Speculation is mounting that the government could scale back one of the most popular pension benefits in next month’s Budget — the right to withdraw up to a quarter of savings tax-free. The 25% allowance has long been seen as a cornerstone of retirement planning, used by millions to clear mortgages or fund big purchases. But Treasury officials are reportedly reviewing the policy as part of a hunt for new revenue, raising concerns among savers and prompting warnings from pension experts not to act in haste.
What the Rules Say Now?
At present, anyone with a defined contribution pension can take up to 25% of their pot tax-free from the age of 55, either all at once or in smaller withdrawals. Defined benefit schemes — such as final salary pensions — offer lump sums too, though the terms depend on each scheme’s rules. Since the scrapping of the lifetime allowance in 2023, the maximum cash sum has been capped at £268,275. Some people with older protections can still take more. In practice, lump sums are often used to pay down debt, renovate homes or simply fund retirement plans.
Why It’s Under Pressure?
The tax-free element is expensive for the Exchequer and is most valuable to those with larger pots, fuelling debate about whether it is fair. Any move to restrict it would raise billions but would also risk undermining confidence in the system. “The 25% tax-free cash has been the most treasured benefit of pensions for a long time,” says Gary Smith of Evelyn Partners. “Slashing it without warning would leave many people feeling the goalposts had been moved.”
Savers Urged Not to Panic
Rumours about cuts are not new. Before last year’s Budget, thousands rushed to take lump sums early, only for the rules to remain unchanged. That left some worse off, having given up future investment growth and exposing their savings to new taxes. “Rumours encourage people to act too soon,” says Helen Morrissey at Hargreaves Lansdown. “Once money leaves a pension, you lose its protections, and you can’t just put it back.” She warns that trying to “recycle” withdrawn cash into a pension can trigger HMRC penalties.
The Complications
Taking the cash upfront is rarely essential. Withdrawing smaller amounts keeps the chance of extra tax-free growth if investments rise. Going beyond the 25% allowance restricts future pension contributions with tax relief to £10,000 a year. And while some providers allow people to cancel withdrawal instructions, others do not. Experts say anyone considering it should take advice rather than act on headlines.
Inheritance Tax in the Mix
Another complication looms in 2027, when pensions will become liable for inheritance tax. That change is already encouraging some retirees to draw down pots earlier, either to spend, gift, or move into other products such as offshore bonds. For those over 75 by the time the rules kick in, unspent pensions could also face income tax when inherited — a double hit for beneficiaries.
The Bigger Picture
For many, the tax-free lump sum has been central to retirement planning, particularly for clearing mortgages. Cutting it back would alter expectations overnight. But for the Treasury, it represents a tempting way to raise funds without formally increasing tax rates. The question is whether Rachel Reeves will risk the backlash.
Until the Budget is delivered, rumours will continue to swirl. Experts say the key is not to panic. “A pension is still one of the most tax-efficient ways to build wealth,” says Morrissey. “Acting on speculation could leave you worse off in the long run.” Millions of savers will now wait to see whether one of the UK’s most trusted retirement benefits survives intact.
