Retirees pull billions from pension pots to escape Reeves's tax raid
Official figures showed 672,000 retirees, representing roughly 5pc of all pensioners, pulled £5bn from their pots in the first three months of this year.
HM Revenue and Customs (HMRC) said the amount taken from retirement funds was 25pc higher than the same quarter a year ago, with 13pc more people withdrawing money.
It means withdrawals during the period were the highest since George Osborne introduced pension freedoms a decade ago.
It comes after the Chancellor announced in her maiden Budget last October that pension pots would no longer be exempt from inheritance tax from April 2027, making them subject to a levy of up to 40pc.
Baroness Altmann, a former Tory pensions minister, urged the Chancellor to reverse the policy, warning that many more people would choose to withdraw money from their retirement pot as soon as possible, creating a 'pensioner poverty time bomb'.
Sweeping changes mean retirees can now withdraw unlimited amounts from their pot as soon as they hit 55.
The figures also revealed a 50pc increase in the number of octogenarians taking money out of their pensions over the course of last year with the amount withdrawn by those aged 81 and over up by 80pc to £360m.
'It's a disaster'
The Chancellor hopes to raise £1.5bn from her decision to bring pensions within the scope of inheritance tax.
Pension withdrawals from defined contribution pots above the 25pc tax-free lump sum incur an income tax charge of 20pc for basic rate taxpayers and a 40pc levy at the higher rate.
The changes mean heirs will be subject to both inheritance and income tax at the marginal rate from 2027.
'It's a disaster,' Lady Altmann said, adding that she expected withdrawals to accelerate as more people became aware of the looming inheritance tax charge.
She added that the 'draconian' way the policy was introduced was storing up a crisis for the future, and said she was pushing for changes in the Lords that would see beneficiaries charged a maximum 20pc 'pension recovery tax' instead on inherited pots.
Lady Altmann said: 'This policy could end up being as damaging to workplace pensions as Gordon Brown's tax rate was for DB [defined benefit] pensions.
'I honestly think this is an existential threat to the long-term survival of our DC [defined contribution] pensions, because there's a clear incentive to take the money out as soon as you possibly can.'
She added that this would leave many middle-class families in danger of not leaving themselves enough to fund their retirement.
Lady Altmann said: 'This IHT [inheritance tax] imposition will ensure that more and more people – especially those who don't have massive amounts of money – will just say, 'Why on earth would I want to lose two thirds of my pension to the taxman? I'll just take it out as soon as I can.'
'Those who build up, say, between £200,000 and £300,000 over their working life are now in danger of having a real financial incentive not to keep money in their pensions for their later life and then end up in poverty.'
'Taking a big hit'
Guy Opperman, another former pensions minister, said: 'Pensions are taking a big hit from the Government's actions.
'The consequences of this policy are clear: people will save less for their pension and will withdraw more. This will also affect the ability to pass money on. There is time for the Government to think again and they should. It is very short-term.'
Jamie Jenkins, director of policy at pensions giant Royal London, which manages more than £170bn of client cash, said there was already clear evidence that people were changing their retirement planning ahead of the changes.
He said: 'There is increased interest from advisers and their clients in how they can mitigate the potential inheritance tax bill.'
Claire Trott, at wealth managers St James's Place, added: 'Every individual's circumstances are different, but IHT changes to pensions have certainly triggered more conversations about gifting strategies and whether it makes sense to start drawing from pensions earlier.'
An HM Treasury spokesman said: 'We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth – and more than 90pc of estates each year will continue to pay no inheritance tax after these and other changes.'
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