Is the 25% tax-free pension lump sum ending?

There were a couple of pensions changes included in October’s Budget; however, these were not about the tax-free pension lump sum. 

You can read more about the changes to Inheritance Tax and overseas pensions transfers in our Autumn Budget blog.

Currently, from age 55, you can usually take up to 25% of your pension money without needing to pay any tax. This is called a tax-free lump sum.  

For most people, the maximum tax-free lump sum is set at £268,275. This is called the lump sum allowance (LSA). 

Taking money from your pension is not a decision to rush into. 

Here’s what to consider if you’re concerned by the media reports and are thinking of taking money from your pension now.

You’ll only usually pay tax when you take your pension. This means your money can grow in a pension without you needing to pay tax. For example, if the money was in a standard savings account instead, you might need to pay tax on the interest.

Under a defined contribution scheme funds can usually be passed to your beneficiaries when you die without being subject to Inheritance Tax (IHT). Any money outside of a pension would usually be counted as part of your estate, so IHT would apply.

From April 2027 this will change, and most inherited pensions and death benefits under registered pension schemes will be counted towards your total estate for Inheritance Tax.  

Read more about this in our Inheritance Tax guide.

If you take money from your pension earlier than planned, you’ll need to make it last for a longer period. This could mean you’ll have less money each year in retirement because it’s spread over more years.  

To ensure you have enough money later in life, think carefully about when to access your pension and plan how to manage your finances.  

Our Pensions calculator will show you your likely retirement income and how it would change if you take a tax-free cash lump sum.

Before taking money from your pension, it’s worth considering paying for advice. For example, if you choose to take a tax-free lump sum, you’ll also need to decide what’s best for the rest of your pension money. 

A regulated financial adviser will be able to give you advice about the current tax rules and explain your options, including leaving your money invested and getting an income.  

Our Find a retirement adviser tool can help you locate an adviser specialised in retirement planning online, in person and over the phone.