It is important not to make snap decisions with your pension. Accessing funds too quickly can have lasting consequences and may reduce the effectiveness of your long-term retirement plans.
From time to time, the press speculates that the Government may consider changing the rules around taking up to 25% of a pension as a tax-free lump sum (known as “tax-free cash” or Pension Commencement Lump Sum, PCLS).
At present, these are only headlines, no changes have been announced, and the rules remain the same.
Why you should think twice before acting
The rules today remain unchanged: most people can still take up to 25% of their pension benefits tax-free, subject to a maximum of £268,275 (unless Lifetime Allowance protection applies). Importantly, no official proposals to change this have been made. Yet moving early carries significant drawbacks.
- You may lose valuable growth
Funds kept inside a pension continue to grow free from Income Tax and Capital Gains Tax. Withdrawn funds, once outside the pension, can face Income Tax of up to 45% and CGT of up to 24% on future returns.
- You reduce your future tax-free entitlement
By crystallising benefits early, you lock in your tax-free cash today and lose the opportunity to take 25% of future growth on that portion tax-free. This can be a substantial long-term cost.
- You could create an avoidable Inheritance Tax liability
Currently, pensions are generally outside your taxable estate for Inheritance Tax. Once funds are withdrawn, they enter your estate and may be exposed to a 40% IHT charge on death. From April 2027, pensions themselves will fall within scope of IHT, but they remain an efficient vehicle until then.
- You may pay unnecessary costs
Withdrawing tax-free cash is not automatic, it involves advice, provider processes, and sometimes fees. Acting prematurely could mean incurring costs that were avoidable.
- Speculation is rarely the basis for good planning
Governments frequently signal possible pension reforms. Previous changes such as the Lifetime Allowance came with protections to avoid penalising savers overnight. It is impossible to guarantee this will always be the case, but history suggests caution before reacting to headlines.
Why keeping funds in your pension often makes more sense
Retaining funds in the pension wrapper preserves powerful advantages:
- Tax relief on contributions.
- Tax-free growth within the wrapper.
- Flexibility to take income later in line with your needs.
- Investment choice across a wide range of funds and strategies.
Unless there is an immediate and genuine need for cash, leaving funds invested usually enhances long-term outcomes.
The process isn’t simple, or reversible
Withdrawing tax-free cash requires a structured, regulated process that typically takes 4-6 weeks. It involves reviewing objectives, risk profile, income, expenditure, and existing pensions. HMRC is clear: once entitlement is used, there are no “cooling-off” rights.
Summary
Speculation about pension changes is nothing new, but it should not drive irreversible decisions. Withdrawing tax-free cash early can erode future growth, increase tax liabilities, and compromise estate planning.
Unless there is a pressing reason, the stronger case is usually for leaving funds inside your pension until they are genuinely needed.
If you are concerned, speak with a qualified Financial Planner. Together you can review your circumstances and decide whether accessing tax-free cash supports your long-term goals, or whether patience will leave you better off.
Contact us on 0330 320 9280, email info@cravenstreetwealth.com or complete our online enquiry form for practical advice tailored to your own circumstances and needs.
The content of this article is for information only and does not constitute formal financial advice. This material is for general information only and does not constitute investment, tax, legal or other forms of advice.
References to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of publication. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
You should not rely on this information to make, or refrain from making any decisions. Always obtain independent, professional advice for your own particular situation.
Craven Street Financial Planning Limited is authorised and regulated by the Financial Conduct Authority (FCA). The FCA does not regulate tax advice.
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