Reports suggest that Chancellor Rachel Reeves is floating scrapping the 25 per cent tax-free pension relief but analysts are warning such a decision would be “deeply unpopular”.
The new Labour Government is preparing to unveil its fiscal agenda on October 30’s Autumn Budget with rumours circulating of what will be included.
It is understood that Reeves is considering changing the existing rules when it comes to pension savers making withdrawals from their pots.
As it stands, Britons are able to take the entirety of their pension as cash straight away if they choose to, no matter what size it is.
Retirement savers also able withdraw smaller portions of cash from their pot whenever the want.
Some 25 per cent of every Briton’s pension savings is tax-free with millions taking advantage of withdrawals each year.
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In a blow to retirees, Reeves’ rumoured pension overhaul could see this tax relief reduced or scrapped.
Richard Evans from Fidelity International cited that this reform is likely in light of Labour’s election pledge.
Prime Minister Keir Starmer has pledged to not raise taxes on “working people”, including income tax, National Insurance or VAT.
Despite this, the Chancellor has confirmed “tough decisions” have to be made to plug the so-called £22billion “black hole” in the public finances.
Evans said: “One option for her would be to limit the total that can be taken tax free from a pension.
“Currently the most that most pension savers can take as tax-free cash over a lifetime is £268,275 (the strange figure arises from its origin as a quarter of the lifetime limit on pension savings in force when that limit was abolished).
“That £268,275 figure is a very large sum of money and the Chancellor could credibly argue that no ‘ordinary working person’ would ever be in a position to take it, since it would require a pension pot of more than £1million.
“It’s hard to imagine her inciting widespread anger if she decided to cut the lifetime limit on tax-free pension withdrawals.”
However, the tax expert believes any reform to pension tax relief will not be willingly accepted by the British public.
He added: “Any change to the tax-free lump sum would be deeply unpopular, although it is a perennial focus of pre-Budget speculation.
“One advantage for the government is that tax-free cash changes would generate tax revenue more quickly than other possible changes to the pensions regime.”
A UK Government spokesperson told GB News: “We do not comment on speculation around tax changes outside of fiscal events.”
