Pensions Tax Shake-Up? What Might Be Coming in the Next Budget

As the UK edges closer to its next fiscal budget announcement, speculation is mounting over possible changes to pensions tax policy. Former pensions minister Steve Webb has weighed in, offering insights that could have significant implications for retirees and financial planners alike.

What’s on the Table?

Webb suggests that the government may be eyeing reforms to the 25% tax-free lump sum—a cornerstone of pension planning for many. This benefit allows individuals to withdraw a quarter of their pension pot without paying tax, often used to clear mortgages, fund retirement travel, or support family members.

But with mounting fiscal pressures, the Treasury may be tempted to scale back or restrict access to this generous allowance. Webb warns that while outright abolition is unlikely, caps or means-testing could be introduced, particularly for higher earners.

Why Now?

The UK’s ageing population and rising pension costs are putting strain on public finances. At the same time, the government is keen to demonstrate fiscal responsibility ahead of the next general election. Reforming pension tax reliefs—especially those perceived as benefiting the wealthy—could be politically palatable and economically impactful.

What Should You Do?

Webb’s advice is clear: don’t panic, but do plan. If you’re approaching retirement and considering taking your tax-free lump sum, it may be worth reviewing your options sooner rather than later. Financial advisers should also be proactive in discussing potential scenarios with clients, especially those with larger pension pots or complex retirement plans.

Looking Ahead

My own view is that he is not wrong - in fact the Treasury have been eyeing up tax-free lump sum at least since 2006 when the term was dropped and replaced with Pension Commencement Lump Sum (PCLS) ushering in the arrival of the Lifetime Allowance leaving advisers and clients to navigate a complex web of Protections for the next 19 years! But let’s not forget that in April 2024 the Lump Sum Allowance arrived, essentially removing PCLS altogether and with tax free cash essentially capped since the days of Alistair Darling, the likely impact on the Civil Service and many other public servants there may not be much room for maneuver here.

Many high earners are also already caught by a type of means-testing. The tapered annual allowance, reduces the amount they may pay into a pension from £60,000 to £10,000 and also worthy of a mention is that money purchase pension funds are likely to fall within the Inheritance Tax regime from April 2027.

Surely there cannot be more tinkering in this already muddy and yet vital pillar of financial planning?

While nothing is confirmed, the possibility of pensions tax reform is real—and potentially imminent. Staying informed and agile will be key. Whether you're a retiree, adviser, or policymaker, the message is the same: watch this space.

If you do have concerns about your own situation then please do get in touch by clicking the link below.