Marvin OnumonuRathbones has warned that concerns over possible pension tax changes are leading people to withdraw their 25% tax-free lump sum early, with many now regretting it.
The firm’s recent research found a surge in lump sum withdrawals as speculation increased that Chancellor Rachel Reeves may cut the 25% tax-free allowance.
Rathbones found that regret over taking the lump sum topped the list of actions respondents wished they had not taken ahead of the 2024 Autumn Budget, when similar rumours circulated.
Some used the lump sum to pay off a mortgage or support family, but Rathbones said many withdrew their pension cash in reaction to uncertainty.
The firm pointed out that withdrawing early means losing out on future investment growth and tax benefits.
For example, £100,000 invested at a 5% annual return could have grown to £128,000 over five years.
In a savings account at 2%, it would have reached just over £110,000.
Over 10 years, the difference could be as much as £41,000.
Rathbones also noted that money withdrawn from a pension is no longer sheltered from tax, so any future growth could be liable to income tax, capital gains tax or inheritance tax.
Rebecca Williams, divisional lead of financial planning at Rathbones, said: “The pension tax-free lump sum is one of the best-loved and most well-understood parts of the pensions regime, and it’s understandable that people are nervous about potential changes to the rules.
“The ability to withdraw a lump sum free of tax from your pension is hugely beneficial for meeting immediate financial obligations, but withdrawing without a clear plan can lead to missed growth opportunities and tax exposure.
“With the confirmation from the regulator this week that drawing tax free cash doesn’t trigger cancellation rights, taking tax free cash is an irreversible decision. It’s vital to think carefully before acting.”
Williams added: “Taking professional financial advice can help ensure decisions are aligned with long-term goals and made with a full understanding of the risks and benefits.”
Williams also highlighted the money purchase annual allowance.
Once someone takes taxable withdrawals from their pension, the annual tax-relievable contribution limit falls from £60,000 to £10,000.
She said: “Those thinking they can simply recycle their tax-free cash back into a pension could be in for a nasty shock.
“If the move appears pre-planned and contributions spike significantly, HMRC may treat it as an unauthorised payment – potentially landing you with a tax bill of up to 55%.”
Rathbones is advising people to get professional advice before making any pension decisions, with the Budget set for 26th November.
