I have a Sipp with Hargreaves Lansdown and want to take a tax-free lump sum before the Budget.
After following the online process, I put my £500,000 pension into drawdown and applied for the full tax-free lump sum available of £125,000 on 3 November.
After this, I got an email from Hargreaves Lansdown saying it could take 20 working days, due to them being busy – presumably with people like me trying to take lump sums before the Budget.
If the Chancellor makes a change to the lump sum cap in the Budget, will I be okay and protected against it, as I had already started the process on 3 November?
Tanya Jefferies, of This is Money, replies: Speculation has been rife about rules on pension tax-free cash being tightened in the Budget on 26 November.
Latest reports suggest it is not on the table but there could be changes to salary sacrifice, a popular way to boost a pension and save on National Insurance.
People over the age of 55 can take 25 per cent of their pension tax-free up to a £268,275 cap. There has been a rush of withdrawals, according to pension firms and financial advisers.
Pension tax-free cash: A cherished perk to access a chunk of savings at retirement
For some people taking the cash could pay off, especially if they planned to do so anyway in the next year or so and want to spend the money for a specific purpose.
For others, taking out a large sum could backfire, because tax-free withdrawals are irreversible and they may miss out on future investment growth by shifting funds out of their pension.
Pension experts have sounded the alarm about making big financial decisions based on rumours about the Budget.
Turning now to your case, if your application is not yet processed by November 26 what happens then could depend on what exactly is announced by Rachel Reeves that day – which of course we do not know yet.
That is the gist of what Hargreaves Lansdown says in its response to you below.
In fairness, it can’t anticipate or control future changes in the rules by the Chancellor. It will have to implement them for its customers, like all other providers.
But there are several reasons why you should not worry unduly at this stage.
First, Hargreaves might very well process your tax-free lump sum before the Budget. It tells me that it has adjusted timeframes for such requests from 15 working days to 20 working days, and makes this clear to customers before they apply.
However, it is working to complete as many requests as possible by increasing overtime and pulling in staff from other teams to handle the workload.
Second, just like last year, nothing might change and therefore it shouldn’t matter if you receive your money a couple of days after the Budget.
Third, should the Government decide to tighten the rules then precedent suggests it would put in place some form of transitional protection.
Former Pensions Minister Steve Webb points this out in a recent column responding to a This is Money reader about whether tax-free cash could be slashed right away on Budget day.
For the record, Webb also says abolishing pension tax-free cash – or even just capping how much you can take – would cause such public uproar the Chancellor is unlikely to do it.
It is worth reiterating that a decision to take tax-free cash is irreversible.
Hargreaves’ comment below echoes warnings on this from across the pension industry in the wake of twin statements issued on tax-free cash cancellation rules by the Financial Conduct Authority and HMRC.
The FCA has explained there is no ‘right to cancel’ a tax-free cash withdrawal, though pension providers might voluntarily offer this option to customers if they wish.
And HMRC has confirmed any tax consequences cannot be undone if you do cancel – so the withdrawal will still count towards someone’s tax-free lump sum limit of £268,275, even if it is unwound.
People should also be aware you can fall foul of pension recycling rules and face stiff penalties if you try to put tax-free cash back in your pension later because nothing changes in the Budget.
As explained above, speculation that Reeves will reduce the cap for tax free lump sums from the current £268,275 has prompted a rush of requests from savers for their cash, according to firms dealing with them.
Just for example, in recent days wealth manager Netwealth told us it has seen a 143 per cent jump in tax-free cash withdrawals between the end of June 2024, just before the election, and the end of last month.
Netwealth says it has no backlog for processing requests, but it is a different kind of business which will not be dealing with the kind of volumes Hargreaves is probably contending with ahead of the Budget.
Meanwhile, some savers are currently pulling out cash to give away to family members following last year’s announcement that unspent pensions would be liable for inheritance tax from April 2027.
If you give money away and survive seven years it typically falls outside of the inheritance tax net. Experts say you should balance this decision carefully against harming your own retirement.
Finally, it is worth stressing to anyone reading this who is under-55 that you face punitive tax penalties for making early pension withdrawals – with rare exceptions, for example if you have a terminal illness – so beware any attempt to encourage you to take this potentially ruinous action.
No legitimate firm will help you do this, only so-called ‘pension liberation’ scammers out to loot your savings. And even if you have already lost your entire pension to fraud, HMRC will still impose heavy tax charges on you.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, replies: The decision to take tax free cash should be part of a long-term plan and it’s vital people consider their options carefully.
While taking it may be right for some, doing so as a knee-jerk response to speculation risks long-term damage to retirement planning, which can include tax charges and loss of investment growth.
It’s also worth saying the decision to take tax free cash cannot be reversed if no announcement is made – it’s a move that has long-term consequences for people’s retirement planning.
The treatment of an application not processed before the Budget would depend on the detail in any potential announcement.
Should a cut to allowances be announced, we would also hope that protections or transition periods will be put in place.
For any more certainty, we’ll need to wait for the detail in any potential announcement so, for now, it’s a case of sit tight and don’t do anything you might come to regret down the line.
Facing a delay taking your lump sum? Get in touch: editor@thisismoney.co.uk
SIPPS: INVEST TO BUILD YOUR PENSION
AJ Bell
AJ Bell
0.25% account fee. Full range of investments
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing, 40% off account fees
Interactive Investor
Interactive Investor
From £5.99 per month, £100 of free trades
InvestEngine
InvestEngine
Fee-free ETF investing, £100 welcome bonus
Prosper
Prosper
No account fee and 30 ETF fees refunded
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
