Chancellor John Healey is being urged to rule out a pension tax raid in his Budget on October 28, as experts warn he risks repeating the mistake made by Rachel Reeves. The warning comes as borrowing costs rise and fiscal headroom has shrunk from £24billion to below £10billion.
Healey is caught between the bond market, which wants spending cuts, and the Labour Party, which wants more taxes. Experts say he needs to make clear which taxes he will not hike, otherwise he will cause chaos like Reeves did.
Savers rushed to withdraw tax-free cash
Reeves did not rule out targeting the 25% tax-free cash allowance before her Budgets, and millions of savers raced to withdraw money while they could. Tax-free cash, technically known as the pension commencement lump sum, is one of the biggest attractions of investing in a pension.
Today, savers can take up to £268,275 tax-free, meaning anyone with a pension worth up to £1,073,100 gets the full 25% benefit. However, repeated rumours suggest the cap could be cut to as little as £100,000, which would hit anyone with more than £400,000 in a defined contributions pension.
Withdrawals soared before Reeves' Budgets
In the year of Reeves' first Budget, savers withdrew £18billion, some £10billion more than the year before. Before her second Budget, withdrawals rose to £22billion, according to AJ Bell. In total, savers took around £24billion extra due to tax raid concerns.
Reeves hiked various taxes but did not touch pension tax-free cash. She only ruled out targeting it in the final days before her November 2025 Budget, by which time the damage had been done. Many savers had already taken the money and often regretted it.
Cost of premature withdrawals
The longer money remains in a pension, the better, as it benefits from tax-free growth. AJ Bell calculates that someone who withdrew £100,000 in tax-free cash and put it into an ordinary savings account could end up around £51,000 worse off after 10 years than if the money had remained invested in their pension.
AJ Bell chief executive Michael Summersgill said the figures showed the real-world consequences of allowing pension tax speculation to run unchecked. "This trend is bad for households and bad for the economy. Pulling billions of pounds out of pensions prematurely reduces the capital available for long-term investment."
He renewed his call for a "pension lock", a pledge by politicians not to tamper with tax-free cash or the tax relief on pension contributions. Tens of millions rely on these incentives for a comfortable retirement, yet they face peril at every Budget.
