Savers Seek Pension and Inheritance Tax Clarity Ahead of Budget Amidst Speculation

Financial advisers are fielding a significant increase in client questions about inheritance tax and tax-free cash withdrawals from pensions as the Budget approaches, according to recent research. Nearly half of surveyed financial advisers indicated that clients have been taking tax-free cash from their pensions, concerned about potential reductions to the current 25% tax-free lump sum allowance, which has a maximum of £268,275.

More than half of the firms also reported clients bringing forward planned gifts or wealth transfers. This activity is largely in anticipation of pensions being incorporated into inheritance tax calculations, a change slated for next spring. These actions follow a period of 'rampant speculation' about potential changes to pension taxation leading up to the previous Budget.

Despite reports that Chancellor John Healey has dismissed the possibility of changes to pension tax-free lump sums over the weekend, experts caution against early withdrawals unless there are specific plans for the money, such as debt repayment or major purchases. Taking tax-free cash prematurely could lead to missed investment growth and a reduced income during retirement.

The Personal Investment Management & Financial Advice Association (PIMFA) revealed that two-thirds of financial advisers have experienced a rise in inquiries about inheritance tax and estate planning in the past month, surpassing other tax-related topics. When asked about areas of personal taxation most in need of predictability, 70% of firms cited inheritance tax, followed by pension and Isa rules.

Approximately 45% of the 73 surveyed financial advice firms observed an increase in clients maximizing their Isa contributions, with 30% reporting more inquiries about Isas. Notably, the £20,000 cash Isa allowance is set to be reduced to £12,000 from April 2027, with an exemption for those over 65, a move intended to encourage investment in stocks and shares.

David Ostojitsch, director of policy at PIMFA, commented on the findings, stating that "speculation about potential tax changes continues to have an impact." He added that clients are seeking advice and accelerating financial decisions in anticipation of Budget announcements, noting that "recent changes, including bringing unused pension funds into the scope of inheritance tax, have understandably left people concerned about what might come next."

Tom Selby, director of public policy at AJ Bell, welcomed reports that no changes to tax-free cash rules are planned for the upcoming Budget. He contrasted this with the previous year, when unfounded leaks and speculation led to a significant rush to withdraw tax-free cash, with £22 billion accessed in 2025-26, an increase of £14 billion compared to the average before the general election. Selby urged the government to commit to long-term pension tax stability to avoid annual "games of pre-Budget chicken."