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The Budget takes place next month on October 28, with speculation once again mounting over whether the Chancellor could change the amount of pension savings people can take tax-free.
That uncertainty may tempt some people to take their 25% tax-free lump sum now, before any potential changes are announced. But acting on Budget rumours could prove an expensive mistake, particularly if you are still working, don’t need the money immediately, or have no clear plan for what you will do with it.
In the run-up to last year’s Budget, thousands of pension savers rushed to take a 25% tax‑free lump sum from their retirement savings amid fears that the 25% limit could be reduced or capped. Based on a survey of 5,000 UK retirees carried out by wealth manager Quilter, 57% withdrew tax‑free cash ahead of the Budget, and of those people, 41% did so in anticipation of possible rule changes.
Worryingly, however, three in five retirees (61%) who withdrew tax‑free cash from their pension ahead of last year’s Budget say they regret doing so.
Jon Greer, head of retirement policy at Quilter, said: “This research underlines just how sensitive retirement planning has become to continuous Budget speculation. Those saving towards and planning their retirement need and deserve certainty, and there should be a clear commitment to avoid another prolonged period of speculation ahead of future Budgets.
“The Chancellor only ruled out changes to the tax-free lump sum in the final days before the Budget, by which point the damage had already been done – this cannot be repeated in the run-up to the 2026 Budget. Allowing rumours to fill the gap for weeks or months risks undermining confidence in plans that may have been laid for decades and leading to poorer outcomes.”
Here, we explain why it’s important not to make decisions based on speculation, as well as some of the factors you need to consider if you’re thinking about taking your tax-free cash ahead of the Budget.
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How much tax-free cash can you take from your pension?
Under current rules, most people with a defined contribution pension can usually take up to 25% of their pension as a tax-free lump sum once they reach the normal minimum pension age. This is currently 55, although it is due to rise to 57 from 6 April 2028. Learn more in our guide Will the pension access age rising to 57 affect you?
For example, if your pension is worth £350,000, you could potentially take £87,500 tax-free under the current rules. The maximum amount of tax-free cash most people can receive, known as the Lump Sum Allowance, is £268,275, although some people with protected allowances may be able to take more. Find out more in our article How much tax-free cash can I take from my pension?
Once you have taken your tax-free cash, you can generally leave the rest invested in your pension, move it into drawdown, use it to buy an annuity or take further withdrawals. Any pension income you receive beyond your available tax-free amount will normally be subject to income tax at your marginal rate. You can read more about this in our article How much tax will I pay on pension withdrawals?
You can use your tax-free cash however you wish. Quilter’s research found that some 15% of those who withdrew tax-free cash prior to last year’s Budget spent the money on renovations or home improvements, while the same proportion used it to cover healthcare or other costs. A further 14% said they gifted it to grandchildren or great‑grandchildren or put it towards their education, or used it to cover day‑to‑day living costs.
But if you don’t actually need the money, there may be little benefit in taking it simply because you are worried about what might happen in the Budget.
Leaving your pension invested means it has the potential to grow further. And because your tax-free entitlement is generally based on the value of your pension when you take the benefits, a larger pension could mean a larger tax-free lump sum. For example, if your pension is worth £400,000, 25% would currently be £100,000. If it subsequently grew to £500,000, 25% would be £125,000.
Of course, investment returns are not guaranteed and the value of your pension can fall as well as rise. Read more in our guide Should I take a tax-free lump sum from my pension?
Don't assume you can simply put the money back
One of the risks of taking tax-free cash because of Budget speculation is assuming you can simply pay the money back into your pension if the changes you were worried about don’t happen.
There are rules designed to prevent people from taking tax-free cash as part of a pre-planned arrangement to increase their pension contributions and receive tax relief on the money again. However, taking tax-free cash and subsequently paying more into your pension does not automatically mean you have broken the rules.
The pension recycling rules can apply where someone takes tax-free cash as part of a pre-planned arrangement to significantly increase their pension contributions. HMRC looks at a number of conditions when deciding whether the rules apply, so it’s not simply a case of being unable to contribute to your pension for a certain period after taking tax-free cash.
