Millions of UK employees risk making costly errors with their pension tax-free cash due to widespread misconceptions, according to wealth management firm Evelyn Partners. The warning comes as speculation about potential pension tax changes in recent Budgets has prompted some savers to access retirement funds prematurely, often to their detriment.
Andrew King, pensions and retirement specialist at Evelyn Partners, said: “The 25% tax-free entitlement is probably the most treasured feature of defined contribution pensions. Combined with tax relief at contribution stage it can make pension saving incredibly tax efficient and powerful.” For most savers, the maximum tax-free cash available over a lifetime is capped at £268,275 through the Lump Sum Allowance.
One common myth is that tax-free cash can only be taken once. In fact, savers can withdraw tax-free cash from age 55 (rising to 57 in 2028) and continue making pension contributions, as long as they stay within the lifetime allowance. Another misconception is that withdrawing tax-free cash automatically triggers the Money Purchase Annual Allowance (MPAA), reducing future annual contributions to £10,000. However, the MPAA only applies if taxable pension income is also accessed.
Experts also caution against withdrawing tax-free cash solely out of fear that the policy will be scrapped. King warned that acting on policy fears can be costly, as many who withdrew cash found themselves holding large sums outside the tax-efficient pension wrapper after no restrictions materialised. He stressed that savers should only access tax-free cash if they have a clear plan for the funds.
Finally, savers with multiple small pension pots cannot withdraw them entirely tax-free. Only 25% of each withdrawal is tax-free, with the remainder taxed as income. King advised savers to seek professional guidance before making any decisions.
