Savers are taking tax-free cash from pensions ahead of the Budget - despite changes being unlikely

Savers have been bombarding financial advisers with questions about inheritance tax and pension tax-free cash in the run-up to the Budget, new research reveals.

Just under half of financial advisers surveyed said some of their clients were taking tax-free cash from their pensions ahead of the Budget on Wednesday. 

This is because they are concerned about a possible reduction in the amount of tax-free cash that can be taken from their pension pot. 

At the moment, they can take a 25 per cent lump sum worth a maximum of £268,275.

More than half of the firms surveyed said clients are bringing forward planned gifts or wealth transfers, as families get ready for pensions being included in inheritance tax calculations from next spring. 

It follows 'rampant speculation' about a raid on pensions before the last Budget.

Chancellor John Healey has reportedly ruled out changes to pension tax-free lump sums over the weekend. 

Pension experts warn against taking 25 per cent tax-free lump sums early unless you have definite plans for the money – typically paying off debt like mortgages and making big-ticket purchases – because you can miss out on future investment growth and end up with less to live on in retirement.

Two-thirds of financial advisers have seen an increase in enquiries about inheritance tax and estate planning over the past month, more than for any other tax-related topic, according to trade body the Personal Investment Management & Financial Advice Association.

When it asked firms which areas of personal taxation would benefit most from greater predictability and long-term clarity, 70 per cent said inheritance tax.

That was the most popular answer, followed by pension tax rules, and Isa rules and allowances.

Some 45 per cent of the 73 financial advice firms who participated in the survey said clients had increased or maximised their Isa contributions, and 30 per cent reported an increase in enquiries on the topic.

From April 2027, the £20,000 cash Isa allowance will be reduced to £12,000, apart from over-65s in a move designed to increase investment in stocks and shares.  

David Ostojitsch, director of policy at PIMFA, said: 'These findings show that speculation about potential tax changes continues to have an impact. 

'In line with previous Budget exercises, clients are seeking advice and bringing forward financial decisions before we know what the Budget will contain.

'Recent changes, including bringing unused pension funds into the scope of inheritance tax, have understandably left people concerned about what might come next.

'Ahead of each Budget, speculation about pensions, tax-free cash and inheritance tax can prompt people to make significant financial decisions simply to get ahead of changes that may never happen.'

Tom Selby, director of public policy at AJ Bell, welcomed reports that John Healey doesn't plan to change tax-free cash rules in the Budget.

'There has been mercifully little speculation about the future of pensions taxation ahead of this year's Budget, despite the challenging economic environment the chancellor is operating in.

'This relative calm has meant we haven't seen the panicked rush to withdraw tax-free cash we saw last year after a series of unfounded leaks and rampant speculation, with an eye-watering £22billion of tax-free cash accessed in 2025-26 - £14billion higher than the average before the general election – in large part driven by fear rather than long-term financial planning.'

He renewed AJ Bell's call for the Government to make a long-term commitment to pension tax stability, rather than having 'a damaging game of pre-Budget chicken' every year.

'People invest money for decades, doing the right thing by making sacrifices today to provide for themselves in the future,' he said. 

'That decision is underpinned by simple incentives – deferring tax until retirement and benefiting from the added perk of 25 per cent being available tax free from age 55.' The age to access private pension rises to 57 in 2028.