With the Autumn Budget around the corner, many people are wondering whether they should take their tax-free pension cash now, just in case the rules change. HMRC has issued a clear warning:
“Once lump sums are paid, the associated tax consequences (including the use of the individual’s lump sum allowance and lump sum death benefit allowance) cannot be undone, even if the payment is returned or cancellation rights are exercised.”
WHAT SPARKED LAST YEAR’S TAX-FREE CASH PANIC?
Last year, rumours spread that the government might reduce the amount of pension savings you can take tax-free. Currently, from the age of 55, you can access up to 25% of your pension pot tax-free, capped at £268,275. Some platforms offered a 30-day cooling-off period, which advisers used to pre-emptively request withdrawals on behalf of clients, with the option to cancel if no changes were announced.
However, HMRC clarified in September 2025 that once a tax-free lump sum is paid, it cannot be reversed, even if the payment is returned or cancellation rights are exercised. The tax consequences, including the use of the individual’s lump sum allowance and lump sum death benefit allowance, remain in place.
THIS YEAR’S TAX-FREE CASH RUMOUR MILL
Speculation has intensified again this year, with fears that the Chancellor may cut the tax-free cash allowance to £100,000. This has led to a significant spike in withdrawals. Between October 2024 and March 2025, savers withdrew £10.43 billion in tax-free cash, a 72% increase compared to the same period the previous year. Overall, pension withdrawals increased to £70.1 billion in 2024/25, up from £52.2 billion the previous year.
WHAT DO HMRC AND THE FCA SAY?
In a recent newsletter, HMRC and the Financial Conduct Authority (FCA) reminded savers that cancellation rights don’t apply to tax-free pension lump sums. Even if your pension provider offers a cooling-off period, the tax consequences kick in as soon as the money is paid out.
THE RISK OF ACTING TOO SOON
According to Citywire New Model Adviser, over 111,000 pension drawdown pots were accessed for tax-free cash in just six months. Former pensions minister Steve Webb commented that this behaviour reflects how uncertainty around pensions and tax can lead people to make rushed decisions.
The FCA and HMRC have urged savers to avoid making decisions based solely on speculation alone – that’s not to say you shouldn’t take your tax-free pension cash, but to seek professional advice on whether it is the right time for you to do so.
FINAL THOUGHTS
It’s natural to want to protect your savings, especially when there’s talk of change. However, the HMRC’s and the FCA’s guidance makes it clear: once tax-free cash is withdrawn, it cannot be undone.
We encourage our clients to seek professional advice and consider long-term implications before making any decisions.
DISCLAIMER
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
