UK savers are increasingly accessing their tax-free pension cash and accelerating inheritance planning in anticipation of potential tax changes in the upcoming November Budget. Financial data shows a significant spike in pension withdrawals as individuals act on concerns that the new government may alter long-standing tax reliefs to address a reported £50 billion gap in public finances.
Investment platform Interactive Investor has recorded a 61% month-over-month increase in tax-free cash withdrawals from pension accounts, highlighting a trend of proactive financial management among those nearing or in retirement. This activity coincides with heightened speculation about the future of pension tax benefits and inheritance tax exemptions under Chancellor Rachel Reeves.
Key Takeaways
- Savers are withdrawing tax-free cash from pensions at an accelerated rate, with one platform seeing a 61% monthly increase.
- Concerns are focused on potential reductions to pension tax relief and changes to inheritance tax (IHT) rules in the November 26 Budget.
- Wealth managers report a surge in clients making large financial gifts to start the seven-year IHT clock.
- Alternative wealth transfer strategies, such as setting up trusts and using business relief, are also gaining popularity.
- The UK Treasury has not commented on specific tax plans, stating that policy decisions are made at fiscal events.
Pension Withdrawals Surge Amid Tax Uncertainty
Financial advisers are observing a notable shift in client behavior as the November 26 Budget approaches. With the Labour government having pledged not to raise key taxes like income tax, VAT, or National Insurance, attention has turned to other potential sources of revenue, including pension and inheritance tax systems.
The primary concern for many is the future of the 25% tax-free lump sum that can be taken from a pension. Fear that this allowance could be reduced or capped is driving many to access their funds now. This preemptive action is reflected in recent industry data.
Spike in Pension Access
According to figures from Interactive Investor, the volume of tax-free cash withdrawals from self-invested personal pensions (SIPPs) jumped by 61% in the latest month compared to August 2024. This indicates a significant number of savers are choosing to secure their tax-free portion sooner rather than later.
However, this strategy is not without risk. HM Revenue & Customs (HMRC) has clarified its position, warning that once tax-free cash is withdrawn, the allowance cannot be reinstated. This holds true even if a pension provider offers a 30-day "cooling-off" period, as the tax event is considered final once completed.
Inheritance Tax Planning Moves to the Forefront
Alongside pensions, inheritance tax (IHT) has become a major focus for wealthy individuals and families. The current rules allow for unlimited gifts to be made, which become exempt from IHT if the giver survives for seven years. Planners are worried this generous relief could be a target for reform.
"A couple of key concerns we are seeing from clients currently are around possible cuts to the amount of tax-free cash that can be taken from pension pots and whether the Chancellor might overhaul the lifetime gift rules," said Jason Hollands of wealth manager Evelyn Partners.
This has led to a rush to make substantial gifts to children and grandchildren. The goal is to start the seven-year countdown, locking in the current rules. A survey from wealth manager Rathbones found that nearly half of individuals with over £5 million in investable assets expect to reassess their IHT strategy in the coming year.
Simon Bashorun of Rathbones noted the prevailing mindset among clients. "There is a hope that, as tax changes have very rarely been retrospective, you have been allowed to keep what you’ve got, what you’ve put in place. So by making those gifts, bringing forward that action, they hope to insulate themselves."
Where are the Financial Gifts Going?
While helping with property deposits remains a primary use for these gifts—with £9.6 billion used for this purpose last year—advisers are seeing new trends emerge. One notable area is the repayment of student loans.
Frankie Smith, founder of FSWM, reported having as many as 20 client conversations recently about gifting money. She explained that in several instances, the funds were specifically designated to clear student debt. "They’re looking at the student loan and they’re clearing it because they’re concerned about how the loan is compounding compared to what their children are paying off," Smith said.
The Power of Gifting
Under current UK tax law, individuals can give away assets or cash. If they live for another seven years after making the gift, it falls outside their estate for inheritance tax purposes, effectively shielding that wealth from the 40% IHT rate. Any changes to this seven-year rule could significantly impact estate planning.
Exploring Advanced Wealth Protection Strategies
Beyond simple cash gifts, savers are increasingly exploring more complex financial instruments to protect their wealth while retaining a degree of control. This includes the use of trusts and business-related investments.
Financial planners report a marked increase in inquiries about trusts. Michelle Holgate of RBC Brewin Dolphin observed, "There is a marked interest in trust planning. A lot of people are asking about things like discounted gift trusts, which was practically unheard of in the past."
She added that discretionary trusts are also popular for long-term planning. "Discretionary trusts are allowing people to plan for grandchildren and great-grandchildren of the future, without the need to pay out at 18."
Business Relief Investments
Another area seeing heightened activity is investment in assets that qualify for Business Property Relief (BPR). This relief can provide 100% exemption from IHT for certain business-related assets after they have been held for two years. Despite the introduction of a £1 million limit, those who have not yet used the relief are turning to it.
"Investment into business relief allows the individual to still have control over the assets themselves," Holgate explained. "There is an increase month-on-month in activities in that space."
The Nuclear Option: Moving Abroad
For a segment of high-net-worth individuals, the combination of recent and anticipated tax changes is prompting consideration of more drastic measures. Some are exploring the possibility of relocating themselves and their assets overseas.
Bashorun warned that "there’s lots of talk of moving overseas." He stated that the ongoing speculation, layered on top of previous tax adjustments, "is not reassuring them that this is a place to grow and build wealth in the way that they would want to."
This sentiment is echoed by other wealth managers who work with international clients. James Gladstone, head of wealth planning at Cazenove Capital, said, "Many clients have an international perspective and therefore jurisdictional diversification is sensible. We have helped our clients establish offshore positions to complement their UK holdings where they have a non-UK aspect to their family wealth."
The UK Treasury has maintained its standard position on the matter, declining to engage in speculation. A spokesperson stated, "The Chancellor makes tax policy decisions at fiscal events. We do not comment on speculation around future changes to tax policy." As November 26 approaches, savers are choosing to act on speculation rather than wait for certainty.
