Rachel Reeves considers cut to tax-free pension lump sum

Times

4 hours ago

Plans to cut the pension lump sum that can be claimed tax-free are understood to be under consideration as part of revenue-raising measures in Rachel Reeves's budget.
The chancellor decided against more than halving the threshold to £100,000 last year, but the policy is said to feature on a list of options being prepared by officials.
At 55, most people can take a lump sum worth 25 per cent of their pension tax-free, up to the value of £268,275. The age threshold is set to rise to 57 from April 2028.
Treasury civil servants are expected to suggest reducing the amount that can be withdrawn on retirement to raise a further £2 billion, according to The Telegraph.
Allies of Reeves have remained tight-lipped about the budget, to avoid ruling revenue-raising measures in or out.
Torsten Bell, the pensions minister and former director of the Resolution Foundation think tank, previously advocated cutting the tax-free cap to as little as £40,000.
The Treasury is preparing to present Reeves with options to help raise tens of billions of pounds and avoid her breaking her own fiscal rules. The chancellor left herself with just £9.9 billion of headroom in her last budget.
U-turns on moves designed to cut costs, including the winter fuel allowance and reforms to disability benefits, have eaten into that figure. Rising gilt yields and borrowing costs have added to the challenge.
The government is also grappling with inflation, which has risen to 3.8 per cent — nearly double the Bank of England's target.
Speculation about the budget could spark a repeat of last year, when there was a spike in savers taking their tax-free lump sum Reeves's fiscal statement in October. AJ Bell, an investment platform, said its customers took about £300 million extra from their pensions last year than was expected.
• Savers fear for the pension tax-free lump sum
Interactive Investor, another platform, said the value of tax-free lump sum withdrawals were more than 500 per cent higher in July last year, when Labour won the general election, than in July 2023.
Similar moves would be likely to reduce the amount of revenue raised, at least in the short term, if savers sought to get ahead of any possible changes to the cap by drawing down the lump sum early.
The Treasury refused to say this week whether the perk for pensions would be protected. A spokesperson said: 'The best way to strengthen public finances is by growing the economy — which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8 billion and cut borrowing by £3.4 billion
'We are committed to keeping taxes for working people as low as possible, which is why, at last autumn's budget, we protected working people's payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee national insurance, or VAT.'