Tax-free retirement cash and the upcoming Budget

What’s in the news? 

According to the Financial Conduct Authority’s retirement income study, UK pension savers took more than £70bn out of their retirement pots in 2024/25, an increase of 36% on the previous year.

Figures like this could well be the cause of all the fears in the headlines about a possible reduction or outright abolition of tax-free pension cash, in the run-up to the Budget on 26 November.  

Ordinarily, from age 55 (age 57 from April 2028), you can draw up to 25% – to a maximum of £268,275 – of your pension tax-free. For people nearing retirement or already retired, changes to tax-free cash could have a big impact on intentions to spend on expensive plans like a round-the-world holiday, or for practical plans such as repaying mortgages and helping loved ones.

Pension rules have changed a fair few times in the UK. However, past moves have generally come with a grace period before they’re implemented, allowing you to protect pension plans already in place. So even if the Chancellor were to pull the tax-free cash rug out from under savers’ feet – or reduce how much can be taken out – we expect you to be given time. You can use this to make informed decisions, based on what’s right for you.  

The talk about tax-free cash changes this time last year prompted many to withdraw cash from their pensions in anticipation of a Budget announcement that never came. After the Budget, many tried to put the tax-free cash back by using the 30-day cancellation rule, which – depending on the provider’s terms and conditions – allows you to undo a decision if you change your mind. Such is the talk again this year that the regulator, the Financial Conduct Authority, issued a statement in September clarifying that if you withdraw tax-free cash from your pension, you can't change your mind and cancel that decision. The message: if you’re thinking about this, you need to be very careful.  

“Rumours about the reduction or removal of tax-free cash have cropped up during every one of my 20-plus years in the industry,” says Rebecca Williams, Financial Planning Divisional Lead at Rathbones. “With public approval ratings for the government in freefall, the Treasury should think twice before entertaining what would be a hugely unpopular move to reduce or remove the right to tax-free cash.” As well as being politically difficult, this wouldn’t raise any immediate tax revenue to plug the growing black hole of government finances.  

What should you do?

Stay calm! Budget speculation is just that: speculation. If you have a good reason to consider withdrawing tax-free cash in any case, it may be worth doing that before the Budget. Focus on your financial goals and talk to a financial planner in good time. They can work with you to create a resilient financial plan, so Budget changes don’t derail your retirement goals, whether it’s that trip to the Galapagos Islands or finally ridding yourself of that mortgage.