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Reeves Weighs Cut to Tax-Free Pension Lump Sum Cap as Treasury Seeks Budget Cash

Officials are weighing pension changes as one of the few sizable revenue options left under Labour’s tax pledges.

Overview

  • Treasury options presented to the chancellor include reducing the pension commencement lump sum cap, though officials have signalled the move is not a priority and remains unconfirmed.
  • Reported scenarios would lower the current £268,275 maximum tax‑free withdrawal to about £100,000 or potentially £40,000, affecting how much of a pot can be taken tax‑free at retirement.
  • The Institute for Fiscal Studies estimates a £100,000 cap could raise roughly £2bn a year once fully in effect, with receipts accruing slowly because lump sums are typically taken at retirement.
  • Industry figures warn a cut would mainly hit wealthier savers, including some public‑sector defined‑benefit members, and could trigger early withdrawals that depress near‑term revenues and erode trust.
  • The debate comes as forecasts show a public‑finance gap of up to around £50bn, with other revenue ideas under review such as a so‑called mansion tax, inheritance changes, stamp duty reforms and extended threshold freezes.