Pension savers warned of costly mistakes as rumours swirl over tax-free lump sum ahead of Budget

Pension savers are at risk of costly mistakes amid ongoing speculation that the government could curb the tax-free lump sum in the autumn Budget, industry figures say. While Chancellor Rachel Reeves has not ruled out changes, critics argue that the absence of a firm commitment is fueling anxiety and prompting some savers to consider hasty, irreversible decisions.

'vacuum of clarity allows rumours to swirl unchecked,' said Jon Greer, head of retirement policy at Quilter. 'When it comes to pensions, that's dangerous. Decisions like taking a tax-free lump sum are often irreversible.'

With Reeves facing a sizeable hole in public finances — about £50 billion, according to officials — and a debate over possible tax rises, pension changes are squarely on the menu for further scrutiny. Former pensions minister Steve Webb, now a partner at LCP, said: 'If the Government has no plans to change pension tax relief or the tax-free lump sum then it would be helpful if they made a commitment not to do so for the whole of the parliament. That way people could plan for their futures with a degree of certainty, rather than this constant uncertainty.'

Stockbroker AJ Bell has pushed for a 'pensions tax lock', a guarantee of 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. A pensions tax lock would give the stability people desperately need to plan for retirement with confidence.' She added that cutting the tax-free lump sum would cause an outcry, especially amongst public sector workers, and noted that: 'The last thing this Government needs is yet another U-turn.'

Current rules remain unchanged, but debates over possible changes persist. Retirees can access their private pension from age 55, rising to 57 from April 2028, and can withdraw 25 per cent tax-free, up to a maximum of £268,275.

Pension experts warned that any cap on the tax-free cash could be phased in gradually and likely would be closer to £100,000 than £40,000, though some officials and think-tank advocates have floated lower figures. Former pensions minister Torsten Bell, who led the left-leaning Resolution Foundation, has previously called for a £40,000 cap, illustrating the range of options under review.

If a cap is introduced, savers with pots as high as £400,000 could see their tax-free entitlement trimmed, potentially reshaping long-planned uses such as paying off debt or mortgages. Analysts stress that such a change would also discourage savers from contributing more to their pension pots, undermining efforts to shore up retirement incomes in an aging economy.

Last year’s Budget debate already touched on the issue, as Reeves faced pressure to reduce tax-free cash. Ultimately she left the tax-free lump sum untouched, but officials warn that the political calendar creates a propensity for renewed scrutiny as the autumn Budget draws closer.

Separately, the government has announced that unused pension pots will be liable for inheritance tax from April 2027 if they are not used, a policy shift that could compound how savers view retirement planning.

Opposition officials have criticized the timetable for the Budget, with Shadow Chancellor Mel Stride arguing that delaying the Budget to late November creates months of damaging speculation and underscores what he calls Labour's economic mismanagement. He said: 'Under Labour, nothing is safe – not your pension, your job, your pay packet, your home.' A Treasury spokesman declined to comment on speculation around future changes to tax policy.

Experts say the prudent approach for savers is to seek independent financial advice and avoid making abrupt decisions until the Government provides more clarity on pension policy. While the Treasury has signaled it will publish the Budget and deliver detail in due course, the market remains focused on whether the government will promise stability or signal new constraints on tax-free cash.