Rachel Reeves is considering axing the tax-free pension lump sum, in a tax raid that is set to raise over £2 billion a year, experts say.
The plan will be presented to the Chancellor as part of civil servant proposals for the Autumn Budget, with Reeves facing a £50 billion black hole in public finances.
Currently, pensioners can withdraw up to 25% of their pension tax-free, up to £268,000. Cutting this to just £40,000 has previously been advocated by pensions minister Torsten Bell.
One Whitehall official told The Telegraph that they believe it is “unlikely” that Reeves will go for this, saying she is not prioritising pension reform. But experts say she may have no choice, given the state of public finances.
John Havard, a consultant at tax firm Blick Rothenberg, said Reeves has eliminated all her “easy choices” for increasing tax revenue by sticking with manifesto promises. But, he said, one option that “remains open” to her is targeting pension tax reliefs.
He added that the Government’s argument will be that, “as a disproportionate percentage of relief goes to fund the retirements of the ‘better off’, it is not fair for ‘ordinary working people’ to be subsidising the retirement of the ‘wealthy’”.
In the approach to last year’s Budget, the Treasury asked a top pension provider about the impact of reducing the cap to £100,000. The plan was not included in that Budget.
The Chancellor has promised not to break the Government’s election pledge of not raising income tax, VAT or employee National Insurance. She is believed to be considering cracking down on inheritance tax and the sales of high-value homes.
