How does Rest Less make money
We make money through advertising and commission from affiliate links, which enable us to offer Rest Less as a free service to our users. The content on this page may use affiliate links, which track traffic from our website to a third party provider and enable us to receive a commission or payment from any traffic we refer.
* Affiliate links on this page have an * next to them. We place enormous importance on our editorial independence and the integrity of our content which means that we will never change how we write about something as a result of an affiliate link.
The Autumn Budget is looming, triggering fears that tax-free pension cash could be in the firing line in the Chancellor’s hunt for savings.
Given the black hole in public finances, many pension savers are worried that the Chancellor will restrict their ability to take 25% of their retirement savings tax-free. However, it’s worth noting that there were similar predictions prior to last year’s Autumn Statement, yet no changes to tax-free cash were announced.
Gary Smith, senior financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said: “Suspicions last summer that the Chancellor was set at the 2024 Budget to cut the maximum tax-free pension cash down from the current £268,275 sparked a rush of enquiries from concerned clients, and our financial planners are experiencing something similar this summer.
“Before the last Budget a significant number of savers above 55 years of age decided to take their tax-free lump sum. Some of those who had done so without a clear need or purpose for it scrambled in the days after the Budget to reverse their decision, with mixed results.
“In an echo of many recent Budgets, pension tax relief could come under the spotlight yet again, with recent HM Revenue and Customs figures showing very substantial amounts of income tax and National Insurance ‘sacrificed’ by the Treasury as it allows savers effectively to keep their gross income if they put it into a pension. We can expect a rerun of last summer’s uncertainty, unless the Treasury rules out such moves. That it hasn’t, again – despite calls from stakeholders in the financial services sector to do so – can only leave people to suspect that pensions are on the table for the Budget.”
Here, we look at some of the pros and cons of taking your tax-free cash now, and why, if you’re considering doing so, you should make sure you have a clear plan for this money.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
What are current tax-free cash rules?
Under current rules, those with defined contribution pension schemes can usually take a 25% tax-free lump sum out of their pensions once they reach the age of 55, rising to 57 by 2028. However, different pension schemes can have different rules, so you’ll need to check with your provider to see at what age you can start taking retirement benefits from your pension. Find out more in our article Should I take a tax-free lump sum from my pension?
You can currently take a maximum pension tax-free cash lump sum of £268,275 out of your pension, which is equivalent to 25% of the old Lifetime Allowance. This is known as your Lump Sum Allowance (LSA). Find out more in our article How much tax-free cash can I take from my pension?
After you’ve withdrawn any tax-free cash the remainder of your pension may, for example, be moved into a drawdown plan, used to buy an annuity or taken as cash. Any wishdrawals beyond your 25% tax-free cash will be subject to income tax at your marginal rate. Read more about this in our article What are your pension options at retirement?
You don’t have to take the full 25% at once if you don’t want to. For example, you can take smaller regular amounts from your pension if you prefer, and opt for 25% of each of these payments to be tax-free. So, for example, if you had a bigger pension pot and were to take £2,000 from it each month, £500 of this would be tax-free whilst the remaining £1,500 would be taxable. Find out more in our guide How much tax will I pay when I withdraw my pension?
Will Labour scrap the 25% tax-free lump sum?
No one knows for certain what will be unveiled in the Autumn Budget, or whether the 25% tax-free lump sum will be abolished, but one thing that is guaranteed is that such a move would prove extremely unpopular with pension savers.
The new government may consider fully scrapping the tax-free lump sum a step too far. Instead, there’s a chance it might look at reducing the maximum tax-free lump sum you can take, perhaps to £200,000, £150,000 or even £100,000.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Rumours around tax-free cash have been rife, with speculation that the Chancellor may look to trim back how much you can take. Rumours are concerning, but they are just that – rumours, and it’s important you don’t feel pushed into taking a decision that you later come to regret.
