Chancellor Rachel Reeves is thought to be considering a significant reduction to tax-free pension withdrawals.
Currently, savers can take up to 25 per cent of their pension pot tax-free once they reach 55, with a maximum limit of £268,275. However, Treasury officials are now exploring the possibility of slashing this limit to just £100,000.
The potential cut to tax-free pension withdrawals is seen by some as another attempt to address the £22billion hole in public finances.
It follows recommendations from think tanks, including the Institute for Fiscal Studies and the Fabian Society, who argue that the current cap favours the wealthy.
If implemented, this change could provide the Government with up to £2billion in extra funds for Labour policies. However, the proposal has already sparked concerns among pension experts and savers alike.
Steven Cameron of pension company Aegon warned of a “major outcry” from pensioners if the change is implemented.
He stated: “Many individuals will have planned their retirement finances on the assumption they could take 25 percent of their full fund as a tax-free lump sum.”
Mike Ambery from Standard Life highlighted potential operational complications, explaining: “That’s because pension funds are normally written under trust and also you can’t really retrospectively make changes to benefits that people have already built up. It could be subject to a legal challenge.”
The proposal has raised concerns about the stability of retirement plans for those in their late 50s and early 60s.
Some savers are reportedly considering early withdrawals due to fears of an impending tax raid in the upcoming Budget.
This latest proposal comes amid a series of pension-related decisions by Labour.
Earlier this week, Reeves reportedly dropped plans to reduce the 40 per cent pension tax relief for higher earners. This decision was made due to concerns it would unfairly impact public sector workers.
However, the Government continues to face pressure regarding its decision to scale back Winter Fuel Payments for most pensioners.
It comes after concerns that the party’s pledge to abolish non-dom status may not raise the expected funds.
As the autumn Budget approaches, savers are increasingly drawing their tax-free lump sums early or increasing pension contributions in anticipation of potential changes.
The Treasury’s consideration of this proposal has prompted calls for clarity from the financial sector.
Quilter, a wealth manager, has urged the Chancellor to reassure pensioners, warning that Budget fears are leading to “knee-jerk decisions” that could jeopardise financial security.
The Budget is on October 30
PA
Jason Hollands of Evelyn Partner noted an increase in customer inquiries about early withdrawals, stating: “This has been fuelled by think tanks, such as the IFS, saying the lump sum should be slashed to £100,000.
“This has petrified some people who might have been banking on tax-free cash to clear mortgages or reduce debt in the next few years.”
A Government spokesman said: “We do not comment on speculation around tax changes outside of fiscal events.”
