Rachel Reeves ‘must shut down’ pension lump-sum tax rumours

Advisers report an increase in clients asking about taking a lump sum from their pension pots

The Government is being warned to tell savers whether it plans to make changes to pension rules in the Budget as more people look to make a “knee-jerk decision” and take their lump sum.

Experts say that Chancellor Rachel Reeves should dispel rumours about the way pensions are taxed to avoid people acting on rumours and potentially making life-changing decisions that could be damaging in future.

There has already been an increase in withdrawals with the Financial Conduct Authority (FCA) recently revealing that the overall value of money being withdrawn from pension pots increased to £70.88bn in 2024/25 from £52.15bn in 2023/24 – a rise of 35.9 per cent.

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Nimesh Shah, CEO at Blick Rothenberg, said: “I personally haven’t experienced such a wave of enquiries on this subject since 2019, when there was serious concern around a Corbyn/McDonnell government. 

“The rumours during the summer around introducing a much reduced cap, and combined with the introduction of inheritance tax on pensions from 2027, is leading more people to take their tax-free lump sum before the Budget. 

“In one very extreme example, I have a case where the person is considering taking everything out of their pension before the Budget.

“I am really concerned about the behaviour of this Government on the tax rumours. It has created huge uncertainty and people are fed up.

“There is a complete lack of leadership from the Chancellor in relation to these rumours – she could easily close these down. I think there needs to be stronger leadership from the Government and categorically rule this out.”

Currently, the pension commencement lump sum allows people to withdraw up to 25 per cent of their pension pot tax-free, currently capped at £268,275.

It is a popular option for retirees looking to pay off mortgages, support children financially or invest in inheritance tax-efficient vehicles.

But with the Chancellor under pressure to boost tax revenues, speculation is mounting that changes could be on the horizon.

Lisa Picardo, chief business officer UK at PensionBee, said: “The example of individuals rushing to withdraw lump sums before the 2024 Budget serves as a cautionary tale of how speculation, confusion and urgency can lead to decisions that don’t serve an individual’s best interest.

“That’s why it’s vital for any government to set out clear policy intentions in good time, with straightforward guidance and allowing reasonable implementation periods for any changes. This gives savers confidence to plan sensibly. Certainty, transparency and communication are key to maintaining trust.”

Rachel Vahey, head of public policy at AJ Bell, added: “With the Budget fast approaching, the rumour mill is going into overdrive over whether there will be changes to pensions tax incentives from November.

“This constant debate about changing pensions tax rules is wearing down people’s trust in the Government and putting them in danger of making knee-jerk decisions which may not be the right ones for them.”

AJ Bell is calling on the Government to commit to a pension tax lock, vowing not to change the rules on pension tax relief or tax-free cash for at least the remainder of this parliament.

Ms Vahey added: “By doing this, the Chancellor could at virtually zero cost put an end to rampant and damaging speculation – that has in some instances has seen people make long-term decisions around their retirement.”

Some firms allowed those who took their lump sum, and regretted it in the light of the lack of policy change, to put their money back into their pension and undo their decision. They were able to do this under rules that allow cancellation of certain actions within 30 days of it being taken.

But new guidance from HMRC has cast doubt on whether this will be allowed in future.

Statements from the taxman and the FCA this week suggest many decisions to take out a pension will not be covered by the 30-day rules, and that some individuals could be treated as having used up some of their lifetime lump sum limit of £268,275, even if the money has gone back into their pension.