The tax-free pension lump sum has its problems, but is limiting the allowance actually a good idea, asks Daniel Herring

In order to plug the holes in her upcoming Budget, Rachel Reeves is reportedly planning a fresh tax raid, this time on the tax-free pension lump sum.

At the moment, anyone over 55 can withdraw a quarter of their pension pot tax-free, up to a maximum £268,000. The Chancellor apparently wants to limit this to just £40,000.

How does the tax-free lump sum work?

The tax-free lump sum is a funny quirk of our pensions system. In general, you get tax relief on the money paid into a pension pot, but pay tax as you withdraw it. In other words, your income is still taxed, just at a later point in your life. The tax-free lump sum, however, means that a portion of your pension escapes the taxman – acting not just as a pleasant way to start your retirement, but an incentive to save in the first place.

Purist economists would say that, strictly........

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