Rachel Reeves eyes up new tax raid on pensioners in October Budget

The Chancellor is reportedly considering slashing the amount of tax-free cash that can be taken from a pension pot, in a move that would hit millions of savers

Pensioners could face further financial challenges in the upcoming October Budget, as Chancellor Rachel Reeves is reportedly considering another tax increase. According to reports, those with savings might see their tax-free lump sum cut by up to two-thirds in her forthcoming fiscal statement.

At present, individuals who reach 55 can take up to 25 percent of their pension pot tax-free, with a cap of £268,275. However, it has emerged that officials under Ms Reeves are exploring the possibility of reducing this threshold to just £100,000.

This proposal, advocated by progressive think tanks, could provide Ms Reeves with an additional £2 billion in revenue for Labour's spending plans. The Telegraph disclosed this potential policy shift after a leading pension provider was approached by officials to evaluate the impact of such a change.

Both the Institute for Fiscal Studies and the Fabian Society have suggested that the existing cap disproportionately benefits the affluent, with the former suggesting it could affect around 20 percent of retirees. Ms Reeves has been cautioned tonight about a potential "major outcry" from pensioners.

Steven Cameron from Aegon criticised the idea, stating: "Many individuals will have planned their retirement finances on the assumption they could take 25 percent of their full fund as a tax-free lump sum.", reports the Express.

Additionally, Mike Ambery of Standard Life highlighted that implementing the policy would be "operationally complicated".

He clarified: "That's because pension funds are normally written under trust and also you can't really retrospectively make changes to benefits that people have already built up. It could be subject to a legal challenge."

Earlier this week, many pensioners may have felt a sense of relief when it was revealed that Ms Reeves had abandoned plans for another raid on savings. The Chancellor had intended to raise funds by reducing tax relief for those earning just £50,000 a year.

However, senior Treasury officials informed her that lowering the current 40 percent level of tax relief would impact those in good jobs who had dedicated their lives to the public sector. For instance, a nurse earning £50,000 could face an additional tax bill of up to £1,000 a year.

A high-ranking Government source told the Times that such a move would be "madness", considering the Treasury has spent the months since the General Election working hard to provide public sector workers with significant pay rises. There is still intense pressure on the Chancellor to use any surplus to reverse her harsh decision to cut Winter Fuel Payments.

However, Labour is increasingly encountering obstacles ahead of the Budget, as Treasury officials warn that several of their main manifesto money-raising pledges will not generate nearly as much cash as they anticipated. These include plans to abolish nondom tax status.