Chancellor Rachel Reeves is dragging our pensions into uncharted territory (Image: Getty)
Rachel Reeves is rewriting the rules of the pension system. No Chancellor has ever dared go this far. She wants to tell the people managing our defined contribution workplace pensions, where to invest our retirement pots. Tens of millions have these plans. It’s an extraordinary power grab. Under her plan, smaller workplace pension schemes will be forced to merge into so-called “megafunds”, each with at least £25billion in assets.
Reeves claims her plan could boost the average worker’s pension by £6,000. Sounds great. And yes, there are upsides to building large, efficient pension schemes. Economies of scale could cut costs. Members might get access to better-performing investments. But there’s a catch, and it’s a big one. First, that £6,000 figure is highly questionable. No credible investment professional would promise a future return like that.
While there are savings, there will also be added costs. And in the real world, returns depend on markets, not ministers. Reeves isn’t stopping there.
In most workplace schemes, much of the money sits in “default funds”. That’s the standard option when savers don’t choose where to invest. Reeves wants her new pension megafunds to funnel this money into the UK economy. And if pension managers don’t comply, she’ll take legal powers to force it through.
For now, she says those powers won’t be used. But the fact they’re even on the table marks a shift into dangerous, uncharted territory. UK markets have lagged badly in recent years. Pension managers have voted with their feet and gone global, particularly to the booming US.
Forcing money back into underperforming UK assets could give us a bit more growth, so I can see why Reeves is tempted. But it might also drag down returns and make pensioners poorer. There’s another problem. It also risks tying your savings to Labour’s political goals. The job of a pension fund is simple: grow members’ money. Not prop up the British economy. Or keep politicians in power.
That principle is now under threat. Now comes the really scary bit.
Reeves isn’t just setting the framework, she’s picking favourites.
She’s named the sectors she wants your money to go into: infrastructure, clean energy and the fast-growing businesses of the future.
She even claimed her reforms will bring “better returns for workers”. Only someone who doesn’t know much about investing would dare claim that.
Clean energy is volatile and has slumped in recent years. UK infrastructure projects always take twice as long and cost twice as much as planned.
High-growth firms are, by definition, high-risk. Private equity is expensive, illiquid and boom-and-bust.
These investments don’t come cheap either. Pension managers will have to charge higher fees to manage them, which will come straight out of your pot.
Remember, this is a woman who had her credit card taken away from her. Now she wants to decide where your pension is invested.
Reeves is desperate to get the economy growing, but she’s barging in where she doesn’t belong. There’s a reason why no Chancellor has gone this far before. Because no Chancellor should.
HMRC demand letters for people with £3,500 or more in savings account
Anyone with over £3,500 in their savings is being warned (Image: Getty)
People with £3,500 or more in savings are being told they could face an unexpected tax bill letter from His Majesty’s Revenue and Customs (HMRC).
HMRC is able to automatically detect interest on savings generated by your bank account and if you tip over a certain threshold, you will automatically be sent a notice of an extra tax bill. With the new tax year 2025-26 having started in the past month, the taxman has been busy sending out letters to people urging them to register for self-assessment or asking them to pay extra tax.
Because your entire previous financial year is now complete, HMRC is now assessing people’s final situations and issuing tax bills to those who it finds owe money in tax on savings accounts. Such information is automatically reported to the taxman by your bank unless it is in a Cash ISA, which is protected from tax.
The Personal Savings Allowance means you can make £1,000 per year in savings interest without being taxed on it, but this only applies to people earning less than £50,270. If you earn £50,271 or more, your Personal Savings Allowance is cut to just £500. And if you earn £125,000, your Personal Savings Allowance drops to £0.
The exact amount you will owe depends on how much you earn, how much interest you got, and when it was paid out.
But you could be stung with a tax bill with as little as £3,500 in savings if you had placed it into a fixed savings account for three years, because the interest is all paid out in one go in a fixed account, so the interest counts in only one tax year all at once.
If you put £3,500 into a fixed savings account at 5% for three years, you will earn more than £500 in interest. With fixed accounts, the interest is “crystallised” the moment the interest is paid out and you receive all the interest at once. So if you put it away for three years, the money is paid out all in one go at the end of that three-year term.
With just over £500 being paid out at once, you would go over your £500 Personal Savings Allowance even without taking into account any interest from any other accounts you hold and can expect a letter from HMRC.
And because you are a higher-income earner, you lose 40% of every £1 over £500, not 20%. So even going £100 over the Personal Savings Allowance would cost you £40.
If you had more money in savings, you could go over the allowance even with a non-fixed, easy-access account. For example, if you put £11,000 in a savings account for one year at 5%, you would earn £550 of interest, which would push you above the threshold and mean you owe tax to HMRC if you earn over £50,270.
Even if you earned less than £50,270, if you had savings of £21,000 at 5% for one year, you would generate £1,050 of interest and owe money to HMRC because you would exceed your £1,000 allowance.
There are, in fact, many different potential sources of income that count towards your Personal Savings Allowance.
According to the Government, these are:
- Bank and building society accounts
- Savings and credit union accounts
- Unit trusts, investment trusts and open-ended investment companies
- Peer-to-peer lending
- Trust funds
- Payment protection insurance (PPI)
- Government or company bonds
- Life annuity payments
- Some life insurance contracts
HMRC adds: “If you go over your allowance, you pay tax on any interest over your allowance at your usual rate of income tax.
“If you’re employed or get a pension, HMRC will change your tax code so you pay the tax automatically.
“To decide your tax code, HMRC will estimate how much interest you’ll get in the current year by looking at how much you got the previous year.”
