People tempted to take 25 per cent tax free cash from their pension for fear the limit is slashed in the Budget are being warned to treat the decision as irreversible.

Pension experts have issued alerts to savers in the wake of twin statements issued on tax-free cash cancellation rules by the Financial Conduct Authority and HMRC - and one has demanded the Chancellor simply rule out the move now.

Speculation about a new lower cap on tax-free cash is understood to have prompted a renewed rush of withdrawals, following a spike ahead of last year's Budget.

AJ Bell has called for the Chancellor Rachel Reeves to come out against changes now, to discourage people from making hasty decisions that could harm their retirement finances.

'This constant debate about changing pensions tax rules is wearing down people’s trust in the government and putting them in danger of making knee-jerk decisions which may not be the right ones for them,' says head of public policy Rachel Vahey.

'The Chancellor needs to publicly rule out changes to tax free cash in order to put an end to speculation. Doing so would alleviate uncertainty and show that the government is on the side of workers saving for the future. 

'Failure to provide certainty punishes workers, who will rightly worry that the government may move the goalposts before they take retirement income.'

Mark Cunningham, partner at accountancy firm Blick Rothenberg, says: 'Speculation ahead of the 2024 Autumn Budget, that the Chancellor might change the pension rules allowing a 25 per cent tax free withdrawal for those eligible, led to a surge in premature withdraws and then regret for many. 

'No change was announced and some attempted unsuccessfully to return the money to their provider. 

'With the next Budget imminent, speculation is again building. If no changes are intended, it could be seen as irresponsible of the Chancellor not to confirm this in advance, given the previous history and the impact on those approaching retirement.'

Meanwhile, the FCA has explained there is no 'right to cancel' a tax-free cash withdrawal, though pension providers might voluntarily offer this option to customers if they wish.

And HMRC has confirmed any tax consequences cannot be undone if you do cancel - so the withdrawal will still count towards someone's tax-free lump sum limit, which is currently £268,275, even if it is unwound.

A string of retirement experts have warned against making rash moves if you don't have a plan for what you would do with the money, as you can miss out on investment growth under the tax protection of a pension in future.

Taking up to 25 per cent from your pension free of tax is a popular perk at retirement, and people typically use their lump sum to clear remaining mortgages and other debts, or splash out on home renovations, new cars and holidays.

Although Rachel Reeves did not tighten the rules in her Budget last year, there was still an unprecedented 60 per cent surge in tax-free cash pulled from pensions, amounting to £18 billion.

Outflows are likely to have continued at a similar or even greater rate because of the Government’s plan to levy inheritance tax on pensions from April 2027, and ongoing worries a cap might still be imposed.

Vahey says: 'Those people who have built up larger pension pots must feel somewhat as if they are caught in the headlights. But they should not be making important decisions about their future retirement wealth by trying to second guess a chancellor’s Budget speech.

'For those who decide on balance they still wish to do so, because they need it to fund their retirement or for another reason like clearing debts, it’s important to view it as a permanent decision, and understand all the implications, including that it is not reversible.'

Vahey adds that leaving money in your pension until you need it is normally the best course of action.

'It can continue to grow tax free, meaning you should be able to take a bigger tax-free cash lump sum. Once the money is outside your pension, you’ll likely begin to incur some tax. For example, if the money is in a savings account, then you may have to pay tax on the interest if it exceeds your personal savings allowance.

'Or if the money is invested outside of your pension, you may find yourself with a capital gains and dividend tax bill, given that a pension tax-free lump sum will likely take several deposits to drip-feed into a tax shelter like an Isa .'

Rebecca Williams, a financial planning expert at Rathbones, says following confirmation from the regulator regarding cancellation rights, taking tax free cash is an 'irreversible decision'.

'It’s understandable that people are nervous about potential changes to the rules,' she says. 'The ability to withdraw a lump sum free of tax from your pension is hugely beneficial for meeting immediate financial obligations, such as paying off a mortgage, clearing debts, or helping children onto the property ladder.

'But withdrawing without a clear plan can lead to missed growth opportunities and tax exposure.'

A Rathbones survey of more than 600 people with pensions, savings and investments found withdrawing a lump sum from a pension was one of their top regrets among financial decisions made ahead of last year's Budget.

Williams adds: 'It is also important to be aware of the Money Purchase Annual Allowance (MPAA). Once you take taxable pension withdrawals, your annual tax-relievable contributions drop from £60,000 to £10,000 - a rule that often catches people out when trying to rebuild their savings.

'Those thinking they can simply recycle their tax-free cash back into a pension could be in for a nasty shock. If the move appears pre-planned and contributions spike significantly, HMRC may treat it as an unauthorised payment - potentially landing you with a tax bill of up to 55 per cent.

Alasdair Mayes, partner and head of pensions and tax at LCP, says: 'The latest statements by HMRC and the FCA are a reminder that people should think very carefully before making major financial decisions based on speculation about what might be in the Budget.

'In particular, in many cases it may be impossible to undo the tax implications of such a decision if it turns out – again – that there is no Budget change to pension tax free cash.

'For example, people who try to reverse their decision after a Budget may find that they have irreversibly used up some of their lifetime limit of tax-free lump sums.'

How do pension tax-free lump sums work?

Many people nearing retirement age may have a mix of defined contribution and defined benefit pensions, and the rules differ for each type of scheme.

Defined contribution pensions: These take sums from both employers and employees and invest them to provide a pot of money at retirement.

Over-55s can take 25 per cent of their pension pot tax-free upfront, or opt to withdraw it gradually in chunks.

By not withdrawing the whole lump sum out at once, if your pot grows in future you will have more tax-free cash available to take in the longer run.

Defined benefit salary-related pensions:  Final salary, or career average defined benefit pensions, provide a guaranteed income after retirement for the rest of your life.

Unless you work in the public sector, these have been mostly replaced by defined contribution pensions. But many people nearing retirement will have accrued benefits before the schemes were closed to new members.

If you have one, your options for a 25 per cent lump sum vary according to the generosity of the terms and conditions of your scheme, so you must check the details, including the minimum pension age.

The tax-free lump sum is available when you first start drawing a defined benefit pension, but not later on.

Some defined benefit schemes require you to give up a relatively large amount of future pension for every pound of lump sum, so you should check carefully what you are forfeiting before deciding how much to take up front. 

The current limit: The 25 per cent tax free lump sum is currently capped at £268,275.

You may be entitled to more if you had taken out ‘fixed protection’ related to the old pension lifetime allowance, which stood at £1,073,100 when it was axed a few years ago.

Fixed protection is a complicated area, and if you have a large enough pension to have taken it out in the past it is best to get financial advice to avoid costly errors.

What to consider before taking tax-free lump sums from your pension

- You do not necessarily need to take it all at once - depending on your type of scheme - or even at all, if you don't have a good reason to spend it now.

- Think about whether you will need the money later if you are in good health and all being well could live a long time.

- If you are investing your pension and do so wisely, your pot could continue to grow and boost how much you have available to withdraw in tax-free chunks over the longer term.

- When you take anything over and above your 25 per cent lump sum from a defined contribution pension, from then onwards you can only contribute £10,000 a year and still get tax relief.

- Be aware that if you reinvest the tax free cash back into your pension you might fall foul of pension recycling rules, which are aimed at preventing people trying to seek an advantage by getting extra tax relief.