Rachel Reeves could declare an all-out war on pensioners if she decides to place a cap on the Lump Sum Allowance (LSA) in October’s upcoming Budget.
Under the current LSA, Britons can withdraw lump sums of up to 25 per cent tax-free, and to the same amount of £268,275.
However, the chancellor could curb the tax-free sum to be a lower amount or slash the proportion pensioners can take.
Steven Cameron from the wealth manager Aegon, warns that the Government is facing calls to reduce the relief for those with the biggest pension pots.
“There is a possibility that the budget could either cap the tax-free lump sum at a much lower amount or reduce the proportion you can take to, say, 20 per cent. Both would increase the tax take,” he told The Times.
The Institute for Fiscal Studies (IFS) predicts that a £100,000 cap on the tax-free lump sum would impact one in five pension savers.
“To generate extra income tax, these changes would have to apply to pots already built up over years or decades,” Cameron added.
“This would be highly controversial, reducing one of the most valued tax incentives that pension savers look forward to.
“If you were planning to take your tax-free lump sum soon anyway, it may be worth considering taking it before the budget.
“But taking money out of your pension before you need it is generally not a good idea because you will lose other tax benefits.”
The decision to cap the LSA could be devastating for savers following Labour’s cut to Winter Fuel Payments.
Older households will now need to claim Pension Credit from the Department for Work and Pensions (DWP) to access up to £300 in energy bill support in a move that is predicted to impact 10 million elderly Britons.
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