Experts warn Brits against taking tax-free lump sums out of pensions: "It could prove a very costly mistake"

EXPERTS have warned Brits against taking tax-free lump sums out of their pensions out of fear that Rachel Reeves will cut the allowance.

As the Autumn Budget nears, speculation mounts as to how the chancellor will plug a black hole of around £50billion.

One of the rumoured moves is to cut the tax-free amount people can withdraw from their pension pots.

The proposal is expected to raise around £2billion – by lowering the limit on how much people are allowed to take out of their pension without paying tax.

Currently, pensioners can take out a quarter of their pension pot tax-free, with a cap of £268,000 – but this level would be lowered in the proposals.

At this stage though, these are just rumours.

Eamonn Prendergast, Chartered Financial Adviser at Bromley-based Palantir Financial Planning Ltd, said you could regret taking cash out early.

He said: “Grabbing your pension cash early out of fear could prove a very costly mistake. If you genuinely need the tax-free lump sum, take it, but withdrawing just because of Budget rumours risks locking money out of your pension for good.

"In the last Budget, some savers panicked, mistakenly thinking they could repay funds within 30 days, only to find HMRC rules and platform restrictions made that impossible. 

"Talk of cuts to the 25% allowance has been swirling for over a decade, and any real change would almost certainly include transitional protections. Knee-jerk withdrawals create more problems than they solve. It is better to plan calmly, take proper advice, and avoid the costly errors many non-advised clients made last time.”

Philly Ponniah, Chartered Wealth Manager and Financial Coach at Philly Financial, also warned against knee-jerk reactions.

She added: “When governments play about with pension rules, it breeds fear. Last time rumours swirled around Capital Gains Tax (CGT), people rushed into decisions they later regretted. 

"Now I’m hearing clients hesitate to even put money into pensions because they don’t trust what will happen to the rules. From a psychological point of view, it’s really damaging. 

"People already carry plenty of anxiety around money and so moving the goalposts just layers on uncertainty and potentially pushes toward knee-jerk choices that may not serve them and their long term plan.”

Ross Lacey, Director & Independent Financial Adviser at Rayleigh-based Fairview Financial Management, pointed out that it can affect the amount of inheritance tax that you will have to pay.

He continued: “It's dangerous to make permanent decisions based on speculation. Naturally, nobody knows exactly what will come out in the Autumn Budget or indeed any future budget. However, as it stands, it rarely makes sense to take the maximum lump sum from a pension as soon as it becomes available. 

"Currently, unused pension funds are not generally subject to inheritance tax, although this is set to change from 2027. Any growth or income generated within the pension is also free of tax. 

"Historically, when government have made changes to pension rules, there has been forms of protection offered (lifetime allowance protection, protected tax free cash etc) to make rules changes only affect those who are not yet over any particular limits.”

Rob Mansfield, Independent Financial Advisor at Rootes Wealth Management, agreed, saying: "Trying to second guess what taxes are going to change is a disaster waiting to happen. The rumours about tax free cash being cut or scrapped have been going for nearly 20 years now. 

“If you don't need the cash, why withdraw it and lose the tax free growth it could gain in the pension? If you do need it then do it because you need it not because you're speculating on what the chancellor may do.”

Scott Gallacher, Director at Leicester-based Rowley Turton, also advised against being too rash.

He added: “Talk of scrapping or reducing tax-free cash is almost an annual event. While it’s possible, I’d be cautious about rushing to take your lump sum ‘just in case’. 

"Doing so can worsen your inheritance tax or overall tax position, restrict your ability to make future pension contributions, and in some cases even trigger a tax charge under the pension ‘recycling’ rules.”