Why you should never base decisions on speculation

Pension platforms saw a surge in client requests to withdraw money ahead of the most recent budget as clients feared their tax-free lump sums were at risk. It’s a classic example of why we should never base decisions on speculation.

When hard facts are in short supply, rumours run free – and the decisions we make aren’t always the best ones.

That was certainly in evidence ahead of the most recent budget. With very little news to go on – other than concern that there would be bad news – some tried to second guess what the Chancellor would do, and made changes to their finances ahead of any announcement.

Take pensions. According to analysis by Bestinvest, pension withdrawal requests more than doubled in October, compared with the same period in 2023.

One reason for this sudden increase was that people were worried their 25% tax-free lump sum was under threat. It was strongly suspected ahead of the budget that Rachel Reeves would drop the threshold. Of course, when she announced her budget, the Chancellor left pensions largely untouched.

Hindsight is 20/20, but that doesn’t make it any less frustrating if we’ve acted in haste and can’t undo our decision.

Did you lose out on Fixed Protection?

Some clients did come to us before the budget wanting to withdraw just in case the changes came into place. But we were careful to highlight the potential pitfalls and explain why it’s never a good idea to act based on rumour instead of solid information as we discussed in our previous article.

Firstly, whether the money you draw down is tax-free or not, taking it out at the wrong time could mean you’re left with a chunk of capital you don’t need. You might also then lose out on the growth it could have been accruing, making that final pension pot less valuable.

But there’s another reason we’d have said clients should consider pausing. If, like many private pension holders, they had Fixed Protection, they were already covered.

A reminder. What is Fixed Protection?

Fixed Protection was originally created to protect those whose savings exceeded the lifetime allowance (LTA) limit, allowing them to fix their allowance at the old value. The LTA was officially scrapped in April this year, but the protection still applies to the higher lump sum allowance and lump sum and death benefit allowance.

There are three version of Fixed Protection depending on which year the protection has been fixed to: FP2012 gives individuals a protected allowance of £1.8 million; FP2014, £1.5 million; and FP2016 at £1.25 million. You can still apply for Fixed Protection to the 2016 level up until 5 April 2025.

We believe there will be many who have Fixed Protection but aren’t necessarily aware of this, so some of those who withdrew a lump sum early – either unadvised, or whose advisers failed to spot it – may have taken action unnecessarily.

Unfortunately, you can’t turn back time. Once the protection has been used up, it’s gone for good.

What happens if I’ve already withdrawn a lump sum?

It’s not all bad news. If you have withdrawn a tax-free lump sum for the first time before the budget, it’s possible to cancel if you’re within the 30-day cooling off period.

If you’re about to panic, press pause and speak to us

For us, the weeks of rumours ahead of the budget were a good example of how a lack of real information can lead to panic among investors. Sometimes taking action that feels like self-preservation, can actually be self-harm.

As another example, we’ve also have seen clients ask about the benefit of selling off second homes to avoid the change in capital gains tax.

The answer as to whether you should do something is usually “it depends”. If it’s something you were going to do anyway, or it’s already part of a well-structured plan, then yes. If it’s a complete change of direction, then there may be a better way to consider.

The benefit of having a financial planner is we can help you look beyond the headlines to show you what these things mean in reality. And then we help you make a decision that’s grounded in truth and not just speculation.