- Government refuses to commit to Pension Tax Lock following petition backed by over 22,000 signatories
- Despite insisting it wants to promote confidence in pension saving, government opts not to provide long-term commitment to pension tax stability, risking the prospect of a ‘doom loop’ of damaging rumour and speculation ahead of each Budget until the election
- Pension tax stability would encourage retirement saving, giving people confidence in the system
- It remains the case that accessing your pension and taking your tax-free cash is an irreversible decision, and should be made for the right reasons rather than being a knee-jerk reaction to speculation
Tom Selby, director of public policy at AJ Bell, says:
“Despite two bites at the cherry, after fellow MPs rejected the Treasury’s first attempt to dodge the question, Rachel Reeves has comprehensively failed to deliver much-needed certainty for pension savers by rejecting calls to commit to a Pension Tax Lock.
“The government says it wants to ‘encourage pension saving’ and insists it understands the need for ‘promoting confidence in pension saving’. But in the same breath reveals the blatant contradiction in its own thinking by declining to end speculation that damages confidence in the system.
“Having overseen one of the leakiest Budgets in living memory, the government must be well aware it has created the conditions for rampant speculation. It is now knowingly turning a blind eye to the consequences and refusing to do anything to address it, leaving people in limbo once again. This runs a real risk that each successive Budget until the next general election will be met with the same doom loop of unbridled rumours about the fate of pension tax incentives, resulting in more people accessing their pensions for the wrong reasons.
“A commitment to pension stability would encourage retirement saving, giving people certainty government won’t foist extra income tax on their savings – either by curbing tax relief on contributions or reducing tax-free cash at retirement.
“Despite this, the fact remains that pension savers should focus on their long-term plans for retirement when choosing to access their pots, not be swayed by the wildfire of pension tax speculation the government seems so unwilling to put out.”
Background
Government response (22 October):
This response can also be found on the petition page:
The Government is committed to ensuring pensioners have security in retirement and has launched a Pensions Commission to look at what is required to ensure the system is strong, fair and sustainable.
The Government wishes to encourage pension saving, to help ensure that people have an income, or funds on which they can draw on, throughout retirement. The Government is committed to supporting savers at all stages of life. That is why, for the majority of savers, pension contributions made from income during working life are tax-free. This is known as 'pensions tax relief'. This relief is available at an individual's marginal rate. For example, contributions from a basic rate (20 per cent) taxpayer who contributes to a registered pension scheme in 2025/26 receives tax relief at 20 per cent. This makes pensions tax relief one of the most expensive reliefs in the personal tax system, costing £78 billion in 2023/24.
Investment growth of assets in a pension scheme is also not subject to tax. From age 55 (or when scheme rules allow a pension to be taken), up to 25 per cent of the pension can be taken tax-free (capped for most at a maximum of £268,275), depending on scheme rules. Pension income received (for example as a regular annuity payment or as income drawn down from a pension) is subject to income tax at an individual's marginal rate, to reflect the fact that pensions in payment are a form of deferred income and have not been previously taxed.
With regard to the proposed ‘pension tax lock’, the Government does not comment on proposed tax changes or tax related speculation ahead of Budgets.
The Government recognises the importance of promoting confidence in pension saving and is committed to ensuring future generations of pensioners have security in retirement. This is why the government announced a landmark two-phased review of the pensions system days after coming into office.
The first phase, the Pensions Investment Review, focused on reforming the pensions landscape to boost savers’ pension pots. These reforms will be delivered through the Pension Schemes Bill. The Pensions Commission will build on these foundations and make recommendations to the government on the broader questions of adequacy, fairness, and sustainability to guide the long-term future of our pensions system. The Pensions Commission will be undertaken by Baroness Jeannie Drake, Sir Ian Cheshire and Professor Nick Pearce.
More information on the Pensions Commission, including its Terms of Reference, is available here: https://www.gov.uk/government/publications/pensions-commission-terms-of-reference
HM Treasury
Petitions Committee (5 November):
The Petitions Committee (the group of MPs who oversee the petitions system) has considered the Government’s response to this petition. They felt the response did not respond directly to the request of the petition. They have therefore asked the Government to provide a revised response.
When the Committee receives a revised response from the Government, we will publish this and share it with you.
