UK Pension Shake-Up 2025: What You Need to Know

Pension savers are being urged to avoid making hasty financial decisions ahead of possible tax reforms in the upcoming Autumn Statement.

Chancellor Rachel Reeves is set to unveil new financial measures on November 26, which may include adjustments to pension tax rules. However, financial experts warn that moving money around too early could cost savers thousands in the long run.

Simon Harrington, Head of Public Affairs at PIMFA (a trade association), cautioned that ongoing speculation about the future of the 25% tax-free pension lump sum is already influencing consumer behaviour in harmful ways. He noted that while such speculation is difficult for the government to control, it has intensified in recent years, leading many savers to make premature withdrawals.

Currently, individuals can withdraw up to 25% of their pension savings tax-free, capped at £268,275. Any amount taken beyond that threshold is taxed as income.

According to FCA data, the number of people withdrawing just their lump sum has nearly doubled in 2024/25 compared with five years ago. Harrington explained that taking money out too soon reduces the invested balance, meaning savers lose out on potential growth that could significantly increase their retirement funds.

For example, ONS figures show the average person aged 55–64 holds £137,800 in private pension savings. If left invested for 10 years with a 6% annual growth rate, this could grow to £246,779. However, withdrawing the full 25% lump sum early would leave just £185,084, a loss of £61,695 in potential gains.

Savers can currently access private pensions from age 55, while the state pension age is 66, set to rise to 67 next year.

Harrington added that even if reforms are introduced in the Autumn Statement, changes are unlikely to take effect immediately, giving people time to plan. He warned, however, that speculation alone is prompting short-term actions that could harm long-term retirement security, especially with proposals such as subjecting unused pensions to inheritance tax from April 2027, announced in Labour’s 2024 Autumn Budget.