The Tax-free Cash Panic - Calm Minds Should Prevail
Peter McGahan
Monday 13th October, 2025.
EVERY year, the rumour mill whirs into overdrive in the run-up to the Budget. And every year without fail, for the past 37 in finance, headlines shout about the possible end of something or other. “Take it now or lose it forever”. Almost every time, nothing happens.
Yet the fear this year feels sharper with the headlines from some good friends of mine in the big papers highlighting the issue. People are panicking. Pension providers report a 60 per cent surge in withdrawals this year.
When you save into a pension, you enter a pact with the government. You give up part of your take-home pay today, in return for tax relief and the promise that you’ll be taxed on the way out instead - but not entirely. You also get to take up to 25 per cent of your pot as a tax-free lump sum, currently capped at £268,275. That lump sum isn’t some discretionary sweetener; it’s part of the deal. People have shaped their retirement plans around it.
To change that would not just move the goalposts. It would tear up the pitch and empty the stand. Yet that’s what some fear may be coming.
Is it likely? Steve Webb - the former Pensions Minister and now at consultancy LCP - calls for calm. His firm’s analysis shows that scrapping or capping the 25 per cent tax-free cash allowance would be politically toxic, especially for public sector workers with defined benefit pensions, and wouldn’t raise much money during this Parliament. So, what’s the point. Transitional protections would almost certainly be needed, and the fallout could be fierce, not that any government seems to care what people think these days. Webb likens it to the 2012 “Omnishambles” Budget, where well-intentioned tweaks collapsed under public backlash. This, he suggests, could go the same way.
In short: the probability of a dramatic cut to tax-free cash this year is very low. There may be long-term reforms to consider, especially around inheritance tax from 2027, but an outright raid in November seems unlikely. Maybe the fear is there to condition you for transitionary arrangements to make you feel you ‘got a deal’.
Still, if you were planning to take your tax-free cash soon, say within the next year, then bringing that forward might make sense. If you were going to clear your mortgage, planning to gift the sum into trust or to children for inheritance tax, help
children buy a home, or take a well-earned sabbatical, then doing so before the Budget might be a pragmatic decision. But reacting purely out of fear? Nope.
Taking the tax-free cash early means removing money from a tax-sheltered, inheritance-tax-free, growth-friendly environment. It may end up sitting in a low-interest bank account, losing value to inflation. Worse, once it’s out, you can’t put it back in without triggering complex pension recycling rules and getting caught could mean a 55 per cent tax charge. As HMRC and the FCA have both confirmed: once your lump sum is paid, the tax consequences are locked in.
So, what can you do with the tax-free cash if you do take it? You have options. You could transfer it into an Individual Savings Account (ISA), where it can continue to grow free from income and capital gains tax - although the £20,000 annual contribution limit means it may take time to shelter a large sum. You could invest it directly, gift it to family (though with future inheritance tax changes in mind), or use trusts to help reduce the tax footprint of your estate. You might also use it to create your own flexible drawdown income, potentially managing your tax bill over time.
Remember, from 2027, unspent pensions will fall within inheritance tax. Leave the cash in and it’s exposed to inheritance tax after that. Take it out, it’s exposed to inheritance tax now, and it may lose tax efficiency or growth potential.
Remember also, Rachel Reeves, very recently, publicly called talk of scrapping tax-free lump sums “rubbish” and warned savers against making irreversible decisions.
If you need the money, and have a clear reason to use it, consider doing so. If not, don't let speculation override strategy.
If you have a financial query, please call 01872 222422 and if you would like a complimentary fact sheet on tax free cash planning, please email info@wwfp.net
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
