Tax-free cash withdrawals surged to £22bn on 2025 Budget rumours

Tax-free cash withdrawals from pensions have surged over consecutive years, with excess withdrawals of £14 billion around the 2025 Budget, new figures indicate.

Analysis by AJ Bell based on FCA figures show that tax-free cash withdrawals rocketed to a total of £22 billion last year, up 21% from already elevated levels in 2024. Pension tax-free cash is the money from your pension pot that can be withdrawn without facing income tax. This is typically the lower of a quarter of the value of your pensions or £268,275.

Previously published FCA data showed that from 2018/19 to 2022/23, tax-free cash withdrawals across FCA-regulated firms averaged £7.9 billion a year and never exceeded £8.7 billion, despite a post-Covid increase in withdrawals. Withdrawals rose ahead of the 2024 General Election, before the 2024 Autumn Budget then contributed to withdrawals climbing around £10 billion to £18.3 billion in 2024/25.

Today’s figures indicate that the £10 billion rise in excess withdrawals around the 2024 Budget was subsequently compounded by a further £14 billion in 2025.

In total, £40 billion of tax-free cash was withdrawn in 2024/25 and 2025/26, more than in the entirety of the five-year period from 2018/19 to 2022/23.

The pensions industry warned pension tax uncertainty was leading to excess withdrawals around each of the two Budgets following the last Election, with AJ Bell leading calls for a Pension Tax Lock to put an end to uncertainty.

AJ Bell is again calling on the government to commit to pension tax stability in the lead up to the Budget, and throughout this Parliament, with a pledge not to alter key pension tax incentives like tax-free cash entitlements.

AJ Bell’s CEO Michael Summersgill said: “These figures should end any doubt about the real-world consequences of allowing pension tax speculation to run unchecked. The rush to take tax-free cash began in 2024 and the latest FCA data confirms another repeat around the 2025 Budget, just as pension providers warned.

“This trend is bad for households and bad for the economy - pulling billions of pounds out of pensions prematurely reduces the capital available for long-term investment.

“A Chancellor focussed on putting households on sound financial footing and boosting growth should see this as an open goal. Confirming pension tax stability would solve the problem overnight without a penny of new Treasury spending, while clearly signalling the government stands behind its promises to savers.”

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.

A parliamentary petition launched by AJ Bell in 2025 quickly attracted over 20,000 signatures from the public and financial advisers. It called for a government commitment not to reduce the amount people can withdraw from their pension tax-free or the amount of tax relief given on pension contributions.

AJ Bell wrote to new Chancellor, John Healey, following his appointment in July 2026 to outline the extent of tax-free cash withdrawals at recent Budgets and urge him to commit to pensions tax stability to avoid a repeat.

Why taking tax-free cash early matters

From age 55*, individuals are normally entitled to take 25% tax-free cash from a pension up to a limit of £268,275. However, there is no requirement to take the money immediately and leaving it in a retirement account until the money is needed means it continues to benefit from tax free growth inside the pension.

Taking the money out of a pension can be detrimental to someone’s financial position if they leave the money in cash and/or hold it outside a tax wrapper.

Figures from AJ Bell show that someone withdrawing £100,000 tax-free cash could be around £51,000 worse off over ten years if they park the money in a cash savings account**. Even moving the money gradually into a Stocks and shares ISA could leave them thousands worse off due to the tax incurred before the money could be moved into investments within the tax wrapper.

*NMPA set to rise to 57 from April 2028.

**Assumes £100,000 tax-free cash withdrawn age 55 and held in cash accounts paying 4% compared to pension investments with an annual return of 6% net of charges. Individual is higher rate taxpayer with £500 personal savings allowance paying 42% tax on cash interest from April 2027.