No change to 25% tax-free pension lump sum withdrawals in the Budget

Fears the Chancellor would limit the amount of tax-free cash pension savers can take from their pots were allayed in the Budget today.

Withdrawing a tax-free lump sum of up to 25 per cent from your pension is a popular perk at retirement.

And people have raced to pull cash from their funds in the run-up to the Budget to protect it from a cap they worried was about to be imposed.

Savers typically use their lump sums to clear mortgages and other debts, and splash out on home renovations, new cars and holidays at retirement

‘Those who’ve built up substantial pension pots will be relieved that the Chancellor didn’t introduce new limits on tax-free lump sums,’ says Steven Cameron, pensions director at Aegon.

‘Currently, individuals can typically take 25 per cent of their pension pot at retirement as a tax-free lump sum, subject to a recently introduced maximum of £268,275.

‘There was speculation that the Budget could include new limits, such as capping the tax-free lump sum at a much lower level, perhaps £100,000.’

Cameron says many people have planned their retirement finances on the assumption they could take 25 per cent of their full fund, and being stopped from doing so would have caused a major outcry.

‘When saving in a pension, your funds can’t be accessed until age 55, increasing to 57 in 2028,’ he explains.

‘People deserve tax incentives in return for putting away money today to provide for a retirement which could be decades away.’ 

How do tax-free lump sums work?

Many people nearing retirement age may have a mix of defined contribution and defined benefit pensions.

Defined contribution pensions: These take sums from both employers and employees and invest them to provide a pot of money at retirement.

Over-55s can take 25 per cent of their pension pot tax-free upfront, or opt to withdraw it gradually in chunks.

By not withdrawing the whole lump sum out at once, if your pot grows in future you will have more tax-free cash available to take in the longer run.

Defined benefit salary-related pensions: Final salary or career average defined benefit pensions provide a guaranteed income after retirement for the rest of your life.

Your options for a 25 per cent lump sum vary according to the generosity of the terms and conditions of your scheme, so you have to check the specific details.