The Pitfalls of Taking Pension Tax Free Cash Based on Rumours
Tax Free Cash has been an integral part of people’s retirement planning in the UK for some time. While I do not have a crystal ball on the budget (26th November 2025), I can say that a tax free cash abolition has always been rumoured and never actioned to date. While reductions to tax free cash have been made in recent years in line with the Lifetime Allowance, now under the LSA (Lump Sum Allowance), people impacted with sufficient pension accumulation have been given the opportunity to protect themselves following any announcement.
This is also a very tricky area for the government to take immediate action on as, for example, some people have saved for their entire life with tax free cash being the main driver, e.g. where tax free cash is the mechanism for mortgage repayments upon retirement. Experience has shown us that where sweeping pension changes have been made, some form of transitional protection has been offered to provide protection for those most impacted in the short term.
Recent speculation that the Government are considering making changes to tax-free cash pension withdrawals may encourage more clients to withdraw their tax-free cash ahead of the Autumn Budget. The statistics on previous years suggest that this is often carried out before the budget date based on panic, rather than a reasoned approach.
Taking such panicked action may well have negative consequences for future financial planning, so we would encourage you to seek personalised advice before making any final decisions. Tax Free Cash can often be used in a phased manner to provide tax efficient withdrawals over time, alongside minimising income tax and taxes generally when used in the right way. Taking this upfront is often the wrong approach depending on the individual’s circumstances and objectives.
Please also note that pension providers, on the basis of the HMRC stance, have once again confirmed that they do not permit tax-free cash cancellations. This means that once tax-free cash has been withdrawn from a pension it cannot be put back in again. Withdrawing cash is a one off irrevocable decision.
A member of our financial planning team would be happy to assist you, so please contact us if you have any queries or concerns.
David Bethell
David is a Financial Planning Consultant who has been with City Asset Management for over 12 years. He enjoys helping people meet their objectives through effective planning and his experience looking after elderly parents has given him a greater understanding of vulnerable clients and their longer-term planning needs. Before joining the firm, David worked in financial services roles at National Mutual, LV and Hornbuckle Mitchell. He is both a Chartered Financial Planner and a Fellow of the Personal Finance Society after achieving a range of qualifications covering pensions, investments, insurance, trust and tax planning, and long term care.
