Rumours that the government’s November 2025 Budget might change the limits on how much tax-free cash can be taken from pensions proved to be unfounded. But while there’s no immediate cause for concern, it’s still worth considering how the Lump Sum Allowance (LSA) actually works.
How does the Lump Sum Allowance work?
Currently, the rules are that you can generally take 25% of your pensions as tax-free cash, up to a limit of £268,275.
This limit is called the Lump Sum Allowance, and it applies across all your pensions. To be affected currently therefore, you must have over £1,073,100 in pension savings. Note that taking tax-free lump sums from any type of pension scheme, including defined benefit pension schemes, counts towards your LSA.
The LSA is a reasonably new concept in pensions, introduced in April 2024. Under its predecessor the Lifetime Allowance, however, when limits were reduced, customers who had already saved amounts that were higher than any new limit were able to apply for protections. So, there is a precedent for protections being offered, but this is not guaranteed as the LSA hasn’t been changed since it came in.
No cancellation rights on tax-free cash withdrawals
HMRC has clarified that once tax-free cash has been withdrawn, and therefore some or all of the LSA limit used, this can’t be reversed should you change your mind. This means, once a tax-free cash withdrawal has been made, the transaction can’t be cancelled and the money paid back into the pension to restore the LSA limits.
This clarification comes in part because of the number of people who withdrew tax-free cash ahead of the 2024 Budget, hoping to use a 30-day cooling off period if no changes were made in the Budget. This is not an available option.
Remember, acting on rumours of future changes can have unintended consequences, and you should think carefully before withdrawing money from a pension. Money within your pension continues to grow tax-free, and you could be reducing the amount of money you have to live on in retirement by making earlier withdrawals.
Further information from MoneyHelper on this topic can be found here.
Your pension is designed for later life. When you save into a pension, the value of your investment could fall as well as rise and you could get back less money than you put in. You usually can’t access your pension until age 55 (rising to 57 from 6 April 2028). Tax rules can change and depend on your personal circumstances.
This article can give you helpful tips, but it isn’t financial, or tax advice. If you’d like advice, Octopus Money can provide professional help.