Rachel Reeves: will Chancellor scrap tax free pension lump sums - what it may mean for retirement withdrawals

• Pensioners over 60 could face lower tax-free lump sums from their pension pots
• Current cap is £268,000; proposals could reduce it to around £40,000
• The change aims to raise up to £2bn to help plug a £50bn government shortfall
• Larger pension pots would be most affected; smaller savings likely see little impact
• Any final decision is expected in the Autumn Budget, likely between late October and early November 2025

Pension savers over 60 could soon face tighter limits on how much they can withdraw from their retirement pots without paying tax.

That’s as Chancellor Rachel Reeves considers changes aimed at plugging a multi-billion-pound gap in public finances.

But what exactly might the changes look like, and how could they affect pensioners going forward? Here is everything you need to know about it:

What could change?

Currently, retirees can take up to 25% of their pension pot tax-free, capped at £268,000.

Any withdrawals above this are subject to income tax, offering flexibility for those looking to cover big expenses, pay off debts, or gift money to family.

But officials are now reviewing whether lowering this tax-free threshold could raise as much as £2 billion a year for the Treasury, as reported by The Daily Telegraph.

The idea has been floated amid growing concerns over a projected £50 billion shortfall in government finances. Experts warn that without changes, the Chancellor may need to revisit borrowing rules or hike taxes elsewhere.

Pensions Minister Torsten Bell has previously proposed lowering the tax-free lump sum limit to £40,000, a significant drop from the current cap.

While such a move could generate additional tax revenue, it also raises questions about the long-term planning of people who rely on pensions as their primary source of retirement income.

What could it mean for your money?

For older savers, any reduction in the tax-free lump sum could have a tangible impact on retirement planning.

Those approaching or already in retirement may have been counting on the ability to access a substantial chunk of their pension to fund home improvements, cover healthcare costs, or help adult children financially.

A lower limit could mean more withdrawals are taxed at their regular income tax rate, potentially reducing the amount available for these plans.

Any changes to the tax-free lump sum would would primarily affect larger pension pots - those with more modest savings may see little impact.

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How likely is a change?

While Treasury sources have called a cut to the lump sum “unlikely,” economists suggest it is on the table alongside other options, such as a “mansion tax” on capital gains from high-value property sales.

According to the National Institute of Economic and Social Research (NIESR), the Chancellor faces a £41.2 billion shortfall to meet her fiscal rules.

To restore a modest £10 billion buffer in forecasts, the government must raise £51.1 billion overall, leaving no easy options.

Targeting pension tax relief is seen as one of the more viable avenues, alongside potential changes to property taxation. But a Treasury spokesman emphasised that growing the economy remains the Government’s priority.

“We are committed to keeping taxes for working people as low as possible,” they said, adding that income tax, National Insurance, and VAT rates remain protected.

When is the Autumn Budget?

Reeves is expected to outline any concrete changes at a future Budget. The Autumn Budget 2025 has not been officially scheduled yet, but following tradition, it is most likely to be delivered in late October or early November 2025.

It is broadly expected to fall between October 28 and November 4. For now, homeowners and buyers alike will be watching closely, as this shift could reshape one of the biggest financial transactions of our lives.

The second budget under Chancellor Reeves is expected in a couple of months, and all eyes are on whether she will break a key manifesto promise not to raise taxes for working people.