There has been a scramble to take cash from pensions and beat an impending inheritance tax raid — and a possible change to the rules around the much cherished tax-free lump sum.
Between April last year and March this year some 211,000 pension savers took their 25 per cent lump sum — almost a third more than in the year before.
They withdrew a total of £18.1 billion, up from £11.25 billion the previous year, according to figures from the Financial Conduct Authority, the City watchdog, obtained by the wealth manager Evelyn Partners.
The surge coincided with the announcement in October’s budget that most pensions would be included in an estate for inheritance tax purposes from April 2027 (although anything left to a spouse or civil partner will remain exempt). The government estimates that 213,000 estates in the 2027-28 tax year will include inheritable pension wealth.
Nearly £10.5 billion was withdrawn between October and March after the plans were revealed, compared with £6 billion over the same period the year before.
But advisers say the rush has also been triggered by speculation that the pensions tax-free lump sum could be in the chancellor’s crosshairs as she tries to raise revenue. In the lead-up to the budget last year and to the spring statement in March concerns were rife that it could be reduced. Rachel Reeves’s budget this year will be on November 26.
Most savers can take 25 per cent of their pension pot tax-free, up to a limit of £268,275, when they turn 55 (rising to 57 from 2028). It can be taken all in one go or staggered throughout retirement.
Emma Sterland from Evelyn Partners said: “While some will doubtless have taken their tax-free cash as part of a well thought out plan, you can’t help feeling that much of this increase is a panicked dive into pensions sparked by uncertainty over policy change.”
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Financial advisers say they have been inundated with concerns from clients about the future of the tax-free lump sum, which is the bedrock of many retirement plans. But it is unwise to make serious financial decisions based on speculation and advisers generally recommend taking no action until any rules are confirmed.
Sterland said: “Our financial planners are still experiencing something similar to last year. Many savers have a specific purpose in mind for their tax-free lump sum — like clearing mortgages, giving to children, or a carefully thought out income strategy — and while they ideally might not take it quite yet, they are wrestling with the fear that if they don’t they could lose out.”
Taking tax-free cash early, without a specific need for it, also means taking money out of a tax-protected savings pot and moving it to one where it could be subject to tax, Sterland said.
“Many people last year who withdrew their tax-free lump sum purely due to budget fears found themselves scrambling to try and reverse the process when nothing happened — with varying degrees of success.”
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Those with a defined benefit pension, which guarantees a set, often inflation-linked income for life, will typically only have one decision to make: take their tax-free lump sum and get a set income, or leave the tax-free lump sum and get a higher income.
There is more choice open to savers with a defined contribution pension (the kind that will be subject to inheritance tax from April 2027), where how much you get in retirement is based on how much is paid in and how investments fare.
They can take the entire tax-free lump sum in one go, and will need to decide what to do with the remaining 75 per cent of the pension: buy an annuity (an insurance product that pays an income for life), move it into drawdown (where you leave it invested and take money as and when you need it), or take it all as cash.
Or they can take the tax-free cash in stages as part of the regular income from the pension, which means paying less tax when they do make withdrawals — each time money was taken from the pension, 25 per cent of it would be tax-free.