With a background in financial journalism across national titles, Ruby loves helping people take control of their money and specialises in pensions, tax, banking and benefits.
More than 61% of UK retirees who rushed to pull tax-free cash from their pensions ahead of last year’s Budget now regret it.
According to a survey of 5,000 retirees by financial advice firm Quilter earlier this year, 57% withdrew their pension savings prematurely, with 41% of survey respondents doing so out of fear that the 25% tax-free lump sum would be capped or scrapped.
While there is no sign Prime Minister Andy Burnham plans to alter the rules, pension providers are calling for official reassurance ahead of the Budget on Wednesday 28 October to prevent another wave of panic withdrawals.
But acting on Budget rumours isn't the only way you can incur unnecessary tax charges when accessing your retirement savings. Complex rules also apply to lump sum withdrawals.
We've talked to the experts about common misconceptions and your options if you've already taken money from your pension pot.
Under current rules, you can take up to 25% of your pension tax-free from age 55 – rising to 57 in April 2028 – capped at a total limit of £268,275 across all your pensions.
Before April 2024, pensions were managed under a different pension rule called the Lifetime Allowance which had a limit of £1,073,100 (hence the lump sum withdrawal limit, which is a quarter of this). The Lifetime Allowance was the most money you could save in a pension without extra tax.
The Lifetime Allowance has been scrapped. But any tax-free cash taken under those old rules still counts toward your current £268,275 allowance.
Final salary pensions, or defined benefit pensions, calculate tax-free cash differently using individual scheme formulas.
According to HMRC, flexible pension withdrawals reached a record £22.4bn in the 2025-26 tax year, up £3.8bn from 2024-25 and £7.1bn from 2023-24.
Jon Greer, head of retirement policy at Quilter, noted that HMRC data alongside findings from Quilter shows how speculation ahead of last year’s Budget led many retirees to act out of fear rather than genuine need at that moment.
He added: 'This research underlines just how sensitive retirement planning has become to continuous budget speculation. Those saving towards and planning their retirement need and deserve certainty, and there should be a clear commitment to avoid another prolonged period of speculation ahead of future Budgets.
'The Chancellor only ruled out changes to the tax-free lump sum in the final days before the Budget, by which point the damage had already been done. This cannot be repeated in the run-up to the 2026 Budget.'
Whether you’re unsure if you have enough to retire, or are already accessing your savings, our money guidance service can talk you through your options. Which? Money members get unlimited access to them via phone.
Find out moreAndrew King, pensions specialist at wealth management firm Evelyn Partners, notes that even though the 25% tax-free entitlement is a valued feature of defined contribution pensions, it is still widely misunderstood.
He has listed four ways the lump sum is misunderstood:
Many people think that once you access tax-free money, you cannot build your pension back up. This is incorrect. Taking your pension lump sum does not stop you from saving more later, nor does it prevent you from taking more tax-free cash in the future – provided you stay under the £268,275 limit.
For example, if you have a £600,000 pension at age 60 and take £150,000 tax-free to pay off a mortgage, you leave £118,275 of your allowance unused. If you keep working and rebuild your pension to £473,100, you can take that remaining £118,275 tax-free later.
However, final salary pensions work differently. These schemes tend to offer a choice between a higher yearly income with no cash lump sum, or a lower yearly income in exchange for tax-free cash upfront.
Taking tax-free cash from a final salary pension permanently reduces your guaranteed yearly income.
Believing you must take your tax-free cash all at once is another common mistake. Taking it in stages can help your money last longer and benefit from compound growth. However, how you structure phased withdrawals matters:
'Small pot rules' allow you to withdraw up to three personal pensions worth £10,000 or less without triggering the lower £10,000 annual saving limit (MPAA). However, these rules offer no extra tax advantage, only 25% of each small pot is tax-free, while the remaining 75% is taxed as income.
Cashing in multiple small pots in one tax year can create a surprising tax bill by pushing you into a higher tax bracket. Instead of cashing them out early, combining small pots into a single pension allows them to keep growing tax-free for retirement.
Taking only your tax-free cash will not lower your future contribution limits. However, the moment you access any of the taxable 75% portion of your pension (such as through UFPLS), you trigger the money purchase annual allowance.
Once triggered, the maximum amount you can save back into a pension each year with tax relief drops from £60,000 to £10,000. If you plan to rebuild your pot, taking only the tax-free cash and leaving the rest in drawdown protects your £60,000 allowance.
Once you've taken your lump sum payment, you typically cannot reverse the move.
However, there are a few things you can consider:
If you don't want to spend the money soon, reduce the chances of it being devalued by inflation by making sure it earns the most interest possible.
Ideally you'd add it into an Isa, to stop that interest being taxed, but with large sums you may have to add it into Isas over several years.
If you are working and have sufficient earnings, you can pay money back into your pension. However, you must be careful not to break any HMRC pension recycling rules.
These rules are in place to prevent people from reinvesting tax-free cash to gain extra tax relief. You could face a tax charge if all the following conditions are met:
For it to be classed as pension recycling, HMRC must also prove intent. If they can do this, then you will face a severe tax charge.
Select the option that best describes your current situation.
