A reader is concerned about the future of the tax-free lump sum, which was subject to speculation at the Budget

In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he does not know about pensions. If you have a question for him, email us at money@theipaper.com.

Question: I noticed Rachel Reeves explicitly said pensions tax-free cash was being left alone at the Budget in November, but that obviously doesn’t provide any certainty about next year or beyond. Should I be relaxed or could the chancellor come for my pension next year or the year after or the year after that? I’m 60 at the moment but would rather not touch my pension at all until I reach state pension age.

Answer: The ability to access up to a quarter of your pot tax free is one of the key benefits of pension saving, so many people have, understandably, been concerned by speculation ahead of each of the last two Budgets that this entitlement could be reduced. This has, unfortunately, resulted in many people accessing their pension earlier than planned based on fear rather than their long-term financial goals.

Before getting into the likelihood of pensions tax-free cash coming under attack in the future, it’s worth explaining how it works for the two main types of pension that people build up in the UK.

If you’re in a “defined contribution” (DC) pension scheme – where you build up your own retirement pot that can grow completely tax-free then in most cases you will simply be entitled to take up to a quarter of the value of that pot tax-free from age 55. This minimum access age is due to rise to 57 in 2028. The maximum amount of tax-free cash you can withdraw over your lifetime is usually capped at £268,275.

If you are a member of a “defined benefit” (DB) scheme, you will build up an entitlement to a promised income from your scheme’s “normal retirement age”. This is often, but not always, linked to the state pension age.

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The value of your promised pension will depend on how long you were a member of the scheme, your salary (either final salary or career average) and the scheme’s rules. DB schemes often allow you to take a tax-free lump sum, although you may be asked to reduce your retirement income in order to receive it. As with DC pensions, the maximum tax-free cash you can withdraw from a DB scheme before a tax charge is applied is £268,275.

So those are the mechanics, but what about the politics? As you note, chancellor Rachel Reeves went out of her way in her Budget speech to say she wasn’t going to lower tax-free cash entitlements. This will have come as a relief to millions of pension savers but, as you say, provides no guarantees about the future.

To put an end to this uncertainty, AJ Bell has urged Reeves to commit to a “Pension Tax Lock” – a pledge not to alter tax-free cash or upfront tax relief incentives, at least for the rest of this Parliament. A petition we launched has garnered over 22,000 responses from the public, forcing the Government to provide a formal response.

Sadly, that response, while stating the Government “wishes to encourage pension saving”, went on to say the Government “keeps all aspects of the tax system under review as part of the Budget process… and does not intend to introduce a Pension Tax Lock.”

Further speculation about pensions tax incentives is therefore inevitable next year and beyond. Given taking your tax-free cash is an irreversible decision and withdrawing it earlier than planned can lead to poor outcomes, I’d strongly urge you to ignore the noise and focus on your long-term goals