Millions of people saving in Defined Contribution (DC) pension schemes can usually take 25% of the their pension pot as a tax-free lump sum once they reach 55 (57 from April 2028). The most that can be taken is £268,275.
Ahead of the next Budget on 26 November 2025, there is continued speculation around a reduction in the amount of money that can be withdrawn free of tax. It has been suggested that the £268,275 maximum may be reduced to as little as £40,000.
This will inevitably lead to some savers making withdrawals. Indeed, speculation in recent months has already led to record withdrawals, with data from the Financial Conduct Authority showing that the amount taken as tax-free lump sums in the six months to the end of March 2025 was £10.43bn – a 72% increase on the same period last year.
Against this backdrop, the Society of Pension Professionals (SPP) has cautioned savers against taking their lump sum purely on the basis of such speculation. If there were no previous plans to take a lump sum in the short-term, then doing so now could mean losing out on tax-free investment growth on whatever money is taken, resulting in a smaller pension pot at retirement and therefore a lower retirement income.
Previous changes to pensions taxation have typically included transitional protection for funds already built up, to avoid retrospective taxation. So even if there are changes to the tax treatment of lump sums, there is still a risk of withdrawing lump sums unnecessarily.
For those who change their mind after making a withdrawal, an unwanted tax charge is more than likely. This is because, unlike other financial transactions, there is no 30-day cooling off period. This means that any attempt to put the withdrawn money back into a pension scheme is likely to breach HMRC recycling rules, leading to additional tax penalties for unauthorised payments.
Steve Hitchiner, Chair of the SPP Tax Group, said;
“Budget speculation is, by its very nature, speculative, often proves to be largely inaccurate, and frequently causes problems.
Such speculation happens every year and it should never be used as the sole basis for making major financial decisions.
Even if there are changes to the tax-free lump sum available, there would likely be transitional protections too.
So, pension savers should only withdraw what they need, when they need it, rather than because of worries about legislative changes.”
