Reeves warned not to cut tax-free pension lump sum

Rachel Reeves has been warned that cutting the tax-free amount people can withdraw from their pension pots would be self-defeating and “hit responsible savers who have diligently put money aside”.

- ARCHIE MITCHELL

The chancellor will look at proposals by civil servants that could raise around £2bn by lowering the limit on how much people are allowed to take out of their pension without paying tax.

Currently, pensioners can take out a quarter of their pension pot tax-free, with a cap of £268,000. Lowering the level could bring in billions of pounds of additional tax revenue each year as the Treasury grapples with a black hole of as much as £50bn.

But Lisa Picardo, chief business officer at the pension platform PensionBee, said: “Such a cut would disproportionately hit responsible savers who have diligently put money aside. Savers already face shifting tax rules, so removing or altering this benefit would only add more uncertainty and make it harder for people to plan with confidence.

“This kind of policy shift risks punishing those who have played by the rules - it sends a signal that the goalposts can be moved after decisions have been made, further eroding trust in the pensions system,” she added.

And the former Liberal Democrat pensions minister Sir Steve Webb warned that any change to the tax-free lump sum allowance would be “hugely controversial”.