State pensioners will lose £268,275 allowance after Winter Fuel Payment cut

The £300 Winter Fuel Allowance cut from the Department for Work and Pensions ( DWP ) and new Labour Party government has sparked fury.

Rachel Reeves is set to declare an "all-out war" on pensioners with a cap on their tax-free lump sum in the wake of the Winter Fuel Payment cut. The £300 Winter Fuel Allowance cut from the Department for Work and Pensions ( DWP ) and new Labour Party government has sparked fury.

And now Ms Reeves could call for a cap on Lump Sum Allowance (LSA) off the back of the Winter Fuel Payment cut. Under the current LSA, people can withdraw lump sums of up to 25 per cent tax-free, and to the same amount of £268,275.

But Ms Reeves could curb the tax-free sum at a lower amount or slash the proportion pensioners can take. Steven Cameron from the wealth manager Aegon, warns that the Government is facing calls to reduce the relief for those with the biggest pension pots.

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"There is a possibility that the budget could either cap the tax-free lump sum at a much lower amount or reduce the proportion you can take to, say, 20 per cent. Both would increase the tax take," he told The Times. The Institute for Fiscal Studies (IFS) predicts that a £100,000 cap on the tax-free lump sum would impact one in five pension savers.

"To generate extra income tax, these changes would have to apply to pots already built up over years or decades," Cameron added. "This would be highly controversial, reducing one of the most valued tax incentives that pension savers look forward to.

"If you were planning to take your tax-free lump sum soon anyway, it may be worth considering taking it before the budget. But taking money out of your pension before you need it is generally not a good idea because you will lose other tax benefits."

Mr Cameron said: "Higher and additional rate taxpayers concerned about losing out, and who plan to boost their pension pot in the future, could consider paying in more before the budget."