As Chancellor Rachel Reeves faces increasing pressure to address fiscal challenges, speculation is mounting that she may consider reforming pension tax reliefs as a way to raise additional revenue.

With the upcoming Autumn Budget on the horizon, financial experts and think tanks are warning that such reforms, though potentially lucrative for the Treasury, could come with significant practical and political risks.

Noting that Ms Reeves has left the nation “in no doubt” that painful decisions are coming in the Budget on October 30, Tom Selby, director of public policy at AJ Bell, said: “The country remains in the dark on where exactly the axe will fall.

“Like nature, politics abhors a vacuum, and the lack of clarity has led to inevitable speculation about possible revenue-raising reforms to pension tax relief and tax-free cash, as well as Capital Gains Tax.

“The fact the Government has boxed itself in by ruling out increases to the rates of income tax, National Insurance (NI) and VAT; insisting it will not raise taxes on ‘working people’; and saying its key economic priorities are growth and wealth creation further confuses the picture. It is hard to see how the Chancellor can raise the money she says she needs without undermining at least one of these pledges.”

One of the most frequently discussed proposals is the reduction of the amount retirees can withdraw from their pension tax-free.

Currently, individuals can take out 25 percent of their pension pot tax-free, up to £268,275. Lowering this threshold could potentially raise £2billion annually, according to estimates by the Institute for Fiscal Studies (IFS).

However, Mr Selby warned that such a move would be “deeply unpopular” and could undermine broader Government efforts to promote long-term savings and investment.

Another reform gaining attention is the idea of subjecting pension pots to inheritance tax, which could raise hundreds of millions of pounds. Mr Selby described this “pension death tax” reform as a “low-hanging fruit ready to be picked”.

A present, pension savings are exempt from inheritance tax, unlike housing or other assets, if an individual dies before they reach 75.

For individuals who pass away after the age of 75, any inherited pension is subject to income tax, with beneficiaries taxed at their personal income tax rate. Importantly, pensions typically remain outside of the deceased’s estate for inheritance tax (IHT) purposes, allowing beneficiaries to inherit the pension without facing IHT liabilities.

While Mr Selby acknowledged that these rules are “undoubtedly generous,” he stressed that changing them could create a sense of betrayal among those who have already made financial decisions based on the existing system.

He said: “There will, for example, be lots of people who chose to transfer defined benefit pensions into a defined contribution scheme in part because they wanted to prioritise passing money on tax efficiently to loved ones.

“If all of a sudden that money became subject to a new pension death tax, those people would, understandably, feel like the rug has been pulled from under them.

“It is therefore possible a complicated protection regime would be needed to ensure people are not subject to unfair and arguably retrospective tax measures. This would inevitably reduce the money the Treasury could potentially raise from such a move.”

Mr Selby noted that, given the Government’s focus on stability, it would be “positive” if the Chancellor used her Budget to commit to ending the constant speculation and providing long-term certainty around pension tax incentives.

He added: “Savers are making a long-term commitment when saving in a pension, so a commitment to stability from the Government doesn’t feel like too much to ask.”