How rumoured pension changes are affecting investors

Funding a secure retirement requires commitment from a saver but also a stable and consistent approach to pensions from the Government. This is why incessant speculation around pension changes in the upcoming Autumn Budget on November 26 can have huge repercussions, as it can discourage savers from topping up their retirement pots at a time when they’re already being criticised for not contributing enough. This uncertainty can also prevent people from taking full advantage of the many benefits that pensions offer - such as income tax relief at their marginal rate when they contribute and the opportunity to grow their wealth free from tax on income and capital gains while the money remains invested.

Introduction: Why are investors concerned?

One of the biggest concerns currently centres on rumours the Chancellor may reduce the maximum amount pension savers, aged 55 and over, can withdraw tax-free from their retirement pots. Currently savers can access 25% of their pension tax-free, up to a maximum of £268, 275 – a ceiling introduced by former Conservative Chancellor Jeremy Hunt. Similar speculation ahead of last year’s Autumn Budget triggered a wave of withdrawals from pensions, with some savers later regretting their decision after realising they did not need the cash immediately, and no changes were made.

This year, rumours of further pension tax changes appear to be having a similar effect, compounded by the fact that pensions minister Torsten Bell, had previously advocated reducing tax free cash while running the Resolution Foundation, a think tank.

How have the rumours affected investors?

Concerns that the amount of pension tax-free cash could be reduced have prompted more savers to access their lump sum early. Bestinvest research found that pension withdrawal requests surged by a third in September compared to the average for the same month over the past two years – driven largely by those aged 55 and over accessing their 25% tax-free cash lump sum.

The size of those withdrawals has also increased dramatically with a 146% surge in the size of (Self-Invested Personal Pension) SIPP withdrawals in September compared to the two-year average for the same month in 2023 and 2024. The Financial Conduct Authority’s (FCA) latest retirement income market data tells a similar story, with withdrawals leaping 63% to £18.3 billion in 2024/25.

With pensions brought under the scope of Inheritance Tax (IHT) in the Chancellor’s maiden fiscal statement last year with effect from April 2027, many investors have radically changed their approach to pension saving – choosing to withdraw pension funds to spend or gift rather than risk their beneficiaries being hit with a heavy tax bill on their death. Add to that speculation around potential changes to gifting rules – including the possibility the seven-year rule may be extended, or a lifetime gifting cap introduced, and it’s no surprise to see a significant behavioural shift.

Meanwhile, the move away from prioritising pension saving is also evident in broader savings behaviour. Bestinvest research showed that while ISA contributions rose by 38% in September compared to the previous two-year average for the same month, SIPP contributions only saw a modest 3% uplift. Look back over the three months to the end of September and SIPP contributions are down by 24% compared to the previous two-year average for the same period as opposed to ISA contributions which rose by 10%.

What to consider before making a decision

While pension income is taxable on the way out, being able to access 25% of your pot tax-free – known as the Pension Commencement Lump Sum (PCLS) – offers peace of mind for many as they approach retirement. Some earmark this money to pay down debts, clear a mortgage or bridge the gap between retiring and accessing the state pension. Others may use it to fund school fees, support children through university or even to fund a bucket-list trip. So, for some, taking the maximum tax-free cash now might be a sensible thing to do.

However, taking tax-free cash prematurely as a knee-jerk reaction to speculation about a possible policy change can undermine retirement plans and prove to be tax inefficient. Moving a large sum out of a tax-protected wrapper, like a pension, into a taxable environment such as a bank or building society savings account can counteract the gain someone makes from making the tax-free withdrawal in the first place. From that point, interest, income or capital gains could be liable for tax unless the money falls within an existing tax-free allowance, such as the modest Personal Savings Allowance, or is transferred into another tax-efficient account such as an ISA.

1. Seek financial advice

Anyone considering taking their 25% tax-free lump sum would be wise to take regulated financial planning advice before they make any decisions. Without a clear picture of their retirement funding strategy, they cannot assess whether accessing their tax-free pension lump sum now makes sense - or whether it’s better to leave the money invested for longer or only take a portion of the 25% tax-free element. Interestingly, 70% of people do not seek such advice when accessing their pension for the first time .

