With the Autumn Budget approaching, the “outright abolition” of the tax-free pension lump sum allowance is “exceptionally unlikely,” according to former pensions minister Sir Steve Webb.
Pension companies have reportedly seen an influx in inquiries about tax-free withdrawals, amid concerns that Chancellor Rachel Reeves might reduce the tax-free lump sum amount or lower the proportion pensioners can withdraw in the upcoming Budget.
Currently, Britons can take lump sums of up to 25 percent tax-free, with a cap of £268,275. However, there is speculation that the tax-free sum may be capped at a lower figure or the proportion available for withdrawal could be reduced.
Discussing a potential pension raid, Mr Webb told This is Money: “Because huge numbers of people are expecting to get tax-free cash from their pensions, including 10 million people newly enrolled into workplace pensions since 2012, the political outcry if this right was abolished overnight would be enormous.
“I therefore think outright abolition is exceptionally unlikely.”
Mr Webb further explained that any changes to the tax-free lump sum would more likely focus on its capped amount.
He noted that, since April 2023, this has been set at the “very precise” figure of £268,275, which works out to be 25 percent of the (now-abolished) Lifetime Allowance of £1,073,100.
At the very least, Mr Webb said: “I would expect this figure to be frozen each year, meaning it will gradually bite on more people over time.
“But one possibility would be for a new Chancellor to cut the limit – perhaps to £200,000 or £150,000.”
However, Mr Webb expressed doubt that the Government would pursue this route as there would have to be transitional protection in place, which would take time to implement.
He said: “You’d have to have lots of protections, and my guess is that you would need significant relief, which would take time to implement. You wouldn’t get a lot of money for some while, but you’d get all the grief on day one.”
