The Chancellor, Rachel Reeves, is considering reducing the maximum tax-free lump sum that savers can withdraw from their pensions. Sources reveal that government officials have asked a leading pension provider to assess the impact of lowering the cap from £268,275 to £100,000. This potential change follows recommendations from the Institute for Fiscal Studies (IFS) and the Fabian Society, which argue that the current tax-free lump sum disproportionately benefits wealthier individuals.
The IFS estimates that the proposed reduction could affect one in five retirees and raise approximately £2 billion in revenue in the next Budget. However, the move has raised concerns among pension experts. Steven Cameron from Aegon warns that many individuals have planned their retirement finances based on the assumption they could take 25% of their total fund as a tax-free lump sum, and being stopped from doing so would cause a significant outcry.
Mike Ambery of Standard Life adds that such changes could be legally complex, as pension funds are typically written under trust, and benefits that people have already built up cannot be retrospectively altered. Due to these complications, the Treasury may consider tapering the tax-free lump sum gradually over time, although this could impact immediate revenue gains.
Changes to pension withdrawal limits
The government has already faced significant backlash, including from Labour MPs, for scaling back the winter fuel allowance. There have been longstanding concerns about the sustainability of the £268,275 cap, especially after the Conservative government abolished the lifetime allowance in April 2024. With the autumn budget on the horizon, more savers are withdrawing their tax-free lump sum as soon as they reach retirement age or increasing their pension contributions.
Bestinvest, an investment platform, reported a tenfold increase in contributions to self-invested personal pensions (Sipps) in September, while pension withdrawal requests doubled compared to the previous year. Wealth manager Quilter has urged the Chancellor to reassure pensioners after reports that savers are prematurely withdrawing funds due to fears of imminent tax raids. Steven Levin, Quilter’s CEO, emphasized the need for clarity from the Treasury to prevent financial insecurity among savers.
Wealth managers have warned that such changes would be destabilizing for those in their late 50s and early 60s. Jason Hollands from Evelyn Partners noted an increase in clients seeking advice on early withdrawals, spurred by think tank proposals suggesting a cut to £100,000. The government has stated that it does not comment on speculation around tax changes outside fiscal events.
