Tax-free cash withdrawals are increasing while pension contributions are falling as savers panic over budget rumours

Pensioners are rushing to withdraw cash from their pensions amid feared cuts to tax-free benefits in the Budget, the boss of one of Britain’s leading investment platforms has said.

Savers can typically withdraw 25 per cent of their pension as a lump sum, up to a limit of £268,275, thereby avoiding paying income tax.

Chancellor Rachel Reeves is reportedly considering cutting the amount savers can withdraw without triggering a payment to HM Revenue & Customs.

Michael Summersgill, CEO of pensions provider AJ Bell, said: “Pensions are the main retirement savings vehicle in the UK and it is no surprise that customers are sensitive to changes in their tax treatment.”

“With increasing press coverage in the run-up to the upcoming Budget, we have seen a noticeable change in both customer pension contributions and tax-free cash withdrawals.

“We have therefore submitted a commitment to the Ministry of Finance for a pension tax freeze in the budget to ensure stability in important pension tax laws, at least for this Parliament.”

A change to the UK’s generous pension tax allowances has been feared for several years as chancellors look for ways to raise money without adding further debt to the country or increasing income tax.

The bonuses are designed to encourage workers to save more to top up their state pension, which at £11,502.40 is one of the stingiest in Western Europe.

However, these rules are most beneficial for high earners who want to reduce the burden of the 40 percent and 45 percent tax bracket. These bands start for those who take home more than £50,571 a year.

In addition to tax relief when withdrawing pension savings, there are also tax relief for savers who are still building up their pension fund.

In contrast, these savers are investing more money and betting that the Treasury will cut their generous tax-free savings allowances, which are most attractive to higher-rate taxpayers who can get back the 40 percent they pay on their income.

Think tanks including the influential Institute for Fiscal Studies and the left-leaning Fabian Society have suggested cutting the tax-free allowance for pensioners to £100,000, saying such a shift would only impact the richest.

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The current allowance will benefit those whose pension funds are around £1 million or less, a group unlikely to need additional help, the IFS suggested.

If AJ Bell’s findings are anything to go by, the change in behavior among retirees and savers has not led to a mass withdrawal of funds. The provider said the amount of money it managed rose by more than a fifth to £86.5 billion in the year to the end of September.

Ms Reeves said she needed to close a £22bn “black hole” to balance the government’s balance sheets, although critics have suggested changes to Treasury rules could ease much of the pain.

The Chancellor told ministers at a Cabinet meeting this week that plans to close the gap in Britain’s finances would only be enough to “shut down public services”.

Ms Reeves is also reportedly considering an overhaul of the capital gains tax, which pays taxes on assets that have increased in value, from company shares to second homes.