Pension lump-sum cuts risk costly mistakes as Reeves weighs autumn Budget

Savers are at risk of costly mistakes if the chancellor does not rule out cutting the pension tax-free lump sum, according to senior figures in finance. With Labour facing a roughly £50 billion hole in the public finances, Rachel Reeves is expected to outline a raft of tax-raising measures in this autumn Budget, and pension changes have been floated as a possible lever that could affect retirement planning across the country.

A vacuum of clarity around pension changes has drawn warnings from industry figures that rumour and uncertainty could prompt savers to act prematurely, potentially locking in decisions they may later regret.

Jon Greer, head of retirement policy at wealth manager Quilter, said a lack of clear guidance allows rumours to swirl unchecked, and that when it comes to pensions, “that’s dangerous. Decisions like taking a tax-free lump sum are often irreversible.” Former pensions minister Steve Webb, now a partner at consultancy LCP, added that if the government has no plans to change pension tax relief or the tax-free lump sum, it would help to commit not to do so for the whole Parliament. “That way people could plan for their futures with a degree of certainty, rather than this constant uncertainty,” Webb said.

AJ Bell, the stockbroker, has been vocal in arguing for a pensions tax lock—a commitment to stability on pension taxation for at least this Parliament. Rachel Vahey, head of public policy at the firm, said: “We need to put a stop to this speculation by ruling out changes to tax relief or tax-free cash, at least for this parliament.”

Retirees with private pensions can access their money from age 55, rising to 57 from April 2028, and can withdraw 25% tax-free up to a maximum of £268,275. But experts fear the Chancellor could cap the amount that can be withdrawn tax-free, a move that could redefine how households structure their retirement savings. Pension minister Torsten Bell previously pressed for a £40,000 cap when he led the Resolution Foundation, a price tag that has since been the subject of debate. Some pension specialists say a cap around £100,000 is more plausible, and could be phased in. Either scenario would reduce the value of many savers’ tax-free cash and could push some to accelerate or alter other retirement decisions, such as mortgage repayments or debt clearance.

Experts warn that any reduction to the tax-free lump-sum entitlement would be another hurdle that could discourage savers from funneling money into underfunded pension pots. The concern echoes last year’s Budget, when Reeves faced pressure to cut the tax-free cash but ultimately left the policy unchanged, leaving some savers to withdraw early in anticipation of future changes.

The political backdrop remains tense. Shadow Chancellor Mel Stride criticized Reeves’s plan to delay the Budget until late November, saying it would prolong harmful speculation about tax rises. “Under Labour, nothing is safe – not your pension, your job, your pay packet, your home,” Stride said.

A Treasury spokesperson declined to comment on speculative discussions about future changes to tax policy. The department’s position underscores the difficulty of delivering policy clarity when the government is navigating a large fiscal gap and a crowded autumn agenda.

In a related policy shift, Labour has signaled that unused pension pots could be liable for inheritance tax from April 2027, part of broader reforms aimed at addressing long-term pension sustainability. Analysts and savers alike will be watching closely how Reeves balances the need for revenue with the goal of preserving retirement security, particularly as market conditions and demographic pressures continue to shape pension funding and consumption patterns.