The chancellor chose to leave the tax-free lump sum unchanged in the Autumn Budget
The pensions tax-free lump sum has remained unchanged, despite speculation the chancellor would tinker with this in the Autumn Budget.
Chancellor Rachel Reeves delivered her Budget today (26 November), confirming changes to salary sacrifice for pensions and inflation protections for pre-1997 pensions in the Pensions protection Fund and the Financial Assistance Scheme.
One potential area of change that has been discussed since the chancellor announced the date of this Budget back in September is the tax-free lump sum and whether there would be any tweaks to this. However, during her speech, Reeves confirmed there would be “no change” to the tax-free lump sum, a move Gallagher chief executive David Piltz said was “welcome”.
Burges Salmon partner and head of pensions Richard Knight added: “The chancellor confirmed today that there will be no changes to the existing lump sum allowance for members to take tax-free cash from their pensions. Whilst the move not to reduce the allowance has been widely welcomed, its worth noting that there is no increase to the allowance in prospect either.
“To recap, the lump sum allowance was introduced with effect from April 2024, following the abolition of the lifetime allowance (LTA). The cap is set at £268,275 (being 25% of the LTA at the date of abolition) and, whilst it might be easy to forget about at this stage (since the number of individuals with savings in excess of the 2023/24 LTA will be small), with no provision in the legislation for this to be uplifted over time, this frozen amount could be considered another form of fiscal creep (similar to the frozen income tax bands that have attracted so much comment today).
“A brief glance online at the Bank of England inflation calculator shows us that, over a working lifetime of 40 years, inflation can have a dramatic impact. As an illustration, £268,275 in 1984 would have been equivalent to nearly £850,000 in 2024. Or put another way, £268,275 in 2024 terms was equivalent to just £85,000 in 1984 money.
“Whilst few people are affected by the lump sum cap now, if there is no action to adjust the cap in future it will continue to be eroded in real terms by the rate of inflation and more and more people will hit the cap over time. This is likely to have a material impact in the public sector, where most schemes remain defined benefit and members are still accruing benefits (so may have pensions worth more than the LTA – indeed the abolition of the LTA was in part driven by concerns over the impact on public sector workers).”
Aegon UK pensions director Steven Cameron noted: “This year, like last, there was extensive and harmful speculation that the chancellor would cut entitlements to the tax-free lump sum. This remains intact with individuals able to take up to 25% of their pot tax-free, subject to a maximum of £268,275.
“There were also fears over cuts to the tax relief top-ups individuals receive on contributions made into pensions. Under the continuing system, the government boosts personal contributions at your highest marginal income tax rate, up to a generous annual allowance of £60,000.
“Given pensions are long-term investments, which can’t be accessed until age 55 (rising to 57 in 2028), it’s important that people have confidence in these tax incentives, encouraging them to save for their futures.
“We can’t afford another year of Budget ‘hokey cokey’, which has led to some individuals taking pre-Budget actions they might later regret. We urge the government to confirm no further changes to the pensions tax system, at least for this parliamentary term.”
Holly Roach Professional Adviser