“We know from last year that there’s a risk that speculation encourages people to take their tax-free cash earlier than they need to, and once it is removed, there are no guarantees it can go back in. Doing so without a plan for what you are going to do with it can create all sorts of issues. A pension is a hugely tax-efficient way to build wealth – taking it out and putting it elsewhere risks leaving you open to a host of taxes, such as capital gains or dividend tax. You could also miss out on all important investment growth that would give you not only a bigger pension, but also a bigger slice of tax-free cash further down the line. If you leave the money in an easy access account, there’s also the chance that you fritter it away over time.
“Those who take the tax-free cash and hope to reinvest it back into their SIPP if the change is not made need to be incredibly careful. There’s every chance you could fall foul of strict pension recycling rules that could see you clobbered with a substantial tax charge. Some thought they could make a late instruction to take tax-free cash in the run-up to the last Budget and then cancel it if needed, only for HMRC to say they would be unable to do so. It’s a situation that can cause upset and distress.”
Things to consider before taking your tax-free cash
Taking a 25% tax-free lump sum from your pension shouldn’t be entered into lightly, and there are several things you’ll need to consider before you act.
1) What will you do with the money?
There’s little point in taking your 25% tax-free lump sum out of your pension just for it to sit in a savings account, as over long-term periods cash savings are likely to be eroded by inflation. If you invest this money outside your pension, you may have to pay Capital Gains Tax (CGT) on investment growth and tax on dividend income. It’s therefore a good idea to have a clear plan as to what you’ll do with it, whether that’s using it to pay down your mortgage or to cover everyday living expenses. Find out more about options for your tax-free cash in our article What’s the best way to use my 25% pension tax-free cash?
Bear in mind that there are rules which prevent you taking your 25% tax-free lump sum cash and paying it into another pension – if you do this there could be both tax consequences and extra charges to pay.
2) Think about inheritance tax (if it applies to you)
It’s worth remembering that, at the moment, pensions can be passed on free of Inheritance Tax (IHT), and are completely tax-free if you die before age 75. If you die after the age of 75, your pension will be taxed in the same way as income when your beneficiary (or beneficiaries) come to make a withdrawal. If you take money out of a pension, however, including your 25% tax-free lump sum, it will count towards your estate for IHT purposes. Bear in mind though that these rules are changing in April 2027, when pensions will be brought into the scope of inheritance tax for the first time. You can find out more about these changes in our articles Budget 2024 pension changes and 5 ways to beat pension Inheritance Tax Budget changes.
3) It might affect any benefits you’re claiming
Your pension income will be taken into consideration when you’re assessed for means-tested benefits such as tax credits, Universal Credit and housing benefit, so think carefully about the impact that taking a lump sum could have on these and find out whether it will reduce your entitlement. Only savings worth £6,000 (£10,000 if you are over State Pension age) or less will not affect your claim for means-tested benefits. Find out more in our article How lump sum payments and savings can affect your benefits.
4) Consider the benefits of leaving your tax-free lump sum in your pension
If you’re thinking about taking your tax-free cash, remember that there are (for now at least) several advantages of leaving it in your pension for as long as possible. Importantly, any growth your fund enjoys within a pension will be completely tax-free, and if you don’t take your tax-free entitlement straight away, this will grow too.
Of course, investment returns aren’t guaranteed, so you’ll need to be comfortable accepting that there’s a level of risk involved. The other benefit of leaving your tax-free cash for now is that your pension fund will have a greater chance of supporting you throughout retirement. Given that many of us will spend several decades in retirement, taking out 25% of your pension early on and spending it could mean you run out of money too soon in retirement.
A final thought…
If you have a specific plan in mind for your pension tax-free cash, and changes to the amount you could take could derail these plans, then you may decide that taking your 25% lump sum is worth doing ahead of the Budget, just in case any radical changes are announced.
However, if you don’t have a particular need for the money, you’ll need to weigh up carefully whether you think it’s worth taking it out now, or whether you might be better off leaving where it is so you can benefit from the tax advantages pensions provide, and hopefully end up with a higher income later in life.
This area of pension planning can be complex and will almost always depend on your own personal circumstances, so it’s worth speaking to a professional financial advisor who can help you navigate this.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.
Join the discussion
Read our full commenting terms and guidelines