To draw or not to draw – taking cash out of your pension

Are you considering drawing a lump sum from your pension before the Autumn Budget? 

One of the major tax benefits of saving through pensions is that, generally, 25% of the pension’s value can be drawn as a lump sum, free of income tax, up to a maximum of £268,275. From a legal perspective, the cash qualifies as a pension commencement lump sum (PCLS), meaning it has to be taken at the same time as pension income starts. In practice, the level of regular income taken can be nil and the lump sum (and accompanying income) may be drawn in stages; there is no statutory requirement for your pension pot to be converted to cash and income all at once.  

Forty years ago, one of Chancellor Rachel Reeves’ distant predecessors, Nigel Lawson, teased about “the anomalous but much-loved tax-free lump sum” in his Budget speech, but made no changes. In the run-up to the Autumn 2024 Budget, the fate of the PCLS was subject to more than usual speculation, given that substantial extra revenue needed to be found. However, Reeves also left the PCLS unchanged.  

Responses to a recent Freedom of Information request indicate that the public is acutely aware of the risks to the PCLS.

• In the six months to March 2025, over £10.4 billion was drawn as PCLS, more than a third above the level of the previous six months and nearly three-quarters higher than the total drawn in the half year to March 2024. 

• Over the entire 2024/25 financial year, the amount of PCLS withdrawn was 61% up on 2023/24. However, the number of savers making those withdrawals rose by only 29%, suggesting that the average PCLS taken was almost a quarter larger. 

There is some evidence after last year’s Budget that some of those taking their PCLS regretted their actions. HMRC had to remind pension providers that “The payment of a tax-free lump sum cannot be undone.”  

At this point, the outcome of the Budget remains uncertain, but if you are considering taking a PCLS, it is essential to seek advice before making a final decision.

Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.

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Important information:

This blog is for general information only and does not constitute advice. We recommend you speak to your financial adviser before making any decisions. The information is aimed at retail clients only. No statements or representations made in the article are legally binding upon Shackleton Advisers Limited or the recipient.

All references to taxation are in relation to UK taxation and are based on our current understanding of UK laws and HMRC practices. Tax reliefs may change in the future and may not be maintained.  Tax treatment is based on your individual circumstances. All other information is based on our understanding of current legislation and regulation which may be subject to change.