Tax-free pension withdrawals jumped in 2024-25 – should you act before the Autumn Budget?

Almost 112,000 people took their 25% tax-free pension lump sum in the six months to March 2025 – a 33% rise on the same period a year earlier.

Across the 2024-25 financial year as a whole, the number of people withdrawing lump sums was up 29% compared with 2023-24. The total value of withdrawals climbed from £11bn to £18bn, according to Financial Conduct Authority data obtained by wealth management company, Evelyn Partners.

The surge came ahead of the 2024 Autumn Budget, when pensions were brought within inheritance tax from 2027. With the next budget scheduled for 26 November, debate over whether the 25% allowance could be reduced has re-emerged.

Why withdrawals surged last year

One reason behind the surge was speculation that the government might reduce the size of the tax-free lump sum people can withdraw from pensions after the age of 55. The allowance is currently set at 25% of your pot, up to a cap of £268,275.

The FCA figures show most withdrawals took place in the second half of 2024-25, with £10.43bn taken between September and March, up 72% on the same period a year earlier. More than 111,000 people withdrew during that half-year alone.

Evelyn Partners said part of the increase may have reflected families reacting to the inclusion of pensions in inheritance tax from 2027, announced at last October’s budget. 

But the wealth manager’s chief financial planning officer, Emma Sterland, added that the scale of withdrawals also pointed to fears that the tax-free allowance could be cut – a possibility that continues to be debated ahead of this year’s budget.

• Find out more: can I take a lump sum from my pension?

Are tax-free lump sums at risk?

The Institute for Fiscal Studies (IFS) has estimated that tax-free lump sums cost HMRC around £5.5bn a year. With the government under pressure to raise revenue, pensions remain part of the wider debate in the run-up to the 26 November Budget.

However, there have been no official reports or proposals to reduce the tax-free lump sum, and any speculation to date has come from think-tanks and commentators rather than ministers or the Treasury.

• Find out more: Autumn Budget 2025: when it is and what will it contain?

How do pension tax-free lump sums work?

Many people nearing retirement may have a mix of defined contribution and defined benefit pensions; each has their own set of rules.

• Defined contribution pensions: These are built through contributions from both the employer and employee, and the amount you save depends on investment performance. You can typically take up to 25% of your total pension pot as a tax-free lump sum, subject to a lifetime cap or in chunks. 

• Defined benefit (final salary) pensions: These pensions provide a guaranteed, lifelong income based on your salary and length of service. Your options for a 25% tax-free lump sum depend on your specific scheme's rules, with some often involving giving up a portion of your guaranteed income. 

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What to think about before you withdraw

Experts warn against making rash moves ahead of the November Budget. If you’re considering taking money from your pension, here are the key points to keep in mind.

The effect on your future income

Taking a lump sum early could leave you short later in life. 

According to the Office for National Statistics (ONS) life expectancy calculator for 2025, a man aged 50 is expected to live to 84, while a woman of the same age can expect to reach 87. 

Retiring at state pension age means covering more than two decades, but accessing your pot at 55 could mean funding 30 years or more. 

With medical and care costs often rising later in life, withdrawing too much too soon risks a financial shortfall.

• Find out more: how much you need to retire.

Growing your savings

Just because you can take a tax-free lump sum at 55 doesn’t mean it’s the best option. If you have other savings, leaving your pension invested gives it the chance to benefit from compound growth. 

By contrast, moving large sums into cash risks losing value to inflation over time.

• Find out more: how long does my pension need to last?

Tax implications

Anything beyond your 25% tax-free lump sum is taxed as income if your total earnings exceed the personal allowance of £12,570. 

Taking income or a series of lump sums can also trigger the Money Purchase Annual Allowance (MPAA), which cuts your annual pension contribution limit from £60,000 to £10,000. This makes it harder to rebuild savings if you keep working.

• Find out more: pension options: what can I do with my pension pot? 

What else could change in the budget?

With the Autumn Budget set for 26 November, pensions remain part of the debate about how the government could raise revenue. Nothing has been confirmed, but two areas are attracting attention.

Pension tax relief  

When you pay into a pension, the government adds tax relief at your highest rate of income tax — 20% for basic-rate taxpayers, 40% for higher-rate and 45% for additional-rate. 

The Institute for Fiscal Studies (IFS) has suggested that this system is expensive and benefits higher earners most. 

One option being discussed is moving to a flat rate for everyone, potentially around 25-30%. This would give basic-rate savers more support, but reduce the perk for those on higher incomes.

• Find out more: how to calculate pension tax relief.

Inheritance tax on gifts

Commentators have also suggested that inheritance tax rules could be tightened, including limits on gifting. 

With pensions already set to fall within inheritance tax from 2027, further changes could affect how families plan to pass on wealth.

• Find out more: will inheritance tax rules on gifts be tightened?