The Labour government is set to announce its first Budget at the end of the month, and, as usual, there are rumours about potential changes. One of these rumours is that the 25% tax-free pension lump sum might be at risk. But nothing has officially been announced or confirmed, so there’s no need to make any quick decisions about your pension right now. 

All announcements will be made on 30 October

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). 

No changes have officially been announced but there are reports in the media that the government might reduce the amount of the LSA. Importantly, this is a rumour. We’ll only find out if anything is changing (and what any start date would be) when the autumn Budget takes place from midday on 30 October 2024.

Taking money from your pension should be considered carefully

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.

1. Money in a pension can continue to grow tax-free

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.

2. Money in a pension can be inherited tax-free

Your pension 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.

3. You might have less money to live on in retirement

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.  

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

4. You might not be able to withdraw your money before the Budget

Changes (if any) will be announced on 30 October 2024, so it might be too late for your pension provider to withdraw your money before then. Even if changes are announced, the government might decide to start them at a later date. For more information, see the section Taking your pension. 

Consider paying for financial advice

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.  

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