Should you make changes to your pension before the Budget?

With the Autumn Budget now just over a month away, speculation is building about what the Chancellor could announce – and what it could mean for our finances.

Some possible changes have been ruled out, including changes to income tax and stamp duty. But a question mark remains over pensions.

So, should you act now in advance of possible rule changes? Or wait it out until October 28th?

What could change?

As always, before a Budget, plenty of rumours are swirling. But which are the ones to take more seriously?

We’re still a month out from the Chancellor’s official announcements, and in previous years we’ve seen some heavy leaking closer to the event. But for now we’re still guessing. That said, those who have been reading the signs and studying the advice the government has been receiving from various experts and think tanks, point to the following pension reforms as most likely if changes come at all:

• A cut to the tax-free pension lump sum

The government could reduce the amount UK pension savers can take tax-free from the age of 55 (rising to 57 in 2028). Currently it’s capped at 25% or £268,275 (whichever is lower). Suggestions have included a much lower flat cap, such as £100,000 or £50,000, and/or a reduced percentage portion of the whole that can be taken tax-free.

• Reduce pension tax relief for higher-rate taxpayers

Currently, pension contributions receive tax relief broadly according to the individual’s marginal income-tax rate, subject to the relevant rules and allowances.

One frequently discussed alternative is a flat-rate tax relief/top-up, potentially around 30%, rather than giving higher-rate taxpayers relief at 40% or 45%.

• Reduce the annual pension allowance

The annual pension allowance is a limit on how much you can contribute to a pension each tax year while still benefiting from tax relief. The current annual allowance is £60,000 for 2026/27. Reducing this has been proposed as a relatively straightforward way of reducing the amount of pension tax relief the government pays.

• Change salary-sacrifice pension rules further

The Government has already announced that from April 2029, only the first £2,000 of pension contributions made through salary sacrifice will stay exempt from National Insurance contributions. There could be further changes or acceleration of this policy.

• Change the Money Purchase Annual Allowance (MPAA)

The government could reduce or potentially abolish the £10,000 allowance that applies to people who have flexibly accessed certain pension benefits.

• Reduce or remove pension carry-forward rules

Or they could restrict the ability to use unused pension allowance from the previous three tax years.

• Revisit pension Inheritance Tax rules

From 6 April 2027, most unused pension funds and pension death benefits will be brought into the deceased person’s estate for IHT purposes. The Government could alter, delay or simplify this plan in light of the fact that there has been mounting concern in the pensions and investments industry about how the new system will work.

What should you do if you think possible changes will affect you?

Remember – none of these are confirmed changes, simply speculation at this stage. However, if you can see that a potential policy change would have a significant impact on your financial plans, or your expected wealth in retirement, it’s understandable to worry and wonder whether you should make changes now, before things could change.

One question we get asked a lot at Investing Insiders, is “should I take the 25% tax-free sum from my pension now, before the rules potentially change?”

While this could pay off if the tax-free amount is reduced at the Budget, acting now carries a risk.

Last year, Brits withdrew a massive £18.3 billion tax-free from their pensions before the Budget. That was up from £11.3 billion the year before and, in large part, in response to the same kind of speculation about cuts to the tax-free pension lump sum that we’re seeing now.

What happened in the end? The change didn’t materialise. And thousands of Brits were left with extra cash they hadn’t originally planned to take as early and which, crucially, was no longer continuing to grow, tax-free, in their pension.

In fact, the same rumour has now caused people to withdraw large amounts of pension money ahead of multiple Budgets, despite the Government not ultimately changing the rules each time.

he October 2024 speculation was followed by people trying to reverse withdrawals after the Budget — something that isn’t straightforward because using the lump sum allowance is effectively permanent.

That left those people with a problem: what to do with their money now it was no longer protected from tax inside their pension? Many people tried to reverse their decision – something that isn’t straightforward because making taking a lump sum is a permanent decision.

For those who had a plan to spend the money straight away, the decision didn’t prove to be disastrous. (So if you’re already planning a trip, project or gift with that money, it could make sense to draw it before the Budget.)

Those who had no such plan, however, discovered they had limited tax-efficient options for keeping it protected.

While ISAs can perform the same duties as a pension in keeping savings and growth from the tax man, only £20,000 can be paid into ISAs per tax year.

If the money is placed into a bank or savings account, you’ll need to ensure the interest rate keeps pace with inflation or it loses spending power. Plus there’s potentially tax to pay on the interest.

Putting the money back into a pension is tricky, too, as there’s a £10,000 yearly limit to pension tax relief. So reinvested sums could be heavily taxed.

Editor’s note: The £10,000 limit referred to here is the Money Purchase Annual Allowance (MPAA), which can apply if you have already flexibly accessed certain pension benefits. It does not apply to everyone who takes tax-free cash.

So, what should you do?

It can be tempting to make changes now, particularly when there is so much speculation about what could happen in the Budget.

But there is no guarantee that the rules will change. And unless the action (for example, withdrawing your lump sum now instead of after the Budget) works for you whether the rule changes or not, you could end up worse off and inconvenienced for no reason.

One thing you can do is use this opportunity to check how much you have saved, how much you might need, whether you’re on course to meet your retirement goals, audit what your pension is invested in and check if it’s exposed to a suitable amount of risk.

That way, if the Budget does bring changes to pensions, you’ll be in a better position to know what will and won’t impact you, and what you can do about it.

If any of these conversations raise questions for you, it could be worth speaking to a financial advisor who can tailor their advice to your specific needs and circumstances. Use our Find an IFA service to be matched with a qualified professional.