Tax-free lump sum withdrawals from pension pots could be slashed as Rachel Reeves scrambles for fresh ways to plug a £50bn hole in the public finances.
The Chancellor is reportedly eyeing a cut to the amount of money pensioners can withdraw from their savings pot without paying tax to as little as £40,000.
That would mark a major raid on the pensions rules, which at present allow as much as 25 per cent of pots up to a cap of £268,000 to be withdrawn tax free.
The move would be expected to raise more than £2bn for the Treasury, as Reeves searches for ways to raise tax receipts without breaking Labour manifesto commitments.
The Treasury has not denied that the tax change was under consideration but told the Telegraph the Chancellor was not prioritising pension reforms and thought it was “unlikely”.
A raid on pensions is one of several fresh taxes Reeves is thought to be mulling, including a “mansion tax” on homes worth more than £1.5m, as well as a tightening of inheritance tax rules.
‘There didn’t seem to be a plan on the table’
Economists have predicted the Treasury will need to raise as much as £50bn in extra taxes to stay within its fiscal rules, laying bare the scale of the pain that could be wrought on businesses by Rachel Reeves in the autumn.
The government is set to miss its “stability rule” by as much as £41.2bn by 2029-30 on top of having to maintain its £9.9bn “wafer thin” fiscal headroom, according to a report by the National Institute of Economic and Social Research, with economists adding that there was no way such huge sums could be raised without Labour breaking its manifesto commitment not to increase taxes on working people.
“The really disappointing thing from my point of view was that when Labour came in there didn’t seem to be a plan on the table,” said NIESR deputy director, professor Stephen Millard.
“A lot of problems the chancellor is facing now could have been headed off at the pass if they had come in with a clear plan.”
Millard said there were “really hard decisions the chancellor is going to have to make if she is going to raise that £50bn.
“That requires large increases in taxes – fiddling at the edges is not going to do.”