Speculation’s been rife that tax-free cash could be cut in the forthcoming Budget – a rumour that risks people making decisions they later come to regret.
We’ve already seen the damage these rumours can cause.
In the most recent FCA Retirement Income Market stats the number of pensions from which tax-free cash was taken surged by 29% between 2023-24 and 2024-25 with the amount of money taken soaring by an enormous 63%.
It suggests there are a lot of people making big decisions in haste that they could regret in the future.
The decision to take tax-free cash should be part of a long-term plan made after assessing all the pros and cons rather than a knee jerk reaction. Especially in response to a rumour that could have a whole host of unintended consequences.
This article isn’t personal advice. If you’re not sure if an action is right for you, ask for financial advice. You can usually access money in a pension from 55 (rising to 57 in 2028). For free, impartial guidance, the government’s Pension Wise service is available if you're over 50. Remember, pension, ISA and tax rules can change, and any benefits depend on your circumstances.
What you should consider before taking your tax-free cash
Plan ahead – don’t take it just because you can
any people take their tax-free cash as part of a long-term plan to pay off their mortgage, travel or make home renovations.
If you take it without knowing what you want to do with it, then you risk some poor outcomes. For example, if you take the money from a tax efficient environment like within a Self-Invested Personal Pension (SIPP) and instead keep it in an account paying poor rates of interest while you decide what to do with it.
There’s also the potential to fritter it away over time through ad-hoc spending, or have the value eroded by inflation.
Think about tax
Before taking money from a tax efficient wrapper like a SIPP, you should consider the tax consequences of where you plan to now put this tax-free cash.
You could reinvest some in a Stocks and Shares ISA but if you’ve got a significant amount, you might still have money left over after using your ISA allowance.
Depending on what you want to do with it you need to consider the potential impact of taxes such as capital gains tax or dividend tax for instance. Investing in assets outside of a tax efficient wrapper like an ISA, could draw your tax bill into higher territory.
Are you planning to reinvest it back into your SIPP if the decision doesn’t happen?
You could decide to take the money now and if the decision doesn’t happen simply reinvest it back into your SIPP.
This might seem straightforward but you’ll need to watch out so you don’t fall foul of pension recycling rules.
This is where if HMRC believes someone has taken tax-free cash and reinvested it into their pension to benefit from extra tax relief.
Falling foul of these rules could land you with a nasty tax charge with HMRC looking at issues such as how much was taken, the proportion of tax-free cash contributed, whether there has been a significant uplift in contributions as well as whether it was pre-planned.
Being landed with a tax charge could significantly derail your long-term plans so if you’re looking to do this, financial advice can help.
It’s also worth saying that HMRC has clarified its stance around cancellation rights. This means you are unlikely to be able to request tax free cash and then cancel the instruction if there’s no change in the Budget.
Is inheritance tax (IHT) a concern?
The decision from last year’s Budget to include pensions as part of people’s estate for inheritance tax purposes from April 2027 has impacted a lot of people’s pension planning.
Those with large estates might think about gifting their money away now, rather than leaving it to loved ones in their Will to avoid a potentially higher tax bill on the estate.
But it’s important that if you do this you don’t give away too much too soon, as it could potentially leave you struggling later in life, particularly if you need care.
You must also follow the rules carefully around gifting to ensure you don’t breach any allowances, incurring further tax charges and, keep clear records that can be used in case of any questions from HMRC.
If you think you could benefit from getting expert financial advice from a professional, start by booking a call with our advisory team today.
You won't get personal advice on the call, but they'll talk you through the advice service we offer, including charges and connect you with an adviser if you'd like to go ahead.
Our advisers can recommend how you can make the most of your tax allowances through financial planning. But if you need complex tax calculations, your adviser might recommend you speak to an accountant to complement their advice.