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Speculation that the Chancellor may reduce the amount of tax-free cash you can take out of your pension in this year’s Budget is growing, with many worried that it could see their tax bills jump during retirement.
Under current rules, usually you can take a 25% tax-free lump sum from your defined contribution pension once you reach the age of 55 (rising from 57 to 2028). The maximum tax-free lump sum you can take is linked to the previous Lifetime Allowance, which was scrapped in April 2024. This means you can take out no more than £268,250 tax-free (25% of the old £1,073,100 Lifetime Allowance). If you have more than £1,073,000 in your pension, then the tax-free element you can take will be less than 25%. Learn more in our article How much tax-free cash can I take from my pension?
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 25% of these payments will be tax-free. So, for example, if you had a bigger pension pot and were to take £3,000 from it each month, £750 of this would be tax-free whilst the remaining £2,250 would be taxable. Find out more in our guide How much tax will I pay when I withdraw my pension?
Here we look at how changes to the tax-free lump sum could affect you, and explain how to get advice on your pension. Bear in mind that the examples shown below apply to defined contribution pensions, where any contributions made are invested, and the amount you end up with depends on how much has been paid in and how your investments have performed.
It’s also worth noting that there was similar speculation that the tax-free lump sum would be cut in last year’s Budget, but in fact, no changes were made to it.
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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 could happen to the tax-free lump sum?
There are rumours that the Chancellor Rachel Reeves might cut the amount of tax-free cash people can withdraw from their pensions, possibly to as little as £100,000.
According to the Institute of Fiscal Studies (IFS), reducing the amount that can be taken tax-free by almost a third from £286,275 to £100,000 would affect about one-in-five retirees. It says that this change would raise around £2 billion a year in the long run for government coffers, with losses concentrated among the relatively wealthy.
However, if you’re worried about the tax-free cash limit falling, try not to make any knee-jerk reactions which might leave you worse off in future. Jamie Jenkins, director of policy at Royal London, warned that there could be significant implications for pension savers planning to withdraw their pension tax-free cash now to try to beat any potential Budget changes.
“For example, some people may still be saving towards their retirement, and taking 25% tax-free now could be worth less than had they left it until their overall pension pot grows further,” he said. “Also, if the money isn’t needed immediately, holding it in a bank account may depreciate its value over the years that follow, instead of remaining invested in their pension and benefiting from potentially higher returns.”
How cutting the tax-free lump sum could affect you
Any reduction in the tax-free lump sum would affect people differently, depending on the size of their pension savings and whether they have any existing protections in place.
At the moment, most people can take up to 25% of their pension pot tax-free, up to a maximum of £268,275. This cap is based on the old Lifetime Allowance of £1,073,100 — so only those with pots larger than this can currently take the full £268,275.
If your pension is smaller than that, you can still take 25% of it tax-free, and this wouldn’t change unless the government reduced the maximum tax-free amount.
Financial services company Hargreaves Lansdown has looked at how pension savers might be affected if that maximum were lowered to £225,000, £150,000 or £100,000. The following examples show what the changes could mean for people with larger pots that exceed those thresholds.
Bear in mind that if you have any form of tax protection, your personal limits could be higher. You can read more about these protections on GOV.UK.
Scenario 1
If the maximum tax-free lump sum fell to £225,000
Who might be affected: Those with pension pots over £900,000, since 25% of £900,000 equals £225,000.
For example, someone with a £1.1 million pension could currently take £268,275 tax-free. If the cap was reduced to £225,000, they’d lose tax-free access to £43,275. This would mean an extra £17,310 in tax for a higher-rate taxpayer, or £8,655 for someone paying basic-rate tax.
Scenario 2
If the maximum tax-free lump sum fell to £150,000
Who might be affected: Those with pension pots over £600,000, since 25% of £600,000 equals £150,000.
For instance, someone with a £1 million pension can currently take £250,000 tax-free. If the limit dropped to £150,000, they’d have £100,000 less available tax-free — potentially adding an extra £40,000 in tax at higher rates, or £20,000 at basic rates.
Scenario 3
If the maximum tax-free lump sum fell to £100,000
Who might be affected: Only those with pension pots over £400,000, since 25% of £400,000 equals £100,000.
For example, someone with a £1 million pension could currently take £250,000 tax-free. If the cap was cut to £100,000, they’d lose tax-free access to £150,000, which could mean an extra £60,000 in tax for a higher-rate taxpayer, or £30,000 for a basic-rate taxpayer.
The bottom line
If your pension pot is below the point where 25% equals the new cap, a cut in the maximum tax-free lump sum wouldn’t affect you.
But for those with larger pension pots, a lower limit could mean thousands of pounds more in tax — particularly if you were planning to take the maximum amount tax-free at retirement.
Even if you’re not affected right now, it’s worth keeping an eye on any changes, as your savings could grow over time and eventually exceed a new lower limit.
Although these numbers may be alarming, remember that nothing has actually happened yet and, as mentioned, rushing to take your money out because of rumours could have a long-lasting negative impact on your finances.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Speculation has been rife that tax-free cash could be cut in the forthcoming Budget – a rumour that risks people making decisions they later come to regret. We’ve already seen the damage these rumours can cause. In the most recent FCA Retirement Income Market stats, the number of plans entering drawdown where only tax-free cash was taken surged by 29% between 2023-24 and 2024-25. The amount of tax-free cash taken overall ballooned by an enormous 63%. It suggests there are an awful lot of people making big decisions in haste that they could repent at leisure.
“The decision to take tax-free cash should be part of a long-term plan made after assessing all the pros and cons rather than a knee-jerk reaction in response to a rumour that could have a whole host of unintended consequences.”
A final thought…
Recent weeks have seen countless pension savers rush to take money out of their pensions to take advantage of tax-free cash rules as they currently stand. However, this is not a decision to be taken lightly, nor without first seeking professional financial advice, as it can come with significant risks, not least that many of us will spend several decades in retirement, so taking out 25% of your pension early on might mean you end up running out of money too soon in retirement.
Philip Lewis, Head of Financial Planning Advice at wealth management firm Evelyn Partners, said: “Taking tax-free cash too early or without careful consideration might end up coming back to bite you tax-wise and could also undermine retirement plans. Simply taking a large amount of money out of a tax-protected environment and moving it into a taxable one can backfire even if the pension withdrawal itself is tax-free. Any interest, income or capital gains that the sum earns from then on could be subject to tax unless it falls within allowances or is placed in another tax-protected wrapper like an ISA.
“Taking a pension tax-free lump sum is best done as part of a plan, with a picture of how your future years of retirement will be funded, and it’s hard to beat cash-flow modelling from a professional financial planner for that. It also helps if there is a clear purpose for the sum, such as paying down the mortgage, gifting, or taking an income. But for others, a good financial plan might recommend leaving it untouched for several years more, or taking the 25% tax-free element of the pension gradually in tranches.”
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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.
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