Should I withdraw money from my pension before the Budget?

A growing number of pension savers are taking action ahead of the Budget in November 2025 as concerns mount that Chancellor Rachel Reeves may target pensions in a bid to raise revenue. The most significant fear being a reduction—or even scrapping—of the 25% tax-free lump sum.

New figures from the Financial Conduct Authority (FCA) showed that £70bn was withdrawn from pension pots in the tax year 2024/2025 which was an increase of 36% on the previous tax year. But it was tax free cash that saw the biggest jump in withdrawals, with £18.3bn withdrawn, up 62% on the previous year. While some are taking early action as part of planned retirement or inheritance strategies, others may be reacting to speculation and that may carry its own risks.

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So, what’s really happening, and what should pension savers consider before making any, potentially rash, decisions?

Is 25% tax-free cash under threat?

One of the most cherished benefits of pension saving is the ability to withdraw 25% of your pension pot tax-free from the age of 55 (rising to 57 from April 2028). This feature is often a key part of retirement planning, offering a welcome financial boost in early retirement years.

However, there has been much speculation in the media that this benefit could be in the Chancellor’s sights. Given the growing cost pressures on the Treasury and the need to balance the books, the Government may see this as a politically tolerable way to raise funds, especially if positioned as a move to make the system “fairer” or to close “tax loopholes.”

Some rumours have hinted that the allowance could be capped or means-tested, while others believe it could be scrapped altogether for higher earners. Though nothing has been confirmed, it has been enough to make many savers act early.

Why are people withdrawing pension money now?

A major driver of this accelerated activity is likely inheritance tax planning. Many people have used pensions as estate planning vehicles because, under current rules, unused defined contribution pensions can often be passed on to beneficiaries tax-free if the saver dies before age 75 (and pre-2027), or at their beneficiaries’ marginal income tax rate after that age.

Whilst pensions were not designed to be passed on tax-free, this became a feature only with the pension freedoms introduced in 2015. It would appear that the Government now sees this an unintended generosity hence changing the rules from April 2027.  

Major factors potentially driving this trend:

• ‘Lock in’ current rules: By taking their tax-free cash early, even if they didn’t need the money immediately.
• Support for adult children: In a cost-of-living crisis, many parents are using their pension pots to help their children buy homes, support education, clear debts, or simply get by.
• Impending legislation: Known changes are coming in April 2027 that will bring most pensions into a person's estate for inheritance tax purposes making their longer-term benefit less tax efficient, as such some are accelerating inheritance tax planning through gifting.  
• Desire to see the benefits: More people may be choosing to gift during their lifetime to witness the impact their money can have, rather than waiting until after death.

The HMRC crackdown: Watch out for re-contributions

However, pension savers must tread carefully. HMRC have confirmed that they are now targeting people who have withdrawn pension funds and then tried to re-contribute the money. This often happens when people access cash “just in case” and later realise they didn’t need it.

HMRC is treating these “recycling” activities as unauthorised payments, and in some cases is issuing penalties of up to 70% of the amount re-contributed.

This crackdown should act as a serious warning: pension planning must be done properly and ideally with advice. Knee-jerk decisions based on speculation or panic can come at a very high price.

So, should you withdraw your tax-free cash now?

Plan, don’t panic, is the key. The temptation to act quickly in light of Budget rumours is understandable but the best outcomes come from measured, strategic financial planning, not reacting to headlines.

Yes, the landscape may change. But making major pension decisions without understanding the long-term impact could create bigger problems down the line, particularly if HMRC penalties counteract any tax saving you set out to achieve. The smarter move? Review your financial and estate plan now, not later. If you’ve already been considering gifting or restructuring your assets, this could be the right time. Equally if you were planning to take your tax-free cash soon, anyway, now could be a good time. But don’t make a move based on speculation and what might happen. Ideally, speak to a qualified financial adviser who understands your full situation.

Because while Budget speculation may be out of our control, how we plan for our financial future isn’t.

Inheritance planning tips

If you're considering how to manage your pension and reduce your estate for IHT purposes, here are a few strategies to consider:

1. Use spouse exemptions: Transfers between spouses are free from IHT. Consider aligning pension and estate planning as a couple.
2. Gift excess income: Regular gifts from excess income (not just capital) can be IHT-free if documented properly and as part of a regular pattern
3. Use other allowances: Don’t overlook the £3,000 annual gifting exemption or small gift allowances.
4. Lifetime gifting: Gifts survive the 7-year rule for IHT purposes if you live long enough, so starting earlier has advantages.
5. Consider life insurance: A whole-of-life policy written in trust can provide a tax-free lump sum on death to help cover an IHT bill.
6. Don’t rely solely on pensions: A balanced approach using ISAs, property, other tax incentivised products, and trusts may be more resilient against future rule changes.

For this any many more tips on how we can improve you and your family’s financial future, why not get in touch for free initial consultation.  

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The value of your Investments and the income derived from them can fall as well as rise and you may get back less than you originally invested.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.