Revised government response (Response given 10 December and published 17 December):
The Government wishes to encourage pension saving, to help ensure that people have an income, or funds on which they can draw on, throughout retirement. The Government is committed to supporting savers at all stages of life. That is why, for the majority of savers, pension contributions made from income during working life are tax-free. This is known as 'pensions tax relief'. This relief is available at an individual's marginal rate. For example, contributions from a basic rate (20 per cent) taxpayer who contributes to a registered pension scheme in 2025/26 receives tax relief at 20 per cent. This makes pensions tax relief one of the most expensive reliefs in the personal tax system, costing £78 billion in 2023/24.
Investment growth of assets in a pension scheme is also not subject to tax. From age 55 (or when scheme rules allow a pension to be taken), up to 25 per cent of the pension can be taken tax-free (capped for most at a maximum of £268,275), depending on scheme rules. Pension income received (for example as a regular annuity payment or as income drawn down from a pension) is subject to income tax at an individual's marginal rate, to reflect the fact that pensions in payment are a form of deferred income and have not been previously taxed.
The petition proposes a ‘Pension Tax Lock: a commitment not to reduce the amount people can withdraw from their pension tax-free or the amount of tax relief given on pension contributions’.
At Autumn Budget 2025 the Government announced that it is changing how salary sacrifice for pension contributions works – from April 2029, the amount that is exempt from National Insurance contributions (NICs) will be capped at £2,000 a year for employee contributions made via salary sacrifice. More information on this change is available here: https://www.gov.uk/government/publications/changes-to-salary-sacrifice-for-pensions-from-april-2029
The government made no changes at Autumn Budget to the pension lump sum tax-free allowance, or to income tax relief on employee pension contributions. The Government keeps all aspects of the tax system under review as part of the annual Budget process, and in the context of the wider public finances, and does not intend to introduce a pensions tax lock.
The Government recognises the importance of promoting confidence in pension saving and is committed to ensuring future generations of pensioners have security in retirement. This is why the government announced a landmark two-phased review of the pensions system days after coming into office.
The first phase, the Pensions Investment Review, focused on reforming the pensions landscape to boost savers’ pension pots. These reforms will be delivered through the Pension Schemes Bill. The Pensions Commission will build on these foundations and make recommendations to the government on the broader questions of adequacy, fairness, and sustainability to guide the long-term future of our pensions system. The Pensions Commission will be undertaken by Baroness Jeannie Drake, Sir Ian Cheshire and Professor Nick Pearce.
More information on the Pensions Commission, including its Terms of Reference, is available here:
https://www.gov.uk/government/publications/pensions-commission-terms-of-reference
HM Treasury
This is a revised response. The Petitions Committee requested a response which more directly addressed the request of the petition. You can find the original response towards the bottom of the petition page (https://petition.parliament.uk/petitions/740486)
Petition
The petition, registered on 1 October, can be found here.
Anyone can start a petition as long as they are a British citizen or UK resident. If a petition receives 10,000 signatures the government must respond. If it reaches 100,000 signatures it will be considered for debate in parliament.
Petition text:
Introduce a Pension Tax Lock to help protect retirement savings and incentives
The chancellor should introduce a Pension Tax Lock: a commitment not to reduce the amount people can withdraw from their pension tax-free or the amount of tax relief given on pension contributions. We believe this would help ensure retirement savings are protected and people can save with confidence.
We believe this simple commitment could put an end to the speculation seen ahead of every Budget – speculation which we think erodes confidence in long-term saving and can all-too-often lead to people making poor, sometimes irreversible, financial decisions.
We think this would come at zero cost to the Exchequer and would allow people to save for retirement with more confidence. We feel it could support the government’s twin aims of delivering pensions adequacy and boosting economic growth.
Pension Tax Lock
AJ Bell has consistently campaigned for government to commit to pension tax stability, with a focus on key tax incentives – tax-free cash (pension commencement lump sum) and tax relief.
Constant speculation about potential changes to retirement saving incentives, particularly tax-free cash, undermines confidence in the pensions system and leads to people making irreversible decisions based on fear, rather than their long-term financial goals. This is an unacceptable position given pensions form the cornerstone of long-term financial planning and personal financial responsibility.
Furthermore, it runs counter to wider government efforts to boost pensions adequacy and drive greater levels of investment, including in the UK economy.
The Tax Lock proposal calls for a government commitment to the two core tax incentives in-built in the pension system:
- Tax relief: Pensions operate on the basis of a tax deferral system whereby individuals are expected to pay tax in retirement but receive tax relief on contributions at their marginal rate.
- Tax-free cash: Individuals are entitled to take 25% of their pension tax-free, normally referred to as tax-free cash or a pension commencement lump sum. At the very least this entitlement should not be reduced from its current level of £268,275.
