Britain’s Pensions: The 25% Question That’s Making Savers Panic

There’s panic in the pension aisles again. With the UK Budget due on 26 November 2025, savers are rushing to grab their tax-free lump sums while they still can.

The culprit? Fear that the government will tamper with one of Britain’s most cherished retirement perks - the rule that lets you take 25 % of your pension pot tax-free.

According to Reuters, wealth managers have seen an extraordinary surge in withdrawals. The Financial Conduct Authority reports a 76 % rise in lump-sum withdrawals in the six months to March 2025 compared with a year earlier.

Private bank Arbuthnot Latham says its wealthy clients have taken 300 % more in pension cash this year than in all of 2024.

It’s not hard to see why. The 25 % tax-free slice costs the Treasury about £5.5 billion a year and disproportionately benefits higher earners - roughly 70 % of that relief goes to the top fifth of income earners.

The Institute for Fiscal Studies has suggested capping the benefit at around £100,000, arguing that the current system is unsustainable and regressive.

Why This Matters

This isn’t just an obscure tax tweak. The tax-free lump sum is baked into how Britons think about retirement. It’s the one part of the pension system that feels like a reward, not a punishment; a rare piece of good news after decades of opaque rules and ever-shifting goalposts. Touch it, and you touch a nerve.

But fiscal reality is biting. With anaemic growth, a fragile gilt market, and an electorate wary of stealth taxes, Chancellor Rachel Reeves faces a near-impossible balancing act: raise revenue without triggering panic among middle-class savers. That panic, of course, is already visible in the data.

Behavioural Fallout

Advisers are warning that many are cashing out too early, fearing changes that might never materialise. They could face regret later, especially if markets rise or tax rules grandfather existing pots.

The Pensions Age magazine reports a spike in “pre-Budget regret” among those who withdrew funds unnecessarily.

It’s a classic case of policy uncertainty destroying rational planning. Investors behave like drivers slamming the brakes at every flashing amber light - even when the road ahead remains clear. The government, meanwhile, risks eroding trust in long-term saving just when it needs people to save more, not less.

The Political Calculation

The optics are irresistible: a Labour chancellor “taxing the rich” by cutting a perk used by wealthier retirees.

But in practice, this move could hit prudent middle-income earners: teachers, NHS consultants, small-business owners; who’ve simply done what governments have urged for decades: save responsibly.

Reeves may choose to freeze the lump-sum allowance rather than abolish it outright, quietly allowing inflation to erode its real value - a more politically palatable option that still raises revenue.

Bottom Line

Britain’s pension system doesn’t need more complexity or mistrust. It needs clarity. If the Treasury wants to reform reliefs, it should do so transparently and far in advance.

Otherwise, savers will keep treating every Budget like a raid on their retirement.

Because if there’s one thing markets hate more than tax, it’s uncertainty. And right now, the only thing compounding faster than interest in the UK’s pensions is anxiety.

At Campaign for a Million we recognise more than ever pensioners need a boost to growth away from poor performing cash and fund managers.

They need to be able to grow their investments (what's left of them) themselves with simple free financial education.

Sources:

• Reuters – UK savers pulling cash from pensions ahead of budget

• The Times – Rachel Reeves considers cut to tax-free pension lump sum

• FT – Pension tax breaks: what’s in the Budget line of fire?

Disclaimer: This article is for information and education only and does not constitute financial, tax or investment advice. Pension rules and tax treatment can change and depend on your individual circumstances. Do not take or stop any pension withdrawals based solely on this content. If you are unsure about the best course of action, please consult a regulated, independent financial adviser.

Alpesh Patel OBE www.campaignforamillion.com