Industry experts have stressed the need to avoid knee-jerk reactions to the speculation often seen ahead of the Budget, after research from Rathbones revealed that withdrawing a lump sum from a pension tops the list of pre-Budget regrets. 

There has been growing concern over the impact of Budget speculation on saver behaviour, after data from the Financial Conduct Authority (FCA) revealed that there has been a significant increase in the amount of money being withdrawn from pensions, with a particular "surge" seen in those accessing large pension pots.

Whilst the Pensions Minister, Torsten Bell, has dismissed the early rumours as "nonsense", industry experts have speculated that the recent reports that Chancellor Rachel Reeves could cut the 25 per cent tax-free allowance could nevertheless prompt a further increase in people taking their lump-sum.

Research from Rathbones has highlighted the saver remorse that can surround these decisions, revealing that more than a quarter (27 per cent) of people regretted withdrawing a lump sum from a pension ahead of the 2024 Budget. 

Rathbones said that while there are legitimate reasons to access the lump sum, such as paying off a mortgage or supporting loved ones, a knee-jerk reaction driven by uncertainty could mean missing out on substantial investment growth and long-term tax advantages.

With the confirmation from the regulator this week that drawing tax-free cash doesn’t trigger cancellation rights, Rathbones emphasised that taking tax-free cash is an irreversible decision.

Given this, the firm emphasised the need for savers to take professional financial advice to help ensure that decisions are aligned with long-term goals and made with a full understanding of the risks and benefits.

“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," Rathbones divisional lead of financial planning, Rebecca Williams, said.

"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...It’s vital to think carefully before acting."

Williams also emphasised the need for savers to be aware of the money purchase annual allowance (MPAA), pointing out that once taxable pension withdrawals are taken, annual tax-relievable contributions drop from £60,000 to £10,000 - a rule that often catches people out when trying to rebuild their savings.

“Those thinking they can simply recycle their tax-free cash back into a pension could be in for a nasty shock,” she said.

"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 per cent.”

---