Pensioners face mortgage crisis over £100,000 cap on lump sum

The Chancellor is rumoured to be planning to slash the figure people can take from their pension nest eggs free of tax from the current maximum of £268,750 to £100,000

Pensioners who had hoped to use a tax-free lump sum from their pension pots to clear their mortgage could be hit by a crisis amid concerns that this amount might be capped at £100,000. There have been reports Chancellor Rachel Reeves is looking to slash the current tax-free limit people can draw from their retirement savings from £268,750 down to £100,000.

Traditionally, retirees have utilised the tax-free sum for clearing lingering mortgage debts, funding essential home renovations or as financial aid to help adult offspring break into the property market.

Mortgage advisors are highlighting the potential dilemma a reduced cap would represent it could mean that numerous seniors find themselves burdened with continued mortgage repayments into their golden years, the interest of which would chip away at their monthly budget.

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Should individuals withdraw beyond this new, smaller threshold, they could face income tax charges of up to 40% on the excess amount. Although, taking out less upfront might increase the regular income derived from their remaining pension funds, reports the Express.

With rumours of the anticipated alteration in the upcoming Budget gaining steam, there has been a notable flurry of professionals pondering whether to take their tax-free lump sooner than they'd initially expected. But financial pundits warn such haste could prove costly.

Commenting on the issue, Gabriel McKeown of Sad Rabbit Investments expressed his concern: "Chancellor Reeves' latest pension pot pinch threatens to tarnish retirement prospects for an entire generation."

"With Labour's commitment not to raise income tax, NI, or VAT, pensions are once again in the crosshairs, with a change that could reduce the appeal of pensions altogether."

"Furthermore, the repercussions of this policy shift could ripple through the mortgage sector, as with less tax-free cash available, retirees may be forced to extend their mortgages considerably."

"The coming weeks may determine whether the dream of a mortgage-free retirement remains within reach for Britain's future pensioners."

Iain Swatton, director at Exemplar Financial Services, expressed his concerns to Newspage: "Reports that the government may cut the amount of tax-free cash that can be withdrawn from pensions in the upcoming Budget will undoubtedly feel like another blow to pensioners."

"For many, accessing their lump sum is a key part of their retirement strategy, and while this change may primarily impact those with larger pension pots, there are mortgage holders relying on these funds to repay their loans. This could place them in a very difficult position. Even if the numbers are small, it all adds up to yet another attack on those who have diligently saved for their future."

Patricia McGirr, founder at Repossession Rescue Network, described the proposal as a "shambolic idea".

She said: "People who save and invest wisely to create a secure retirement must be free to use their capital as they choose at a time when they're ready to enjoy the fruits of their labours."

"Those reliant on using this cash windfall to pay off a remaining mortgage or other debts to reduce their outgoings will feel this most. This is just another raid on those of pensionable age. Poor form. Poorer economics."

Ben Perks, Managing Director at Orchard Financial Adviser, commented: "If you're a long-serving Police Officer who's made plans to utilise their Pension Commencement Lump Sum you're going to be pretty pee'd off, and rightly so. You cannot just move the goal posts on someone's retirement provision."

"This will almost definitely see more people taking mortgage debts into retirement, which will leave many feeling uncertain."

Michelle Lawson, Director at Lawson Financial, cautioned: "Any changes to pensions and investment retirement planning can have disastrous consequences."

Harps Garcha, Director at Brooklyns Financial, said: "The potential changes to the Tax-Free Lump Sum policy could cause undue stress for many who had planned to use it to reduce their mortgage. For those nearing retirement, this sudden shift leaves limited options to adjust their financial plans, potentially forcing some to sell and downsize. This policy risks disproportionately impacting older individuals, who may now face unexpected financial challenges at a crucial time in their lives."

Jonathan Halberda, Specialist Financial Adviser at Wesleyan Financial Services, has noted an uptick in queries from professionals like doctors and teachers about early pension withdrawals: "We've been getting more and more questions from doctors and teachers about whether they should be withdrawing their lump sums early."

He cautioned them by saying, "What we're reminding them is that so far, we're just seeing reports that this is something under consideration. While it's natural that people want to try and maximise what they get out of their pension savings, there's a real risk that by rushing into something based on speculation they actually undermine what could be years' worth of careful retirement planning."

Halberda advises patience and preparation: "It's better to wait until we have more certainty before doing anything. In the meantime, review what different scenarios might mean for your finances so you can be on the front foot if change does happen."