Will pension tax-free cash be cut in the Budget on 28 October 2026?

The Budget is on Wednesday 28 October 2026. There's speculation that the tax-free lump sum from pensions could be cut, but as of 7 October 2026 the government hasn't announced any change, and nobody outside government knows what the Budget will contain.

This page sets out the rules now, what the last two Budgets did, and the facts that apply if you take tax-free cash early. Worked example: someone aged 60 with £410,000 in a pension and savings, still working until 65, who takes a quarter of the pension as cash now and puts it in a savings account. Your money lasts to 95, with £105,992 left.

The rules now

• You can usually take up to 25% of each pension tax-free. The most across all your pensions is £268,275, unless you hold a protected higher amount.
• The rest is taxed as income when you take it.
• You can take the quarter all at once, or a quarter of each withdrawal as you go.
• Taking only tax-free cash, and leaving the rest invested, doesn't trigger the money purchase annual allowance. Taking taxable money from a pension does: it cuts the yearly limit for paying into pensions like these to £10,000.

What the last two Budgets did

There was similar speculation before the Autumn Budget on 30 October 2024, and some people took tax-free cash early, then tried to pay it back. That Budget didn't change tax-free cash. It announced that unused pensions would count towards estates for inheritance tax from 6 April 2027.

Budget 2025, on 26 November 2025, didn't change tax-free cash either. Its pension measures included a £2,000 limit, from April 2029, on salary sacrifice contributions that escape National Insurance.

That's what happened before, not a forecast of what happens next.

Taking it can't be undone

HMRC and the Financial Conduct Authority set out their position in September 2025. Once a tax-free lump sum is paid, its tax effects "cannot be undone, even if the payment is returned or cancellation rights are exercised". It still uses up that part of your £268,275 allowance.

Paying the money back into a pension counts as a new contribution, within your annual allowance. HMRC's recycling rule can also tax the lump sum itself where paying it back in was planned. The rule applies to lump sums over £7,500 in 12 months, when contributions end up more than 30% of the lump sum higher because of it.

What changes when the cash leaves the pension

The worked example takes £100,000 out at 60 and holds it in an ordinary savings account until it's spent. The comparison leaves it in the pension and takes a quarter of each withdrawal tax-free from 65.

	Cash taken at 60	Taken bit by bit from 65
Pots at 65 (today's money)	£447,489	£453,187
Lifetime income tax	£99,548	£77,957
Money	lasts to 95	lasts to 95
Left at 95	£20,840	£112,918

Most of the extra tax is on the savings interest: £17,163 over the plan. Interest outside an ISA is taxable once your allowances are used, and savings tax rates rise by 2 points from April 2027. The other reason less is left is growth: the cash earns the savings rate here, 3.5%, rather than the pension's 5% before fees. Different rates give different answers, and you can change them in the calculator.

From 6 April 2027, unused pensions and money in the bank both count towards your estate for inheritance tax, so moving money from one to the other doesn't change the estate's size.

Free guidance

Pension Wise from MoneyHelper gives free, impartial appointments on your pension options if you're 50 or over. Your pension provider can tell you how and when it pays tax-free cash.

This page will be updated after the Budget with whatever is announced.