Chancellor proposes £2 billion cut to tax-free pension withdrawals

Chancellor Rachel Reeves is facing pressure to implement significant reforms to pension withdrawals in the upcoming Budget. The Institute for Fiscal Studies (IFS) has highlighted that the current tax-free lump sum rule disproportionately benefits higher earners, with 70% of the benefits going to the top fifth of earners. The IFS has proposed reducing the upper limit for tax-free withdrawals from £268,275 to £100,000, which could generate approximately £2 billion annually, primarily affecting wealthier retirees. The IFS argues that while encouraging savings is important, the existing scheme is poorly targeted and costly to the exchequer, costing £5.5 billion each year. They acknowledge that changes should be gradual to respect the expectations of those who have saved under the current rules. Additionally, the think-tank suggests that pensions should be subject to inheritance tax and that national insurance should be levied on employer contributions. However, the IFS warns against reducing income tax relief for higher-rate earners, labeling such a move as damaging and complex. This comes amid broader discussions about the need for tough fiscal choices to repair public finances, with Labour indicating that various sectors, including retirement savings, may be scrutinized in the Budget. The speculation surrounding these potential changes is already impacting the housing market, with an increase in the sale of larger homes as landlords and second-home owners anticipate possible tax hikes. This trend reflects a broader concern about the implications of the upcoming Budget on various financial sectors.