In what has become an annual (or more frequent) event there’s been speculation about possible Budget changes to pensions. Whatever happens in future Budgets, there are sound, personal reasons why some people may choose to take their pension tax-free cash. Below are four examples we see in practice – and none rely on second-guessing the Chancellor’s plans!
Who this is – and is not – for
This article is general information. It is not a recommendation to take tax-free cash now. People’s situations differ, and the right approach depends on your wider plan, tax position, cash needs and risks. If you want help weighing this up, please contact us.
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You are nearing, or over, age 75
Why it can make sense: pension death-benefit tax treatment changes after age 75. If you die before 75, your beneficiaries may inherit your pension income tax-free. After 75, withdrawals are taxed as the recipient’s income. From 6 April 2027, pensions may also become subject to inheritance tax (IHT), although full details are pending.
What to weigh up: taking cash may bring it into your estate for IHT and reduces funds left in a pension. Consider beneficiaries, expected withdrawals, and other assets. Left in the pension it is possible for the tax-free cash to be “lost” (reverts to taxable) where death occurs after age 75.
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You haven’t used your ISA allowance
Why it can make sense: moving tax-free cash into an ISA can keep money in a tax-advantaged wrapper. Future income and gains in an ISA are generally free of UK income tax and capital gains tax.
What to weigh up: from an IHT perspective this can be broadly neutral – particularly after April 2027 when pensions are expected to also face IHT. Circumstances vary (e.g. age, gifting plans, surviving spouse). This factor has changed the historically “preferential” treatment of the tax-free sum allowance.
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You are near the Lump Sum Allowance
Why it can make sense: there is a lifetime cap on the total tax-free lump sums you can take across pensions (the “Lump Sum Allowance”), set at £268,275 for most people. If your 25% entitlement is close to the cap, further growth won’t increase your tax-free cash. Crystallising now may lock in today’s entitlement, and move the “surplus” from being taxed to income tax – normally at least 20%.
What to weigh up: confirm your remaining allowance and any protections or certificates. In some cases you may need a Transitional Tax-Free Amount Certificate (TTFAC), which evidences how much tax-free cash you are entitled to if you had existing pension benefits before 6 April 2024. Check how all these factors interact with your drawdown strategy and future income needs.
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You plan to make financial gifts
Why it can make sense: some clients use tax-free cash to support family or to establish regular gifts. In certain situations, regular gifts out of income may fall outside the estate for IHT if the criteria are met.
- Gifts should be normal and regular.
- They should be from surplus income, not capital.
- They should not reduce your normal standard of living.
What to weigh up: withdrawals from pensions may count as income when establishing the pattern, but HMRC requires records to show the gifts were affordable. Your executors may need this evidence to claim the exemption. Consider affordability and whether other non-pension assets might be more suitable.
This is not about the Budget
You won’t find “act now before rules change” here. Acting on speculation can lead to poor outcomes. The reasons above stand on their own merits and may be appropriate for some people irrespective of Budget headlines.
Next steps
If you’re weighing up whether to take tax-free cash, we can help you model options in the context of your broader plan — spending needs, tax, investments, and estate wishes. Start a conversation with a Chartered Financial Planner: get in touch.
Important information
This article is for information only and is not personal advice. Tax and pension rules can change, and their impact depends on your circumstances. Investments can fall as well as rise. Do not act on this content without regulated advice tailored to you.
FAQs
Does taking tax-free cash reduce my future income?
It can. With less money left invested in a pension, future withdrawals may be lower. Using tax-free cash to reduce debts or fund ISA contributions may help in some cases. Model scenarios before deciding.
Is moving tax-free cash into an ISA always better?
No. It depends on your age, withdrawals, IHT position, and other assets. Pensions and ISAs have different tax and estate features; neither is automatically “better”.
What is a Transitional Tax-Free Amount Certificate (TTFAC)?
A TTFAC is an HMRC certificate that records the tax-free cash entitlement you had on 6 April 2024. It can be necessary if you had pension benefits in payment before this date, to avoid losing entitlement under the new rules.
What are ‘regular gifts out of income’?
These are gifts that qualify for exemption from IHT under section 21 of the Inheritance Tax Act 1984. They must be regular, from income, and not affect your normal standard of living. Executors may need to show records (using HMRC form IHT403).
