Pension savers urged to avoid 1 mistake before November 26 | Personal Finance | Finance

With just weeks to go until Chancellor Rachel Reeves delivers the Autumn Budget on November 26, pension holders are being strongly urged to think twice before withdrawing from their pensions, especially when it comes to taking out the popular 25% tax-free lump sum.

In its latest survey, wealth management firm, Rathbones found that there’s been a recent surge in lump sum withdrawals driven by fears that the Government may cut this tax-free allowance. Their latest research showed many investors who acted on similar rumours ahead of last year’s Budget now regret their decisions. The firm said that while there are good reasons to use the lump sum, when withdrawn, any eventual growth will usually take place outside the tax-efficient pension wrapper, which can then expose it to income tax, capital gains tax, or inheritance tax as well.

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.

“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.”

Another important consideration is the Money Purchase Annual Allowance (MPAA), which reduces the annual tax-relievable pension contribution limit from £60,000 to £10,000 once taxable pension withdrawals begin. This rule often catches people off guard.

She added: “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%.”