More people are debating whether to withdraw a cash lump sum from their pension amid fears the Chancellor could restrict the allowance in the Budget.
Financial advisers told The i Paper they are fielding questions from clients worried that changes to pension rules could reduce the amount they can take tax-free.
Some are already withdrawing large sums because they fear losing access to it.
Alex Pugh, a chartered financial planner at Saltus, recently dealt with a client who withdrew £268,275 from his pension, the highest amount you can take before being charged tax, before seeking professional advice.
She said: “This client was worried the government would remove or restrict the tax-free element in the Budget this week. His reaction is understandable.
“When people have spent years building their retirement savings, the prospect of losing a valuable tax break can understandably prompt them to act. But there can be significant consequences.”
By taking such a substantial sum out of his pension, her client had reduced the amount remaining invested for potential future growth.
She added: “We now need to consider how the money he has withdrawn and the pension he has left can work together to support his long-term plans, including how much income he will need in retirement and how best to invest his assets.”
Nouran Moustafa, an independent financial adviser at Roxton Wealth, said enquiries from people considering taking their tax-free pension lump sums had doubled compared to before Labour came to power.
She said calls had become almost daily as the Budget approaches, with clients worried about taxation, pension rule changes and the value of their retirement savings.
“People have spent decades working, saving and planning for retirement, suddenly questioning whether they should withdraw substantial amounts of money because they no longer feel confident about what the government might do next.”
William Annison, a pension expert and managing director of HWWA Consulting, said he received enquiries throughout the summer and in the run-up to the Budget.
He said: “What stands out is the persistence of the anxiety. Some people I have spoken to have already withdrawn money because they feared the rules would change.
“Most of the people I speak to do not consider themselves wealthy. They are worried about making their savings last, and there is a real lack of trust that the government will leave the rules alone. People worry about paying more tax than they should.”
What is the tax-free pension lump sum?
Most people can take up to 25 per cent of their pension pot as a tax-free lump sum when accessing their pension, up to £268,275.
The allowance is separate from the remaining pension savings, which can generally be accessed from the age of 66 through options such as drawdown or an annuity. Withdrawals beyond the available tax-free allowance are usually subject to income tax.
For many savers, the tax-free cash is an important part of their retirement plans. It can be used to pay off a mortgage or other debts, fund home improvements or provide a financial cushion as they stop working.
But advisers say speculation that the allowance could be reduced is prompting some people to consider taking money earlier than planned.
What changes are being rumoured?
Ahead of the Budget, speculation has resurfaced that John Healey could reduce the maximum tax-free amount to £200,000, £150,000 or even £100,000.
A £100,000 cap has featured in previous rounds of pension tax speculation, although no reduction has been confirmed.
The rationale behind a potential cut would be to raise money for the Treasury at a time when the Government faces pressure to increase revenues.
Restricting the allowance could mean more pension withdrawals become subject to income tax, although the amount raised would depend on how the policy was designed and how savers responded.
A lower cap would primarily affect people with larger pension pots who would otherwise be entitled to take more than the new limit tax-free.
For those who have built their retirement plans around the existing allowance, a reduction could leave them with less cash to pay off a mortgage, clear debts or fund their later years.
Moustafa warned that withdrawing pension money prematurely could have financial consequences. Once cash is outside a pension, it may lose the tax advantages of the pension wrapper, while interest or investment returns earned on it could be taxable.
What should savers do?
Experts have urged people not to make irreversible decisions based solely on rumours about the Budget.
Tom Selby, director of public policy at AJ Bell, said: “Fiddling with that will prompt some people to second-guess what they should be doing when it comes to long-term investing and risks undermining confidence in the system.
“Taking money out of long-term investments prematurely is bad for savers and bad for growth, leaving people poorer in retirement and starving the economy of capital.”
The firm’s analysis of Financial Conduct Authority (FCA) data shows tax-free cash withdrawals from pensions have surged in recent years, with excess withdrawals of £14bn around the 2025 Budget when compared with the average prior to the build-up to the last election.
Selby wants to see the Government draw a line under the matter with “a firm, long-term commitment to pension tax stability, rather than continuing this damaging game of pre-Budget chicken”.
Annison said he would like to see the existing arrangements retained but with a commitment to greater stability.
Any future reform, he argued, should involve proper consultation, substantial notice and protections for people close to retirement who had planned around the current rules.
He said: “The Government asks people to make pension commitments lasting decades. Savers need confidence that those commitments will be respected.”