Pension savers rush to withdraw lump sum before Budget 2025 - tax rules explained
Tax-free lump sum pension withdrawals rose more than 60% in the 2024/25 financial year to £18.1bn, compared to £11.25bn the previous year, Financial Conduct Authority figures show. It's likely that 2025/26 figures will show a stabilization as savers will have adjusted to the new tax landscape.
Currently, you can access your pension from age 55, but keep in mind that the minimum pension age is scheduled to rise to 57 on 6 April 2028. If you are turning 55 in 2026, you may have a limited window to access your funds before the threshold moves.
For many, this represents a vital source of cash to pay off mortgages, cover living costs or help adult children with property deposits.
But first-time withdrawals are often taxed using an emergency code, which assumes the individual will continue drawing the same amount every month. This can mean a hefty overpayment in the short term, with refunds available later through a self-assessment return or by submitting forms to HMRC. In 2025 alone, HMRC was forced to repay over £190 million to savers who were overtaxed on their first pension withdrawals due to emergency code errors.
Pension inheritance rules add another layer of complexity. Currently, pots passed on after death can usually be taken tax-free if the saver dies before 75. If death occurs later, beneficiaries must pay income tax at their own rate.
From April 2027, the Treasury will go further by including unspent pension pots within the inheritance tax net for the first time - a reform that experts say will significantly increase liabilities for thousands of families.
Following the November 2025 Budget, the 25% tax-free lump sum entitlement remains capped at £268,275. Despite significant speculation that the Chancellor would reduce this threshold, the Government chose to maintain the current limit for the 2026/27 tax year, providing much-needed certainty for those approaching retirement.
Emma Sterland, chief financial planning officer at Evelyn Partners, which uncovered the figures in a Freedom of Information request, said the rush was “unprecedented”, adding: “You can’t help feeling that much of this increase is a slightly panicked dive into pensions sparked by uncertainty over policy change.”
What are the risks of withdrawing early?
While taking money now locks in the 25% tax-free entitlement under current rules, there are downsides:
- You could push yourself into a higher income tax bracket by taking more than you need.
- Withdrawn money may lose its tax-advantaged growth if not reinvested.
- Taking cash too soon could leave you short later in retirement.
- Accessing a pension early could affect entitlement to some benefits.
What if rules do change?
Even if changes are announced, they may not take immediate effect. In the past, major pension reforms have included transition periods. However, with the public finances under strain, a sudden change can’t be ruled out.
Savers unsure about whether to withdraw funds now should seek regulated financial advice.
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