2. Triggering the Money Purchase Annual Allowance (MPAA)

If you wish to take your tax-free cash lump sum but intend to continue working and contributing into a pension then care needs to be taken not to trigger the Money Purchase Annual Allowance (MPAA). The MPAA reduces the amount you can contribute to a pension to just £10,000 a year – far less than the standard Annual Allowance of £60,000 or 100% of your earnings, whichever is lower. Instances where the MPAA is triggered include someone accessing their pension flexibly, such as taking taxable income alongside their lump sum, or withdrawing the entire pension pot. However, if the pot remains invested or is used to purchase a lifetime annuity, the MPAA may not apply – again, advice is key.  

Remember, decisions made in haste cannot always be reversed. While some providers previously allowed savers to cancel PCLS withdrawals within a certain cooling-off timeframe, HMRC and the FCA have recently made clear that providers should not permit savers to reverse their decision. This means once the money is taken, the decision cannot be undone.

3. Gifting rules

Pension savers should also be wary about gifting too much too soon to loved ones in response to the Autumn Budget 2024 decision that unspent pension assets will be subject to IHT from April 2027. The decision prompted many to rethink their approach to retirement savings and their plan for leaving wealth for future generations. While pensions were once left untouched to pass on tax-free to loved ones on death, the future tax treatment will be very punitive. Not only will the pension be subject to IHT, but the beneficiaries will also then pay income tax at their marginal rate when making withdrawals from the inherited pot if the person that passed it on died aged 75 or above. This is now motivating some to gift or spend their pension savings while alive.

But gifting too much too soon can backfire. Retirees risk leaving themselves short in later life, especially if they live longer than expected or face high care costs. There’s also the risk of unexpected tax bills for beneficiaries if gifts exceed the allowable limits and the donor dies within seven years.

Finding the right balance between spending, gifting and preserving pension funds is tricky. While some have increased the amount they gift to get ahead of IHT changes and the risk that gifting rules may change again, perhaps with the introduction of a lifetime gifting cap, it’s never wise to make major financial decisions based solely on speculation. Seeking advice is key to ensuring gifting rules are being adhered to correctly and tax-efficiently. 

4. A mix of ISA and pension savings can balance short- and long-term goals 

As mentioned earlier, at Bestinvest we’ve seen some savers prioritise ISAs over pensions recently, perhaps because ISA withdrawals are tax free. However, such a move sees savers lose out on pension tax relief – a valuable, upfront benefit, particularly for higher and additional rate taxpayers, as it reduces a person’s taxable income in the short-term and helps to turbo-charge pension savings over the long term.

Ultimately, both ISAs and pensions are valuable tools for those looking to build long-term, tax-efficient savings in the UK though they have different limitations. An ISA has a tax-free annual allowance of £20,000 that cannot be carried forward to the next financial year, but the money held within an ISA is not taxable when it is withdrawn. Pensions have a higher Annual Allowance (£60,000 or 100% of your earnings) and the benefit of carry forward rules where savers can backdate contributions, up to their Aannual Allowance, over the previous three financial years once the current year’s allowance has been maximised – useful for those who receive a windfall such as an inheritance or the sale of a business. But a pension is taxable at the withdrawal stage and will also become subject to IHT – like an ISA – in 18 months’ time.

Conclusion: Stay calm, focus on your goals and seek advice (if needed)

Ultimately, retirement planning requires careful consideration and making quickfire decisions based on media headlines without the right guidance is rarely a good idea. If you would like to speak to someone about the current rules around pension access and gifting, you can book a session with one of our Investment Coaches. All of our coaches hold the Level 4 qualification in financial planning from the Chartered Insurance Institute (CII). Our Coaches can provide general information but cannot provide advice based on your personal circumstances. If you need more bespoke advice, our coaches can direct you to the right experts at our parent company, Evelyn Partners. 

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Sources

i) Bestinvest research as of 30 September 2025
ii) According to the Financial Conduct Authority: 30.6% of pension plans accessed for the first time in 2024/25 were accessed by plan holders who took regulated advice (down from 30.9% in 2023/24).