A reduction in the tax-free pension allowance could “devastate” many meticulously crafted retirement plans, experts warn.
The pension tax-free lump sum allows individuals to withdraw up to 25 percent of their pension savings, capped at £268,275, without paying tax, typically available from age 55.
However, Chancellor Rachel Reeves is reportedly considering cutting the tax-free lump sum to £100,000 – a significant drop from the current limit.
The move could form part of the Chancellor’s Budget plans to fill the £22billion hole in the nation’s finances.
Commenting on the potential move, Myron Jobson, senior personal finance analyst at interactive investor, commented: “While the move would increase tax revenues as part of efforts to plug the multi-billion pound black hole in the public’s finances, it threatens to devastate many meticulously crafted retirement plans.
“Those approaching retirement who have already mentally allocated amounts above £100,000 for paying off their mortgage and/or repaying outstanding debts would be forced to go back to the drawing board and reallocate cash from elsewhere – or face a longer time burdened with repayments.”
Mr Jobson described the pension tax-free lump sum as one of the “best-loved” and “most well-understood” parts of the pension system.
He continued: “Significant changes to it could risk undermining confidence in pensions, which is the last thing we need as many people aren’t saving enough for a comfortable retirement.
“Planning for retirement is difficult when key pension policy has seemingly become a political football. We need a public confidence boost in state and private pensions, rather than erosion.”
This potential change has already prompted action from savers. Investment platform interactive investor (ii) has seen a 58 percent increase in the volume of cash withdrawals from Self Invested Personal Pension (SIPP) accounts in September (up to 16th), compared to the same period in 2023. These withdrawals often include part or all of the 25 percent tax-free lump sum allowance.
The platform has also seen a 64 percent increase in the number of SIPP customers contributing the maximum £60,000 since the start of the tax year to 23 September, compared to the same period in 2023.
Ms Reeves will announce the new Labour Government’s Autumn Budget on Wednesday, October 30.
