Exploring Likely and Possible Changes to Pension Commencement Lump Sums Ahead of the November 2025 Budget
As the November 2025 budget approaches, one question continues to crop up from clients: “What changes will be made to Tax Free Cash (TFC) in pensions?” (TFC, also known as Pension Commencement Lump Sum or PCLS, is currently one of the most attractive features of UK pensions.) With so much speculation and little in the way of firm guidance, I thought it would be helpful to review the possible options on the table and add a few more credible scenarios that the government may be considering.
Current Rules: A Quick reminder
At present, individuals can withdraw up to 25% of their pension pot tax free, subject to a cap (currently £1,073,100, meaning a maximum tax-free lump sum of £268,275). This feature has long been promoted as a key benefit of saving into a pension.
Rumoured and Possible Changes
Scrapping the 25% Tax Free Cash
This would be the most drastic change, removing what many see as the main incentive for pension savings. Given the potential backlash from millions of savers who have been encouraged by this promise for decades, this seems the least likely option.
Reducing the 25% to 10% or 15%
It’s plausible that the government could reduce the percentage of tax free cash available. However, this raises complex questions, especially for those who have already taken more than the new lower limit, or who are relying on access to a higher amount in retirement. Transitional arrangements would likely be needed to avoid penalising those already drawing regular PCLS.
Reducing the Lump Sum Allowance
The government could keep the 25% rule but lower the cap (currently £268,275), effectively targeting higher-value pension holders while leaving smaller pots unaffected. While this would mostly affect wealthier individuals, it’s worth noting that the extra tax revenue raised may be relatively modest.No Change
With a general election on the horizon and cost-of-living pressures still front of mind the Chancellor may well decide that now is not the time to tinker with pension incentives.
OTHER CREDIBLE OPTIONS THE GOVERNMENT MAY CONSIDER
Phased Reduction or Gradual Tapering
Rather than an overnight cut, the government could gradually reduce the tax free cash percentage over several years, giving savers time to adjust their plans.
Conditional Tax Free Cash
Future access to tax free cash could be linked to the age at which it’s taken, or to whether an individual remains a UK resident. For example, savers might get a higher percentage if they access their pension after state pension age.
Means-Testing or Income Limits
Tax free cash could be restricted for those with higher incomes or larger pension pots, aligning with broader policies aimed at targeting benefits towards those most in need.
Flat-Rate Lump Sum
Another option would be to replace the percentage-based system with a single flat- rate lump sum, regardless of pot size. This would simplify administration, but may not be politically popular.
FINAL THOUGHTS
While no one can predict the Chancellor’s intentions with certainty, it is clear that pension tax free cash remains under close scrutiny. Any reforms will need to balance the need for revenue with the importance of maintaining confidence in long-term retirement savings. As ever, anyone considering taking benefits should seek professional advice and keep an eye on announcements as the budget approaches.
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