Chancellor Rachel Reeves is reportedly considering cutting the tax-free pension commencement lump sum in a bid to save more than £2bn a year for the Treasury.

According to a report in the Daily Telegraph, the amount that can be withdrawn tax-free could be cut to as little as £40,000.

The current pensions rules allow up to 25% of pension pots to be taken tax-free up to a limit of £268,000.

The Treasury told the newspaper the Chancellor was not prioritising pension reforms and thought it was “unlikely.” But the rumours have sparked concern among pension experts.

Nick Flynn, retirement income director at Canada Life said: “As we have seen in previous years, discussion often turns to the future of tax-free cash ahead of the Budget. While seismic changes, such as abolishing this benefit altogether seem unlikely, it will be interesting to see whether any adjustments to the overall cap are considered.”

He said pension savers should avoid making hasty decisions based on speculation, adding that tax-free cash remains an important element of the pension system, designed to encourage long-term saving, and decisions about accessing pensions are best made with care and, where appropriate, professional advice.

Harriet Betteridge, partner in the private client team at law firm Charles Russell Speechlys, said that clients were already rethinking their pension planning because of previously-announced tax changes.

She said: “With pensions coming into the scope of inheritance tax in April 2027, many of our clients are now considering whether to start withdrawing their tax-free lump sums to gift to children. They are also looking at drawing an income from pensions, with the option of gifting any surplus if it exceeds their needs.

She said it marks a significant shift in approach, given that the prevailing wisdom over the past decade has been to leave pension pots untouched so they could be passed on free of IHT.

She said the concern about the tax-free allowance is not new. “Even before last year’s Autumn Budget, financial advisers were worried that the availability of tax-free cash could be reduced or removed altogether. It would not be surprising if many people choose to access their pension pot cash ahead of the forthcoming Budget.”