The chancellor could be set to declare all-out war on pensioners with a cap on Lump Sum Allowance (LSA) off the back of the Winter Fuel Payment cut.
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, Rachel Reeves could curb the tax-free sum at a lower amount or slash the proportion pensioners can take.
Conditions at present enable Britons who have turned 55 – or aged 57 from April 2028 – to move house or set themselves up for their new retirement needs.
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.
LATEST DEVELOPMENTS:
“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.”
Reeves could also look at introducing a flat rate of pension tax relief of 33 per cent — this would benefit basic-rate taxpayers but would be worse for higher and additional-rate taxpayers who get 40 per cent and 45 per cent tax relief respectively.
When contributing to a pension, Britons benefit from tax relief based on the income tax rate.
For workplace pensions, contributions are deducted from your pre-tax salary, while with personal pensions, the Government adds a top-up.
It is thought that Reeves could also place a death tax on pension pots.
Rachel Reeves could curb the tax-free sum at a lower amount or slash the proportion pensioners can take
GETTY
Most pension funds can typically be passed on without incurring inheritance tax (IHT), which is charged at 40 per cent on other assets.
Each estate benefits from an IHT-free threshold of £325,000 – or £500,000 for most estates if a primary residence is left to a direct descendant.
However, Tom McPhail from the consultancy The Lang Cat said abolishing this perk is one of the most likely changes that the chancellor could make on October 30.
It comes as pensioners are speaking out against the new Labour Government’s decision to means-test the Winter Fuel Payment from this year.
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.
Arnold, 87, told Age UK: “As a senior couple it will be very hard to make ends meet. As ever week daily living get harder and harder ie food/ gas /electric is getting dearer all the time.”
