Pensions tax warning as making one change to your funds could cost you £62,000

Pension savers have been warned not to take rash action ahead of potential tax changes in the Autumn Statement. Chancellor Rachel Reeves will set out her latest financial policies on November 26, which could include changes to pensions. But experts have urged people not to move around their cash too soon, or they could lose out on thousands of pounds.

Simon Harrington, head of Public Affairs at trade association PIMFA, said: "Endless speculation about changes to pension rules - particularly the future of the 25 percent tax-free lump sum - is already having a real and detrimental impact on consumer behaviour. While we recognise that managing speculation is outside the Government's direct control, every Budget season brings a slew of articles predicting changes to pensions taxation, but in the last two years this has become more acute than ever. "

You can usually take up to 25 percent out of your pension as a tax-free lump sum, up to the value of £268,275. If you take a lump sum over your allowance, you have to pay income tax on the additional amount.

FCA data shows that in 2024/2025, the number of pension plans available to be drawn down where just the lump sum was taken almost doubled compared to five years ago. Mr Harrington said: "This shows a clear trend, that people are pulling money out earlier, and in greater sums, than they otherwise might - behaviour that could have serious long-term consequences.

"Taking the 25 percent reduces the invested balance, depriving the consumer of much-needed investment growth in the ten years or more up to their state pension age."

ONS figures suggest the average person aged 55 to 64 has £137,800 in private pension savings. If you were to take out your full 25 percent lump sum, in 10 years' time at six percent growth rate, your pot would be worth £185,084, compared to £246,779 if you had left the amount in. This is a difference of £61,695.

You can draw down from your pension from age 55 while you can claim your state pension from age 66. The state pension age is gradually increasing to 67 from next year.

Mr Harrington said there is another reason to be patient and wait to see what policies are unveiled in the Autumn Statement. He said: "Even if reforms were decided upon, changes would likely not take effect immediately, giving savers time to adjust.

"But speculation alone is already driving short-term decisions that could leave people worse off in retirement. This uncertainty, coupled with actual policy interventions such as the plan to levy inheritance tax on pension funds runs the risk of further discouraging people from in investing in pensions."

In the Autumn Budget in 2024, Labour announced plans to expand inheritance tax, including making unused pensions liable for the tax from April 2027.