Chancellor Rachel Reeves is considering cutting the lump sum savers can remove from their pension without having to pay tax, according to reports.

Savers can currently take up to 25% of their pension savings as a tax-free lump sum up to a maximum of £268,275.

The Chancellor is considering cutting the lump sum limit to £100,000 following recommendations from Think Tanks, according to the Telegraph.

The reports have prompted criticism from Financial Planners and pensions experts who have said cutting the lump sum limit could have unintended consequences.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said a cut to the tax-free lump sum could undermine confidence in saving for retirement.

She said:“The Chancellor may have said rumoured changes are designed to hit ‘those with the broadest shoulders’ but changes to the tax-free lump sum would do irreparable damage to the pension system. This risks undermining confidence and impacting people’s retirement savings.
 
"We would strongly advocate for pension tax-free cash to be kept as sacrosanct in the system. People need confidence to save for the future or they will simply not have the kind of spending levels that they require to maintain their lifestyle in retirement. This will not only prove challenging for households individually but the collective impact will also be a weakening of the economy as a whole."

Calculations from Hargreaves Lansdown showed that should the lump sum limit be cut to £100,000, for someone of the age of 57 with a pension pot of £400,000 the immediate cost to those retiring (with no protection) will be income tax payable on up to £168,275 (£268,275 – £100,000), a cost of £67,310 if taxed at higher rates or £33,655 if taxed at the basic rate.

Graham Crossley, NHS pension specialist at Quilter, warned that any cut to the lump sum limit could exacerbate existing understaffing issues for the NHS as many healthcare workers could bring forward plans to retire.

He said: "A move like this could stoke fear amongst public sector workers that the government is coming for their pensions. The government really needs to start thinking about the consequential impact. Many individuals have earmarked their lump sums to settle mortgages, and their financial plans would be left devastated.

“We could see significant numbers of senior healthcare workers bringing forward their plans to retire to avoid whatever the next attack on their pension could be. We recently saw consultants accept pay deals, but if the government then takes away some of that benefit by taxing the extra lump sum it created, we could see a return to pay unrest and strikes.

“There’s a risk that it could end up costing more to fix the problems this could create, such as increased waiting lists, compared to the tax take from such a move. The government could really shoot themselves in the foot with this. They could introduce this fear of a future pension tax grab, but then find themselves with little additional tax revenue in the short term as higher earners may be able to rely on existing Lifetime Allowance protection certificates which safeguard their maximum tax-free lump sum amount."

Claire Trott, divisional director for retirement and holistic planning at St James's Place, said speculation around a reduction to the limit is already having an impact on people's retirement planning.

She said: "Speculation around a reduction to the maximum tax-free cash allowance is driving behaviours, which could result in people withdrawing excessive funds from pensions, potentially risking reduced retirement incomes. Moving money from a tax-privileged environment into one where growth and income are taxed, and potentially pushing estates into inheritance tax liability, can have significant implications. With the maximum standard tax-free amount close to the IHT nil rate band, many could find themselves crossing tax thresholds they hadn't anticipated."

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