New threat to your 25pc tax-free pension lump sum

The Government is looking to hike taxes and slash spending to close the estimated £60billion black hole in the nation’s finances. Our pensions make a juicy target.

There have been plenty of suggestions that higher the better off will pay more, with some even suggesting Sunak and Hunt will lift the top rate of income tax to 50 percent.

Whatever Hunt finally announces, one thing seems certain judging by recent speculation.

Our pensions are in the firing line.

Most now believe the pensions lifetime allowance, that imposes a punitive 55 percent tax charge on those who save too much, is going to be tightened again.

There have been reports that the government will slash pensions tax relief on contributions made by 40 and 45 percent rate taxpayers.

They may get just 20 percent tax relief in future, in line with basic rate taxpayers. There has even been a suggestion that Hunt will charge inheritance tax on unused pension pots when people die.

The only hope is that Sunak will be deterred by the negative headlines generated from a pensions death tax.

Now it has been suggested that he will take the axe to a hugely popular benefit, the ability to take 25 percent of your pension free of tax from age 55.

Tom Evennett, UK&I family enterprise leader at big four accountancy firm EY, has suggested Hunt may revise rules around the tax-free lump sums.

“Currently individuals are able to withdraw 25 percent from their pension pot as a tax-free lump sum. The Chancellor may look to reduce this tax-free amount.”

Evennett said if he did act, he might only apply the new rules to contributions made after a future date.

But it would still mean “that any future income paid into pensions after this date would not be available to be withdrawn as part of the tax-free lump sum”.

READ MORE: ‘Pensions death tax’ warning as Hunt move threatens inheritances

Evennett said this measure would be highly lucrative to the Treasury in the long term. “But it would be very difficult politically for this Chancellor, who’d attract the ire of pensioners in the short term and receive little benefit in the near term.”

Like the pensions death tax, this could also be too politically unpopular to touch. We will find out more when Hunt delivers his statement.

Like many analysts, Evennett also believes that pensions tax relief is a likely target. “It currently costs the Exchequer £48.2billion a year and could be another area where we may see change.”

Hunt could either restrict relief to a certain amount each year or install a flat rate at which income tax relief is applied, for example, reducing the rate for higher-rate taxpayers from 40p to 25p.”

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This move may backfire though. “It may deter high earners from paying into pension pots and instead encourage investment in savings options that offer tax-free interest and more freedom than pension plans, such as ISAs.”

Jon Greer, head of retirement policy at Quilter, said cutting pensions tax relief to a flat rate of 20 percent for all would save HM Treasury up to £10billion a year. “This could go a long way towards filling the government’s public finances gap.”

Yet it could be some time before the nation’s finances feel the benefit, as the Government would have to consult before its implementation.

“That would take time and furthermore it would prove highly unpopular with the core Tory vote and their own backbench MPs.”

We will know more in just two days’ time.

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