Chancellor Rachel Reeves is understood to have been approached by Treasury officials with a plan to launch a stealth tax raid on pensions as part of her upcoming Autumn Budget.
Reports suggest Ms Rachel Reeves has been suggested a proposal which could see the maximum tax-free pension withdrawal from its current £268,275 limit to as little as £40,000.
The Chancellor is examining these options as she searches for tax-generating revenue streams to address a public finance shortfall exceeding £50billion.
This potential reform would reduce the amount retirees can access without paying tax to HM Revenue and Customs (HMRC) when they begin drawing their pensions.
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The Chancellor is reportedly considering a cut to tax-free withdrawals on pensions
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The Telegraph reports one proposal under consideration would set the ceiling at £100,000, while a more severe option backed previously by pensions minister Torsten Bell would establish a £40,000 threshold.
These measures could potentially generate billions for Government coffers, though Treasury sources have indicated pension changes remain an unlikely priority for the upcoming autumn Budget.
Under existing regulations, retirees can access a quarter of their accumulated pension savings without incurring tax charges, subject to the current ceiling.
This arrangement has formed a cornerstone of retirement planning since the lifetime allowance was eliminated in 2023, with many Britons opting to take a quarter of their savings out as a lump sum.
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Pensions Minister Torsten Bell has previously floated reform to pension tax relief
| PAAn individual with retirement savings of £400,000 can currently withdraw £100,000 without tax implications, whilst someone with £1million in their pension can access the full £268,275 maximum tax-free.
Any withdrawals beyond these thresholds face taxation at the individual's marginal income tax rate. Senior professionals in both private enterprise and public service, including those with defined benefit schemes, would be hit hardest from any reduction in the tax-free allowance.
The National Institute of Economic and Social Research (NIESR) estimates the government faces a fiscal shortfall exceeding £50billion, with deputy director Stephen Millard suggesting the Chancellor might need to generate over £40billion through new revenue measures.
Furthermore, the Institute for Fiscal Studies (IFS) calculates that lowering the tax-free cash ceiling to £100,000 would generate approximately £2billion yearly once fully operational.
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Since pension lump sums are typically claimed at retirement, the full revenue benefits would take years to accumulate, potentially limiting the appeal of such measures for addressing urgent budgetary pressures.
An individual holding £500,000 in retirement savings currently enjoys £125,000 in tax-free withdrawals. Should the threshold drop to £100,000, they would forfeit £25,000 of this benefit, resulting in approximately £10,000 additional tax for higher-rate payers.
A £40,000 ceiling would prove far more punitive, removing £85,000 from their tax-free entitlement and generating roughly £34,000 in extra tax revenue for higher-rate taxpayers.
Those with £1million pension pots presently qualify for the full £268,275 tax-free amount. A £100,000 limit would eliminate £168,000 of this benefit, whilst a £40,000 cap would subject over £228,000 to income tax.
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Many Britons rely on pension tax relief | GETTY Nick Flynn, the retirement income director at Canada Life, cautioned against precipitous action based on Budget speculation.
"Whilst seismic changes, such as abolishing this benefit altogether, seem unlikely, it will be interesting to see whether any adjustments to the overall cap are considered," he stated.
Flynn emphasised that retirement savers should resist making impulsive choices driven by rumours. "Tax-free cash remains an important element of the pension system, designed to encourage long-term saving, and decisions about accessing pensions are best made with care and, where appropriate, professional advice," he added.
Gary Smith from Evelyn Partners noted that limiting the pension commencement lump sum "would not bring in extra revenue for the government swiftly, it would be a long-term gain, so that could make this a less attractive move given how unpopular it would be".