Pension tax speculation underlines need to build bigger, more diversified retirement pots

Susannah Streeter, chief investment strategist at Wealth Club, said: “Pensioners have traditionally been seen as a protected class when it comes to tax, but that assumption is looking increasingly fragile as the demographic maths become harder for governments to ignore.

“The tax treatment of pensions is already changing, even before these latest proposals landed. From April 2027, most unused pension funds will be brought into the inheritance-tax net, fundamentally changing the estate-planning equation for people with larger pension pots.

“Now the Institute for Public Policy Research reckons National Insurance should be extended to pensioners. Although this isn’t government policy, and savers shouldn’t treat every think-tank proposal as a preview of the next Budget, it’s still a useful reminder that the tax treatment of retirement wealth is increasingly a moveable feast for governments increasingly famished for funds.

“As the population ages, governments will face growing pressure to raise revenue to fund pensions, healthcare and social care. That means the debate over who carries the tax burden is likely to become increasingly contentious and older people with substantial assets may find themselves more firmly in the sights of policymakers.

“The best response isn’t to try to predict the next tax raid, as that risks making expensive mistakes. Instead, it’s best to make sure you are building a retirement pot that is big enough and diversified enough to give enough ballast for the future.

“For younger and mid-career workers in particular, there are some relatively simple steps that can make a substantial difference.

“First, check exactly how much your employer is prepared to contribute and make sure you are taking full advantage of any matching scheme. Turning down an employer contribution can effectively mean leaving part of your pay package on the table.

“It’s also worth resisting the temptation to stop pension contributions when household finances become tighter, if that can reasonably be avoided. And when you receive a pay rise or a bonus, consider directing at least part of the sum towards your pension before it simply evaporates into home improvements or flashy holidays.

“Time is one of the most powerful ingredients in retirement planning because contributions made early have longer to benefit from investment growth and compounding. It can therefore be more effective to steadily increase contributions over a career than to leave the heavy lifting until the final years before retirement.

“Once an appropriate emergency fund and short-term savings are in place, investors need to think about the growth opportunities available to them and whether their portfolios are sufficiently diversified.

“For experienced investors who can tolerate higher levels of risk and less liquidity, private markets can play a role here.

“Private equity, private credit, infrastructure and other private assets in a SIPP (a self-invested personal pension) can give investors exposure to companies and assets that aren’t available through traditional listed markets, putting even more eggs in the retirement basket.

“Building a substantial retirement pot is ultimately about having more levers to pull. If tax rules change, markets turn volatile or retirement lasts longer than expected, a well-diversified portfolio can give investors more flexibility and room for manoeuvre.

“Practical steps investors can take now to bolster a pension:

“1. Capture every pound of employer matching. Check your workplace scheme and establish the maximum contribution your employer will match. Employer matching can add significantly to retirement savings.

“2. Don’t leave contribution gaps unnecessarily. Opting out of a workplace pension can mean giving up employer contributions, while even relatively small increases in contributions can compound over many years.

“3. Increase contributions when your salary rises or you receive a bonus. Directing some of a pay increase into your pension can increase long-term savings without feeling like a reduction in existing spending power.

“4. Review your pension regularly. Don’t simply pay into a pension and forget about it. Check charges, investment performance, asset allocation and whether the portfolio remains appropriate as your circumstances change.

“5. Invest for the long term. Retirement portfolios typically have a multi-decade horizon, so investors should consider the potential for long-term capital growth rather than focusing excessively on short-term market movements.

“6. Diversify beyond traditional assets where appropriate. Experienced investors with sufficient assets, a long-time horizon and the ability to tolerate illiquidity may wish to consider private equity, private credit, infrastructure and other private-market investments alongside listed equities and bonds.

“7. Don’t mistake tax efficiency for diversification. A portfolio shouldn’t be built around the assumption that today’s tax treatment will remain unchanged. Tax-efficient wrappers remain important, but the underlying investments and the overall spread of risk matter too.

“8. Keep accessible savings outside the pension. Pension money is generally inaccessible until the minimum pension age, so investors should retain sufficient readily accessible savings for emergencies and shorter-term needs.”