Savers in the UK may soon face significant changes to their pension withdrawals as Chancellor Rachel Reeves is reportedly considering cutting the tax-free pension lump sum.
This would see the current limit reduced from £268,275 to £100,000, following recommendations from two major think tanks.
Currently, savers can withdraw 25 percent of their pension pots tax-free after turning 55, up to the maximum limit. However, the new proposal, aimed at generating £2 billion in additional revenue, would slash this cap by two-thirds. This move is under review as part of preparations for the upcoming autumn budget, though it has already sparked concern from industry experts and pensioners alike.
Think tanks such as the Institute for Fiscal Studies (IFS) and the Fabian Society argue that the existing limit disproportionately benefits wealthier individuals. According to the IFS, reducing the cap would impact one in five retirees, while advocates say the change could help address inequalities in the pension system. However, pension experts warn the cut could lead to legal challenges, especially for those who have planned their retirement based on the current rules.
Steven Cameron of Aegon commented, “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. Being stopped from doing so would cause a major outcry.”
What are the dangers?
Others in the industry, like Mike Ambery from Standard Life, have pointed to the logistical challenges of implementing such a change, noting that pension funds are often held under trust and any retroactive adjustments to benefits could face legal hurdles.
The Government is under pressure to find ways to address a projected £22 billion shortfall in public finances. Reeves has already faced criticism for scaling back the winter fuel allowance for most pensioners, and this latest potential policy shift could further fuel accusations of targeting retirees.
As fears of pension changes grow, more savers are reportedly rushing to access their tax-free lump sums or increase their pension contributions ahead of potential fiscal reforms. Wealth management firm Bestinvest reported a tenfold increase in Sipp (Self-Invested Personal Pension) contributions in September, while requests for pension withdrawals have also doubled compared to the previous year.
Pension advisers are urging the Chancellor to provide clarity to prevent knee-jerk financial decisions. A letter from wealth manager Quilter to the Treasury warned that uncertainty was causing savers to withdraw their pension funds prematurely, potentially jeopardising their financial security.
The Chancellor has yet to confirm any final decision, with a government spokesperson stating, “We do not comment on speculation around tax changes outside of fiscal events.”
As the autumn budget approaches, savers and financial experts alike will be watching closely to see whether the proposal to cut the tax-free lump sum becomes a reality.
Amelia Brand is the Editor for HRreview, and host of the HR in Review podcast series. With a Master’s degree in Legal and Political Theory, her particular interests within HR include employment law, DE&I, and wellbeing within the workplace. Prior to working with HRreview, Amelia was Sub-Editor of a magazine, and Editor of the Environmental Justice Project at University College London, writing and overseeing articles into UCL’s weekly newsletter. Her previous academic work has focused on philosophy, politics and law, with a special focus on how artificial intelligence will feature in the future.
