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<\/p>\nWill she, won\u2019t she cut the amount of tax-free cash that we can take from our pension pots?\u2019<\/p>\n
It\u2019s a question that is being anxiously asked by hundreds of thousands up and down the country as we hurtle towards Rachel Reeves\u2019s rather scary, tax-grabbing Budget on November 26 \u2013 especially by those in their mid-50s and above who are qualified to access theirs.<\/p>\n
Currently, many in this age bracket have the right to acquire 25 pc of their pension fund in the form of tax-free cash, subject to a cap of \u00a3268,275 (a minority can take out more as a result of having locked into past protected allowances).<\/p>\n
Not all exercise this right immediately, though, for a variety of reasons: for example, they\u2019re still working, so have no urgent requirement for the money, or they\u2019re a member of a generous defined benefit pension scheme (typically to be found in the public sector) where full access to tax-free cash and a lifetime income isn\u2019t usually allowed until their mid-60s.<\/p>\n
But there are many within the Labour Government who believe the current tax-free pension deal is far too generous \u2013 and unfairly skewed towards favouring the wealthy with the biggest pensions.<\/p>\n
Adhering to good old-fashioned socialist principles, they want a dose of egalitarianism to be introduced into pensions, resulting in the tax-free limit being given a haircut more in tune with a \u2018number one\u2019 (severe) than a \u2018number 8\u2019 (a gentle trim).<\/p>\n
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Black hole: Chancellor Rachel Reeves is widely expected to launch a raid on pension savings in the November budget\u00a0<\/p>\n
\u2018I\u2019d say there\u2019s a one-in-three chance of the tax-free lump sum being slashed in the upcoming Budget,\u2019 warns Tomm Adams, a partner at accountancy firm Blick Rothenberg.\u00a0<\/p>\n
\u2018The Treasury is in trouble and I expect some kind of attack on pensions to form part of a raft of tax rises in November.\u2019<\/p>\n
By \u2018trouble\u2019, Mr Adams is referring to the mind-blowing \u00a350billion hole in the public finances that the Chancellor\u2019s Budget must go a large way to filling.<\/p>\n
Failure to do so, some experts warn, could lead to a meltdown in financial markets and Ms Reeves going cap in hand to the International Monetary Fund (IMF) for a bailout \u2013 following in the faded footsteps of the late Labour Chancellor Denis Healey 49 years ago.<\/p>\n
> What you need to know each week: Sign up to the This is Money newsletter\u00a0<\/a><\/p>\n Why experts are worried about pension lump sums<\/p>\n Four factors suggest a clampdown on pension tax-free cash is coming.<\/p>\n First, the \u2018trouble\u2019 Mr Adams talks about is more than twice the troubling \u00a322 billion black hole that the Chancellor claimed she inherited from the previous Conservative government ahead of last year\u2019s Budget. This raises the probability of tax-free pension cash being targeted.<\/p>\n Secondly, the Chancellor\u2019s Budget team this time around includes Pensions minister Torsten Bell, an avid supporter of the \u2018number one\u2019 haircut approach to tax-free cash.<\/p>\n In his time as head of Left-wing think-tank Resolution Foundation, he called for a drastic \u00a340,000 cap to be imposed.<\/p>\n Of course, it\u2019s far easier to rant and rave about the fairness of a \u00a340,000 cap from the comfy offices of an economic think-tank than to put such an antagonistic policy into practice as part of an unpopular Labour government.<\/p>\n Some, such as Mr Adams, believe it would be akin to \u2018political suicide\u2019, but Mr Bell\u2019s past rhetoric indicates he has an entrenched aversion to tax-free cash.<\/p>\n Thirdly, while this newspaper was recently told by a Whitehall source that a raid on pension lump sums is not \u2018currently\u2019 under consideration, it might be in the coming weeks as Ms Reeves and Mr Bell scramble to find ways of shoring up the Government\u2019s dire finances.