The Impact of Uncertainty on Pension Withdrawals
Thousands of savers have made what is considered an “irreversible” decision to withdraw hundreds of millions of pounds in tax-free cash from their pension pots due to uncertainty surrounding the upcoming Budget. Experts suggest that pensioners and individuals nearing retirement have risked their savings by withdrawing lump sums earlier than planned, and the government should have been clearer about not touching the non-taxable limit.
This decision is typically irreversible, and withdrawing early means savers miss out on the potential growth of their pension fund over time. Quilter, a multinational wealth management firm, reported a threefold increase in retirees withdrawing lump sums from their pensions tax-free in the lead-up to the anticipated fiscal event compared to normal levels. Similarly, the boss of investment company AJ Bell mentioned seeing hundreds of millions of pounds in additional withdrawals from pensions due to the uncertainty preceding the Budget.
Currently, savers are allowed to draw out 25% of their pension fund tax-free, up to the value of £268,275. However, there were concerns that this policy could be altered by Chancellor Rachel Reeves after the Fabian Society, a think-tank aligned with Labour, proposed reducing the limit to £100,000. Although government sources ruled out a reduction around two weeks before the Budget, experts believe many had already decided to pull their cash in case of a policy change.
For much of the run-up to the Budget, the Treasury remained silent on media inquiries regarding potential changes. This approach contrasted with previous years when the Chancellor’s aides were quick to clarify if certain policies were not under consideration. Limiting the size of the tax-free lump sum is a popular idea among some on the left because much of the benefit tends to go to wealthier pensioners, while those with little or no private savings do not gain from the tax advantages.
However, Reeves has also expressed a desire to encourage a culture of saving in the UK to help people fund their own retirement and invest in promising British firms.
The Surge in Withdrawals
The surge in withdrawals this year continues a trend that began after the Labour Government took power in the summer of 2024, attributed to uncertainty over policy changes. The amount of money withdrawn from pensions increased by almost 36% in 2024/25, with savers taking out £70.9bn compared to £52.2bn the previous year.
Risks for Savers
Wealth advisers warn that the decision to withdraw early can have negative consequences for some savers. Pension investments often grow over time, so waiting longer to withdraw money can result in a larger pot, allowing for a larger tax-free withdrawal. There is also the risk of running out of money if the funds are spent early, especially considering that people are living longer and savings are crucial for a comfortable retirement that can span several decades.
Retirement experts suggest that earlier communication from the government about whether the rules would change before this year’s Budget could have prevented more pensioners from making hasty decisions.
Retirement Plans ‘Undermined’
Jon Greer, head of retirement policy at Quilter, emphasized that lack of clarity and rumour mongering can lead people to act fearfully, which is dangerous when it comes to pensions. Decisions like taking a lump sum are irreversible, and if people fear the benefit is under threat, they may act early, triggering tax charges or undermining their retirement plans.
Gianpaolo Mantini, a chartered financial planner at Saltus, noted a marked increase in withdrawal enquiries driven by speculation. He said clients felt anxious and uncertain, and while the Treasury eventually confirmed that there would be no changes, the reassurance came too late for many. Taking tax-free cash early is rarely advisable unless it forms part of an established long-term plan.
Pensioners Will ‘Have to Live with the Consequences’
Michael Summersgill, chief executive at investment firm AJ Bell, mentioned that there were hundreds of millions of pounds in additional withdrawals from pensions in the lead-up to the Budget as a result of uncertainty. He added that while no changes were made to the key incentives in the current pension system, the uncertainty led to heightened withdrawals.
Some pensioners who took their tax-free cash in anticipation of a policy change before the 2024 Budget tried to reverse the decision. Some providers allowed them to do this, though others did not. This year, HMRC suggested that if pensioners made this decision, they would have to live with the tax consequences.
The Disadvantages of Taking Tax-Free Pension Savings Early
Taking your tax-free pension cash early can be financially disadvantageous because leaving a pension invested can lead to greater growth. For example, if a retiree had a £400,000 pension at 60 and chose to take their tax-free cash, they would get £100,000 tax-free. If they let it grow to £500,000 over the next five or six years and took it at 66, they would get £125,000 tax-free. Additionally, if the money is withdrawn and then invested, tax may be payable on the gains, whereas keeping it within the pension allows for tax-free growth.
Why Some Take Their Cash Sooner
Some retirees choose to take their cash sooner if they need it for specific purchases or to pay off debt. For instance, some use the money to pay down their mortgage, allowing them to enter retirement without housing costs.