AJ Bell CEO: Chancellor John Healey should commit to landmark Pension Tax Lock

AJ Bell has written to new Chancellor John Healey calling for a public commitment to a long-overdue Pension Tax Lock to avoid a repeat of the 2024 and 2025 Budgets and give stability to Brits saving for retirement.

Pension providers raised alarm bells at both the 2024 and 2025 Budgets, warning that cash was being withdrawn from long-term pension investments and parked in the bank due to rumours around the future of tax-free cash.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 Financial Conduct Authority (FCA)’s own data indicates that at the 2024 Budget alone, savers pulled an additional £10 billion compared to the previous five years. That’s money being taken out of long-term investments, which is bad for the economy and could be 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.

The absence of a lasting commitment to stability around key pension tax incentives, including a tax-free cash allowance in retirement and tax relief when contributing, has allowed rumours to fester. A Pension Tax Lock would give certainty to savers and stabilise the retirement savings market without costing the Treasury a penny in new spending.

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 later this year.

How early access can hit people’s retirement plans

The impact on households should not be underestimated. To illustrate this, we explored how someone aged 55 with a £500,000 pension would be impacted by taking their tax-free cash as soon as possible, versus keeping it invested within their pension. Even if that lump sum was put into a Stocks and shares ISA and reinvested after being withdrawn from the pension, they could find themselves £18,535 worse off. This is because the lump sum of £125,000 would need to be spread across many years of ISA subscriptions, capped at £20,000 each year. Over the seven years it took to completely invest the lump sum allowance, the excess funds could be taxed, eating into any investment gains.

Moreso, someone taking their full tax-free lump sum early and placing it in a cash savings account instead of reinvesting could be more than £63,000 worse off a decade later compared with leaving the money invested, AJ Bell research has shown. 

This behaviour also undermines the government’s stated objective of harnessing pension assets to invest in the UK. Persistent rumours about the future of pensions tax-free cash risk weakening efforts to boost retirement saving and build a stronger retail investing culture.

Indeed, the Pensions Commission’s interim report identified early pension access as a specific problem, with around 30% of defined contribution pots accessed at the earliest possible opportunity — a decision the Commission found could reduce retirement income by more than 60% in some cases.

The Commission also noted that many people accessing tax-free cash “tend to put this money into savings” or use it for a one-off purchase. Pension tax uncertainty is amplifying the number of people taking money out of long-term investments and leaving it in cash, with potentially severe consequences for retirement outcomes.

While a commitment to long-term pension tax stability would not solve this challenge on its own, it would provide a firm foundation on which firms can build clearer communications about the benefits of retirement saving.

Pension Tax Lock

AJ Bell has consistently campaigned for government to commit to pension tax stability, with a focus on key tax incentives – tax-free cash (pension commencement lump sum) and tax relief.

Constant speculation about potential changes to retirement saving incentives, particularly tax-free cash, undermines confidence in the pensions system and leads to people making irreversible decisions based on fear, rather than their long-term financial goals. This is an unacceptable position given pensions form the cornerstone of long-term financial planning and personal financial responsibility.

Furthermore, it runs counter to wider government efforts to boost pensions adequacy and drive greater levels of investment, including in the UK economy.

The Tax Lock proposal calls for a government commitment to stability on the two core tax incentives in-built in the pension system: Tax-free cash, also called pension commencement lump sums (PCLS); and tax deferral on contributions, otherwise referred to as pensions tax relief.