<\/p>\n Finally, unlike most other tax-raising measures that could be introduced to trim the cost of encouraging people to save into a pension \u2013 for example, an overhaul of tax relief on contributions \u2013 it\u2019s relatively straightforward to implement.<\/p>\n It\u2019s a point that former pensions minister Steve Webb made in a report published earlier this month on the risks of tinkering with pots in the Budget.<\/p>\n Mr Webb said the existing cap of \u00a3268,275 meant it was \u2018not a major administrative change to simply set this at a lower level\u2019.<\/p>\n So, what could be the limit?<\/p>\n Although Mr Bell has called for a \u00a340,000 cap to be imposed on pension tax-free cash, a new limit is likely to be around \u00a3100,000.<\/p>\n This would still tick most of the boxes for Labour when it comes to targeting the wealthy.\u00a0<\/p>\n According to research last year by the Institute for Fiscal Studies (IFS), the tax break in its current form costs about \u00a35.5 billion a year \u2013 with 70 per cent of the benefit going to the pensions of those accumulated by the top-fifth of earners.<\/p>\n Putting in place a \u00a3100,000 cap, it said, would adversely impact one in five retirees, raising \u00a32 billion a year for the public\u2019s finances.<\/p>\n \u2018A \u00a3100,000 cap is a politically safer level than \u00a340,000,\u2019 says Jason Hollands of wealth manager Evelyn Partners.<\/p>\n Whether Labour would be brave enough to move from \u00a3268,275 to \u00a3100,000 in one fell swoop is debatable. Many experts believe a phased reduction would be fairer.<\/p>\n \u2018Foisting immediate changes on those who are close to retirement would be so unfair,\u2019 says Elsa Littlewood, a tax partner at accountancy firm BDO.\u00a0<\/p>\n \u2018Many have carefully planned their retirement for decades, based on access to 25 per cent tax-free cash. If the cap is reduced, it should be done over time.\u2019<\/p>\n It\u2019s a point also made by James Scott-Hopkins, founder of financial planner Exe Capital Management. He says: \u2018It would be grossly unfair not to phase it in, not least because some people would have planned to use their tax-free cash to pay off a mortgage.\u2019<\/p>\n Mr Hollands says that while a cut could be announced in the Budget, it would be \u2018unlikely\u2019 to come into immediate effect as happened with last year\u2019s hikes in capital gains tax<\/a>, so may be from April 2026 or April 2027.<\/p>\n Those with a protected allowance, giving them a right to a higher tax-free lump sum, should not be impacted by any changes. \u2018There would be legal challenges galore if these protections were ripped up,\u2019 says Mr Hollands.<\/p>\n Last year, the IFS acknowledged that any reduction which was retrospective would anger those who have saved on the understanding that they would get 25 pc of their pension pot tax-free.<\/p>\n But, ominously, it added: \u2018A slower transition would temper that retrospection, but would need to be weighed against the ongoing costs of providing large tax subsidies for individuals with sizeable pension pots.\u2019<\/p>\n Music to Mr Bell\u2019s ears.<\/p>\n Panic: A record \u00a318.3bn of tax-free cash was withdrawn from pension pots in the year to the end of March, compared to \u00a311.25bn the year before<\/p>\n Those who should act now<\/p>\n Mr Hollands says that if you are currently planning to take tax-free cash in the next year, bringing the decision forward several months \u2018out of an abundance of caution may be worth doing\u2019.<\/p>\n This, he adds, is especially the case if you have a specific purpose in mind \u2013 such as using the cash to clear a mortgage or buy a holiday home.<\/p>\n There is also a case for those with pension pots in excess of \u00a3400,000 to take tax-free cash if, again, they are both eligible and were already looking to access it. In doing this, they would secure tax-free cash above \u00a3100,000.<\/p>\n![\"Panic:](\"https:\/\/www.newsbeep.com\/us\/wp-content\/uploads\/2025\/09\/102197409-15104187-image-a-2_1758055728434.jpg\")
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