State pensioners could be set to lose their £268,275 tax free allowance under changes introduced by Labour from October.
Although Labour has promised not to change National Insurance, VAT or Income Tax, Prime Minister Keir Starmer has admitted that the upcoming Budget on October 31 will be ‘painful’, and also underlined it by adding that the government may make ‘unpopular’ decisions to plug what it says is a £22bn ‘black hole’ in the nation’s finances.
One decision which would be both painful and unpopular centres around the tax-free lump sum on pensions.
Under the current system, most people are allowed to withdraw as much as 25 percent of their pension pot built up through work from the age of 55, without paying any tax on that 25 percent.
There is a limit of £268,275, so even if this number represents only 20 percent of your pension pot, you cannot take out any more than that because it caps the withdrawals – so it would be more accurate to say 25 percent of your pension or £268,275, whichever is lower.
Keir Starmer made a comment on scrapping the entire 25 per cent lump sum during the election but this was quickly shut down by Labour, who said he had made the comment in error.
And it has been speculated that, along with changes to pension tax bands, new Chancellor Rachel Reeves could look at changing this tax free lump sum – either by lowering the cap percentage or the cash amount itself.
Tom Selby, director of public policy at AJ Bell said: ‘It would also inevitably be hugely complicated, as those who have already built-up entitlements to tax-free cash under the existing rules could almost certainly need to be protected against a retrospective retirement tax.
“Furthermore, the overall amount people can access tax-free has already been scaled back significantly over the last 14 years, and if the current figure remains frozen, it will continue to be eroded in real terms.”
The final decision on tax changes will be announced in the autumn Budget on October 31, with tax implications likely to kick in from April 6 2025 for any allowances which are changed.
