Fabian Society Calls for Major Pension Reform
A Labour-aligned think tank, the Fabian Society, has urged Chancellor Rachel Reeves to reduce the tax-free pension lump sum from £268,275 to £100,000. The proposal, which could raise around £2 billion, has reignited concerns among retirees and financial experts about future pension taxation.
Currently, pension savers can withdraw 25% of their pension pot tax-free from the age of 55. The Fabian Society argues that this benefit is “too generous and clearly unfair,” claiming that pensions remain “systemically undertaxed” in comparison to other forms of wealth.
Reeves’s Close Ties to the Fabian Society Fuel Concern
Rachel Reeves’s long association with the Fabian Society has intensified speculation that she may consider the proposal in her upcoming November 26 Budget. Reeves has previously described herself as a “Fabian for almost as long as I have been a member of the Labour Party” and once served on its executive committee.
The Treasury has refused to comment on what it called “speculation,” but financial commentators warn that any move to reduce the allowance could trigger a significant backlash among middle and higher-income earners approaching retirement.
Proposal Seen as Progressive Yet Politically Risky
The Fabian Society’s report, led by former general secretary Andrew Harrop, outlines a case for taxing wealthier pensioners more heavily while avoiding cuts to public spending. Harrop called the move “progressive” and said it would “raise revenue from wealthy older people whose pensions were historically undertaxed.”
However, Harrop also acknowledged the political risks, suggesting the Chancellor might phase in reductions gradually cutting the maximum limit in £20,000 to £30,000 slices. Transitional protections for those near retirement would likely be required to avoid disrupting long-term financial plans.
Savers Rush to Withdraw Tax-Free Cash
Reports suggest a surge in pension withdrawals as savers rush to access their tax-free lump sums before any potential change is announced. Investment platform Bestinvest recorded a 33% rise in SIPP withdrawals, with average lump-sum withdrawals increasing by 146% compared to the two-year average.
Financial advisers say clients are anxious to secure their tax-free entitlements amid uncertainty. Two leading pension experts have reportedly decided to cash in their lump sums early, fearing that the tax-free allowance could soon be drastically reduced.
Critics Warn of Backlash and Unfairness
Wealth manager Jason Hollands of Evelyn Partners criticised the government for failing to quash rumours, warning that speculation was “causing real consternation” among pension savers. He said a reduction would “go down like a lead balloon,” particularly in the public sector, where pension benefits are already more generous than private schemes.
Hollands argued that implementing such a change without careful consultation would deepen inequality between private and public pension holders, potentially undermining confidence in long-term retirement savings.
Industry Experts Caution Against Hasty Withdrawals
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, warned that withdrawing funds prematurely could lead to penalties under pension recycling rules, which carry fines of up to 55%. She urged savers not to make “knee-jerk reactions” without understanding the potential consequences.
She also noted that HMRC has clarified that once a tax-free cash withdrawal is requested, savers cannot cancel it even if the Budget announcement does not include any change. This has added further urgency and confusion to the growing number of withdrawal requests.
Treasury Keeps Silent Amid Mounting Speculation
A Treasury spokesperson declined to comment on whether the Chancellor was considering changes to pension taxation, saying: “We do not comment on speculation around future changes to tax policy.”
Meanwhile, experts believe Reeves may instead opt for a less politically volatile move, such as reducing the annual pension contribution allowance from £60,000 to £40,000. That, according to Harrop, remains a “more likely and pragmatic” alternative to the politically explosive lump-sum cut.
