates and scrapping the rule whereby your capital gains tax liability dies with you.
Financial experts warn that some people are rushing to sell assets now over fears that they could face a higher tax bill if they wait until after the Budget and the rules change.
Mr Gillet says: ‘We are seeing people selling property and share portfolios to the extent that we’re putting information together internally to send to clients.
‘I don’t think it’s a disastrous idea if you were planning on realising those gains anyway but if you are making decisions to sell assets purely based on speculation that is a mistake.’
Ms Coles adds: ‘Rumours around possible changes to capital gains tax can force people to rush into selling up.’
She says that the amount that people paid in capital gains tax soared in the run up to last year’s Budget over fears that the tax rates would become even more punitive. Although rates did increase for those selling assets such as shares and belongings, they did not rise for those selling second homes.
Ms Coles adds: ‘For landlords who decided to sell up, they reacted to a tax hike that never came, and the exodus of landlords from the rental market has caused huge headaches for tenants.’
There is one step that you could take ahead of the Budget that could benefit you whether or not the rules change. If you hold shares outside of tax-friendly Isas and pensions, you could take £3,000 of investment profits between now and the Budget, escaping capital gains tax altogether (provided you haven’t taken any gains earlier in the tax year).
You could simply bank the proceeds – or you could sell the shares and then buy them back, resetting their purchase cost for future capital gains tax assessment.
If you do this, you must wait at least 30 days before buying back the shares.
An even better approach is to sell shares with gains under the £3,000 annual tax-free allowance, and then buy them back in a stocks and shares Isa where future profits are free from capital gains tax (and, just as importantly, future dividends are protected from dividend tax).
The provider of your Isa should do all the hard work for you.
With these so-called ‘bed and Isa’ transactions, the 30-day rule does not apply – although the repurchase will attract a trading fee and 0.5 pc stamp duty. The amount going into the Isa will count towards your annual Isa allowance of £20,000.
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