Tax-free lump sum freeze to cost wealthy pensioners £20,000

If the tax-free allowance were to rise with inflation – assumed to be 3pc a year – then the cap would have reached £320,334 by 2030, according to Quilter’s analysis.

If the cap instead remains frozen at £268,275, pensioners would have lost out on £52,059 of additional tax-free allowance, equating to £20,824 of income tax for those on the higher rate.

Savers with a defined contribution pension can access 25pc of their pension pot as a tax-free lump sum, which can be taken in one go or across several withdrawals.

But Steve Webb, a former pensions minister, now of pensions consultancy LCP, said the lump sum freeze means those with large pension funds are disincentivised from paying more in.

He added: “For people who have already saved a lot into their pension, once you’ve maxed out on tax-free cash the attraction of saving more is diminished.

“The Treasury would have privately popped the champagne corks when they put a limit on tax-free cash. These numbers [£268,275] get stuck in the tax and benefit system.

“To most people, the cap looks large but over years it will bite more and more, purely because of inflation.”

Tom McPhail, of financial consultancy The Lang Cat, said the freeze would have “big implications” for wealthier pensioners.

He added: “Fiscal drag and inflation will eat into the value of the tax free lump sum, so logically, the sooner you take the tax free lump sum the more valuable it is.”

The Treasury and the Labour party were approached for comment.