We’ve all been taken for fools by the Chancellor’s latest cynical tax raid which has taken away a huge chunk of your tax-free pension income

Ahead of his recent Budget, Chancellor Jeremy Hunt was poised to substantially increase the lifetime pension allowance to spare thousands of us from 55pc tax rates on our retirement funds.

The cap on tax- free savings had been slashed back and had long lagged behind in real terms, meaning more and more top earners – including top NHS doctors – were being dragged into the punishing tax trap.

No one was expecting what was about to come next. When finally delivering his Budget, the Chancellor told Parliament: “Some have also asked me to increase the lifetime allowance from its £ 1m limit. But I have decided not to do that. Instead I will go further and abolish the lifetime allowance altogether.”

The Chancellor hailed the move as a “tax reform” that will “incentivise our most experienced and productive workers to stay in work for longer”.

But two weeks later, the dust has settled and we are now realising that we have all been taken for fools.

It is now clear that the truth is most of us would have been better off had Mr Hunt simply raised the lifetime allowance (LTA) rather than abolishing it completely.

This is because the tax-free pension lump sum perk has been frozen at 25pc of the old lifetime allowance – £268,275. Had Mr Hunt increased the lifetime allowance, the tax-free lump sum entitlement benefit would have been raised proportionally.

It means those with the very biggest pension pots still no longer have an incentive to save more than the old lifetime allowance of £ 1.07m. This is because, assuming you are a higher-rate taxpayer in both work and retirement, tax relief is given at 40pc when the money goes in and pension income will be taxed at 40pc when it comes out.

The tax-free pension lump sum was £268,275 when the LTA was £1.07m. Had the it gone up to £1.8m as predicted ahead of the Budget, then the amount savers could withdraw tax-free would have soared to £450,000.

By unpegging the tax-free 25pc pen‘The tax-free pension lump sum will be left to wither away as inflation eats into its real value’ sion rule, the Chancellor has cost higher-rate paying pensioners more than £70,000, and those who pay the basicrate in retirement about £36,000.

Had he instead increased the lifetime allowance in line with inflation it would be worth more than £2.5m and higher- rate taxpayers could expect to receive close to £150,000 more in taxfree cash.

So by abolishing the allowance, Mr Hunt has removed a huge chunk of your tax-free pension income. The tax-free lump sum – which many use to pay off mortgages – were a cornerstone of former chancellor George Osborne’s pension freedoms reform, and it has been taken away from you.

It is now clear that the tax- free pension lump sum will be left to wither away as inflation eats into its real value.

The Tories are shamelessly presiding over the highest tax burden since 1948. Calculations from broker Interactive Investor this week showed that tax per person will hit £15,649 in 2027. This compares with the equivalent of £2,260 in 1953.

The Conservatives are truly taking us for fools.