The number of plans entering drawdown where only tax-free cash was taken grew by 29%. Taking money without a plan means you potentially expose it to taxes such as capital gains tax or dividend tax. Keeping it in savings risks poor rates of interest and the potential to fritter it away. Reinvesting the money back into your SIPP leaves you at risk of triggering recycling rules that could leave you open to tax charges.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Speculation has been rife that tax-free cash could be cut in the forthcoming Budget – a rumour that risks people making decisions they later come to regret. We’ve already seen the damage these rumours can cause. In the most recent FCA Retirement Income Market stats the number of plans entering drawdown where only tax-free cash was taken surged by 29% between 2023-24 and 2024-25. The amount of tax free cash taken overall ballooned by an enormous 63%. It suggests there’s an awful lot of people making big decisions in haste that they could repent at leisure.
The decision to take tax-free cash should be part of a long-term plan made after assessing all the pros and cons rather than a knee jerk reaction in response to a rumour that could have a whole host of unintended consequences.
Things to consider.
1. Don’t’ take it because you can – have a plan!
Many people take their tax-free cash as part of a long-term plan to pay off their mortgage, travel or make home renovations. If you take it without knowing what you want to do with it, then you risk some poor outcomes. One example would be taking the money from a really tax efficient environment within a SIPP and keeping it in an account paying poor rates of interest while you decide what to do with it. There’s also the potential to fritter it away over time.
2. What are the tax consequences?
You need to consider the tax consequences of where you plan to put this tax-free cash. You could reinvest some in a stocks and shares ISA but if you’ve got a significant amount, you may still have money left over. Depending on what you want to do with it you need to consider the potential impact of taxes such as capital gains tax or dividend tax for instance.
3. Are you planning to reinvest it back into your SIPP if the decision doesn’t happen?
You may decide to take the money now and if the decision doesn’t happen simply reinvest it back into your SIPP. This may seem straightforward but you need to beware that you don’t fall foul of pension recycling rules. This is where an individual is deemed to have taken tax-free cash and reinvested it into their pension to benefit from significantly increased tax relief. Falling foul of these rules could land you with a nasty tax charge with HMRC looking at issues such as how much was taken, the proportion of tax-free cash contributed, whether there has been a significant uplift in contributions as well as member intent. Being landed with a tax charge could significantly derail your long-term plans so if you are looking to do this you should seek financial advice. It’s also worth saying that HMRC has clarified its stance around cancellation rights. This means you are unlikely to be able to request tax free cash and then cancel the instruction if there’s no change in the Budget.
4. Is inheritance tax a concern?
The decision to include pensions as part of people’s estate for inheritance tax purposes from April 2027 has impacted a lot of people’s pension planning. Those with large estates may think about gifting their money away now rather than leaving it to loved ones in their Will. It’s important that in doing this you don’t give away too much too quickly and potentially leave yourself short of money later. This is particularly the case if you need long term care later in life.”
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