Some pensioners may have taken tax-free lump sums from their pensions ahead of possible tax changes in the 2025 Autumn Budget. Those changes did not happen. What risks could the withdrawals still create?
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Retirees took more than 22 billion from their pensions as tax-free lump sums during the 2025/26 tax year - over 20% more than in the previous year.
Across the past two tax years, they withdrew more than 40 billion tax-free, according to Financial Conduct Authority data.
Under pension tax rules, you can usually take up to 25% of your pension savings as a tax-free lump sum.
FCA figures show that tax-free pension lump sums stayed below 8.7 billion each year from 2018/19 through 2022/23. They edged above 10 billion in 2023/24, then jumped to 18.3 billion in 2024/25.
Despite speculation of a tax raid, Reeves left pension tax-free cash untouched in the 2025 Autumn Budget.
Michael Summersgill, chief executive of AJ Bell, said the figures made the consequences of unchecked speculation over pension tax impossible to dismiss. People began rushing to withdraw tax-free cash in 2024, and the latest FCA data shows the same pattern emerging around the 2025 Budget - exactly as pension providers had warned.
"This trend harms both households and the wider economy. When billions of pounds are taken from pensions ahead of time, less capital remains available for long-term investment."
AJ Bell has called on the new chancellor, John Healey, to state publicly that he will not make major changes to pension tax-free cash or tax relief, in the hope of avoiding another rush before this year's Budget.
"A chancellor determined to strengthen household finances and revive growth should regard this as an easy win. Confirming that pension tax rules will remain stable would settle the issue overnight, cost the Treasury nothing, and show savers that the government intends to keep its promises," Summersgill added.
How tax-free pension lump sums work
You can usually withdraw 25% of your pension pot tax-free, up to a maximum of 268,275. You can take the money as one payment or split it into several smaller withdrawals. The minimum age is currently 55, but that will rise from April 2028.
The 25% limit applies to the combined value of all your pensions, not separately to each one. So if you have 50,000 in one pension and 50,000 in another, you could take up to 25,000 as a lump sum in total.
The lump-sum income does not count toward your tax-free personal allowance. Withdrawals above the 25% tax-free share - or the maximum of 268,275 - are taxed at your applicable tax-band rate.
Risks of taking your pension as a lump sum
You may be able to withdraw up to 25% of your pension pot as a lump sum, giving you more flexibility in retirement. That option can help, but taking the money too soon may leave you with less income later.
Sarah Coles, AJ Bell's head of personal finance, said that most people take tax-free cash from their pension, with millions doing so before retirement age.
Some people will have planned this carefully, and the decision may make sound financial sense for them. Others are acting out of fear about what the Budget might bring - especially after the past two years - and could seriously reduce their retirement income.
A larger pension pot benefits more from compound interest. Withdrawals reduce the amount left to grow, so future returns fall and the pot builds more slowly.
Coles said: "Take a pot worth 400,000 at age 55. Left untouched and growing at 6% for 10 years, it could reach 716,339. But if you withdrew and spent 100,000, the remaining 300,000 would grow to only 537,254 over the same period."
She said people also risked taking their pension as a lump sum too soon because they "dont trust the government not to mess with tax-free cash in the Budget." They could then spend the money before deciding whether an annuity might suit them better.
Taking a quarter of your pension now leaves less money for later retirement, increasing the chance that your savings may run out while you're still alive.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the FCA's data showed how strongly Budget rumours could influence people's decisions. Some withdrew money they did not need, and when the expected announcement never came, they had few options left.
She warned that taking the tax-free lump sum is irreversible: if you change your mind, putting the money back into your pension could trigger an additional tax charge.
If you've already used allowances such as your annual ISA limit, withdrawals may incur capital gains or dividend tax. Leaving the money in cash, meanwhile, gradually reduces its value as inflation eats away at it.
Morrissey said people spend years planning and investing for a pension, so short-term speculation should not put those savings at risk. Retirement funds require a stable tax framework; without one, people cannot make informed choices or build their pension with confidence.
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