Thousands of pension savers could be making a costly mistake by withdrawing tax-free cash too early ahead of the Government’s first Budget, financial experts have warned.
Investment platform AJ Bell has urged Chancellor John Healey to protect pension tax rules in the upcoming November Budget, warning that changes to retirement incentives could trigger further panic withdrawals and leave savers significantly worse off.
Under current rules, people can access private pensions from age 55, rising to 57, and withdraw up to 25% of their pension pot as a tax-free lump sum.
But AJ Bell says taking that money too soon could come at a huge long-term cost.
A saver aged 55 with a £500,000 pension pot who withdrew the full tax-free allowance of £125,000 and placed it into a cash savings account earning around 4% could be £63,169 worse off by age 65, according to the investment firm.
The reason is the lost opportunity for investment growth inside the pension, where the money could potentially continue benefiting from decades of market returns.
The warning comes after a dramatic surge in tax-free pension withdrawals.
Figures from the Financial Conduct Authority show average tax-free pension withdrawals increased from £7.9 billion annually between 2018 and 2023 to £18.3 billion in 2024-25.
AJ Bell believes the sharp rise was driven largely by fears that the Government could reduce the amount savers are allowed to access without paying tax.
The firm has written to Mr Healey calling for a “Pension Tax Lock” to protect tax-free lump sums and provide certainty over pension tax relief.
Budget fears spark retirement rush
The warning comes as the new Government prepares its first Budget under Prime Minister Andy Burnham, with pension policy expected to remain a key area of debate.
Previous speculation over possible changes to pension rules has already prompted some savers to bring forward withdrawals, despite the risk that accessing money early could damage their long-term retirement income.
AJ Bell argues that repeatedly changing pension rules risks undermining confidence and encouraging people to make rushed financial decisions.
The firm says maintaining stability would help savers plan effectively and avoid unnecessary withdrawals driven by political uncertainty.
CEO Michael Summersgill said: “Pension providers raised alarm bells at both the 2024 and 2025 Budgets, warning that cash was being withdrawn from long-term pension investments and parked in the bank due to rumours around the future of tax-free cash.
“The FCA’s own data indicates that at the 2024 Budget alone savers pulled an additional £10bn. That’s money being taken out of long-term investments, which is bad for the economy and bad for people’s long-term retirement plans.
“Although data is yet to be published for 2025, the experience of pension firms across the industry indicates the trend is only getting worse.”
He added: “The appointment of a new Chancellor presents an opportunity to finally draw a line under this issue, preventing a repeat when John Healey comes to deliver his first Budget.”
The challenge for the Chancellor is balancing the need to protect public finances with maintaining incentives for millions of workers to save for retirement.
For pensioners and those approaching retirement, the message from financial experts is clear: a tax-free windfall today could become a costly sacrifice tomorrow.
Leave a Comment