If you’re considering taking a large lump sum and then making substantial pension contributions, it’s important to understand the rules before you go ahead. Otherwise, you could find yourself facing an unexpected tax charge.
Can you still pay into your pension after taking tax-free cash?
Yes, although there are some important rules to be aware of if you plan to make significantly larger pension contributions after taking your tax-free cash.
The pension Annual Allowance – the amount that can usually be paid into your pensions each tax year without triggering a tax charge – is currently £60,000. However, the amount you can personally contribute and receive tax relief on can depend on your circumstances, including your earnings and whether you’re affected by the tapered Annual Allowance. You may also be able to carry forward unused allowance from the previous three tax years.
Be aware that taking taxable income from your pension can have another consequence. If you flexibly access a defined contribution pension and take out more than your tax-free cash, you may trigger the Money Purchase Annual Allowance (MPAA). This can reduce the amount you can subsequently pay into defined contribution pensions to £10,000 a year without facing an annual allowance tax charge. Simply taking tax-free cash does not, by itself, trigger the MPAA.
Mr King said: “If you just take your tax-free cash, you do not trigger the MPAA – as long as you do not also access your pension flexibly and take taxable amounts at the same time. If you simply take the tax-free cash and leave the rest of the pot invested or in drawdown, then you don’t need to worry about the MPAA. This is important to note as many people who take their TFC want to build their pension pot back up afterwards, and the MPAA could restrict that.”
Find out more in our guide What is the Money Purchase Annual Allowance?
Why you shouldn't make pension decisions based on Budget rumours
The prospect of losing some of your tax-free pension entitlement can understandably be worrying, particularly if you have spent decades building up your retirement savings.
But there are good reasons to think carefully before acting on speculation, especially as previous changes to pension allowances have often needed complicated transitional arrangements and protections for people who had already built up pension rights under the old rules.
The Treasury would also need to consider how much additional tax revenue any reduction in tax-free cash would actually generate. People don’t necessarily withdraw their entire pension when they retire, and reducing the amount they can take tax-free may simply result in more taxable income being taken gradually over many years.
Any change would also only affect people with pension savings large enough to be affected by the new limits.
Keep calm and carry on
The key point is that you shouldn’t take your pension tax-free cash simply because you are worried about what might be announced in the Budget.
Sarah Coles, head of personal finance at AJ Bell, said: “We know from previous years just how much damage people can do to their finances if they feel forced into panicked decisions. Ahead of both the 2024 and 2025 Budgets, widespread speculation about possible reform to tax-free cash on pensions persuaded people to raid their pots. AJ Bell analysis of FCA data indicates that in 2024/25 an additional £10 billion may have been taken out of pensions for no reason other than panic.
“If this money is withdrawn without a plan, there’s a real risk it comes out of a tax-efficient environment, misses out on investment growth, and is eroded by tax, inflation and incidental spending.”
If you need the money for a specific purpose and taking it now fits with your wider retirement plans, that is one thing. But taking a large lump sum that you don’t need, simply to try to beat a possible change in the rules, is a very different proposition.
Once the money is outside your pension, you will need to decide where to keep or invest it. If you leave it sitting in a low-interest bank account, its purchasing power could be eroded by inflation over time. If you invest it elsewhere, its value could rise or fall and you may lose some of the tax advantages associated with pension saving.
Perhaps most importantly, you cannot know in advance what the Chancellor will announce. Making an irreversible financial decision based on speculation could therefore leave you worse off than simply waiting to see what actually happens.
If no changes are announced and your pension continues to grow, delaying taking your tax-free cash could potentially give you a larger lump sum in future.
For example, a £400,000 pension would currently provide up to £100,000 in tax-free cash. If the pension grew to £500,000, the equivalent 25% would be £125,000.
Investment growth is not guaranteed, of course, and pension values can fall as well as rise. But this illustrates why taking money early isn’t automatically the safer option.
A final thought…
The best approach is to look at your individual circumstances, your retirement plans and whether you actually need the money now, rather than allowing Budget speculation to make decisions for you.
If you’re considering taking a substantial amount of tax-free cash, particularly if you plan to reinvest it or pay more money into your pension afterwards, consider seeking financial advice before going ahead.
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
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