According to reports from The Telegraph, the Chancellor will reduce the tax-free limit by two-thirds of its current £268,275 amount.
As it stands, savers over the age of 55 can withdraw 25% of their pension fund without paying tax, but the newspaper claims this will change after the Autumn Statement on 30 October.
It understands that the impact of reducing the amount has been explored by Government officials with “one of Britain’s top pension providers”.
“A source told The Telegraph that the Government was looking at recommendations by two major think tanks to reduce the limit in an effort to raise around £2bn in revenue at the Budget”, the newspaper noted.
Rumours about the future of the pension tax lock began on Monday, with pension providers urging the Government not to make a “disastrous” move by dropping the tax-free level.
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A Government spokesperson said: “We do not comment on speculation around tax changes outside of fiscal events.”
However, pension experts have since reacted to the rumour, which could contribute around £2bn of the “£22bn black hole” in public spending that the Chancellor said needs filling.
‘Threatens to devastate meticulously crafted retirement plans’
Myron Jobson, senior personal finance analyst at Interactive Investor, said the potential decision “threatens to devastate many meticulously crafted retirement plans”.
He added: “Those approaching retirement who have already mentally allocated amounts above £100,000 for paying off their mortgage and/or repaying outstanding debts would be forced to go back to the drawing board and reallocate cash from elsewhere – or face a longer time burdened with repayments.
“The pension tax-free lump sum is one of the best loved and most well-understood parts of the pension system. Significant changes to it could risk undermining confidence in pensions, which is the last thing we need as many people aren’t saving enough for a comfortable retirement.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said changes to the tax-free lump sum “would do irreparable damage to the pension system”.
The reports follow the Age UK study that found that four in five pensioners on the breadline will lose their Winter Fuel Payment this year, and this potential change in policy would hit even more retirees.
Morrissey explained how this could affect more than just high earners who have a huge retirement fund.
She said: “The rumoured changes may sound like they will only hit the wealthiest, but this is not the case. If we look at someone with a £400,000 pension purchasing an annuity, it would generate an income of around half the median average wage in income (£34,953) of around £20,000 a year at age 67.
“If you wanted to hit this median level, you would need a pension pot of £469,000 after adding in the full state pension (annuities bought on a joint life 50%, 3% escalating – 4.99% at age 67). So, while this group may have enough income to meet their needs in retirement, they are hardly living a lavish lifestyle.”
