Chancellor ‘rules out’ cut to pension tax-free lump sum – but it’s too late for savers who already pulled out funds

The Chancellor has reportedly ruled out cuts to the tax-free pension lump sum limit in the upcoming Autumn Budget, it has been revealed.

News the lump sum will remain fixed comes after months of speculation that the limit, as well as tax relief on pensions, could be at risk – and it marks a victory for the Daily Mail who have campaigned for Rachel Reeves to come clean over any plans she had to tinker with the pension perk.  

Fears the Chancellor would slash the tax-free lump sum limit have led to many choosing to withdraw their 25 per cent without a plan for how to use it.

There was a 33 per cent increase in withdrawal requests on the Bestinvest platform in September, the firm said, with the size of pension income withdrawals also growing by 146 per cent over the same period.

Other wealth managers have also reported seeing increases in tax-free lump sum withdrawals from pension funds.

Arbuthnot Latham, a private bank, told Reuters it had seen a 300 per cent increase year-to-date in comparison to the whole of 2024. 

Netwealth told us it has seen a 143 per cent jump in tax-free cash withdrawals between the end of June 2024, just before the election, and the end of last month.

Similar speculation ahead of last years’ budget led to significant withdrawals of tax-free lump sums, which many came to later regret.

Currently, people aged over 55 can withdraw 25 per cent of their pension pot tax-free up to a cap of £268,275.

The Chancellor previously refused to rule out changes to the amount pension holders can withdraw, as the Government looks to fill a fiscal black hole of as much as £30billion.

For some people taking the cash could pay off, especially if they planned to do so anyway in the next year or so and want to spend the money for a specific purpose.

For others, taking out a large sum could backfire, because tax-free withdrawals are irreversible and they may miss out on future investment growth by shifting funds out of their pension.

Steve Webb, former Pensions Minister and partner at pension consultants LCP, says: ‘While it is obvious good news that tax free lump sums are to be left alone in this year’s budget, the widespread speculation – which the government did nothing to quell – may mean that thousands of people made life-changing decisions to withdraw pensions which they may now regret. 

‘We need the Treasury to make clear that pension tax relief will be untouched for the rest of this Parliament, not just one year at a time, to give savers and investors the confidence and certainty that they need.’

Lisa Picardo, chief business officer UK at PensionBee, said: ‘We welcome the Government’s decision to maintain the pension tax-free lump sum. 

‘It’s a cornerstone of retirement planning, which many have factored into their financial future.

‘It enables people to pay off debt, clear what’s left of their mortgage, or build a financial buffer for life after work.

‘Keeping this important benefit unchanged will help preserve savers’ confidence in the pensions system and encourage people to continue putting money aside for their future. 

‘Stability and trust are essential to ensure people feel rewarded, not penalised, for saving consistently throughout their working lives.’

The concerns that the limit could be slashed came on the back of calls to cut the lump sum, such as from the left wing think tank the Fabian Society, which urged a reduction to £100,000.

Pensions Minister Torsten Bell previously advocated for a reduction to the tax-free cash allowance while at thinktank the Resolution Foundation.

Latest reports indicate that that Rachel Reeves is planning to cap the amount that employees can pay into their pensions via salary sacrifice without facing national insurance contributions.

New rules could see the exemption camped at £2,000 per worker per year, which would in effect be a stealth tax on pension saving for many.

The move could bring in an extra £2billion per year for the Treasury, as it scrambles to fill the gap in the UK’s public finances.

This is Money has contacted the Treasury for comment.