I took my pension tax-free lump sum before the Budget – now I want to put it back

In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@theipaper.com. Question: I took my tax-free cash from my pension early in the lead-up to the Budget as I was worried they would change the rules – what do I do now? Answer: One thing I was thankful for in the run-up to this Budget was that there was less feverish speculation about pension tax than we have seen in previous years. As a financial planner, that came as a relief. Ahead of previous Budgets, I found myself constantly fielding calls from worried clients. Should I take my tax-free cash now? Should I realise a capital gain? Should I bring forward a decision I had planned to make next year? Shorts That is not a good environment in which to make important financial decisions, particularly when it comes to pensions. Pensions are inherently long term. We ask people to put money away that they may not touch for decades, so they need confidence that the rules they are planning around will not disappear tomorrow. No government can promise the tax system will never change, but people should not feel they need to second-guess every Budget. Thankfully, nothing changed in this Budget when it comes to tax-free pension cash. So if you, like this reader, accelerated plans to take yours solely because you feared the rules were about to change, with hindsight you didn’t need to. The speculation of recent years has understandably made people nervous. It is difficult to sit on your hands when you fear doing nothing could leave you worse off. But there is a difference between taking stock and feeling that you have to take action. Under current rules, you can usually take up to 25 per cent of your pension tax-free, subject to a lump sum allowance of £268,275 for most people. But before taking it early, I would ask, what is the money for? If you need it to clear a mortgage, fund retirement or meet another planned expense, that is very different from taking it because you fear the rules might change. Given you have taken your tax-free cash earlier than planned, don’t panic. You still have options, although the right answer will depend entirely on your circumstances. You might gradually make use of your ISA allowances, keep some money accessible for planned spending, make gifts to family if that fits your wider estate plans or, for some people, consider more sophisticated investments such as bonds with professional advice. The overall ISA allowance is currently £20,000 a year. And don’t forget the most obvious option, which is to enjoy some of it. If there are things you always intended your retirement savings to pay for, spending money on them isn’t a failure of financial planning. What I wouldn’t do is rush into another decision to try to correct the first. Money left within a pension benefits from a tax-advantaged environment. Once withdrawn, savings interest may be taxable depending on your circumstances, while investments outside pensions and ISAs may generate taxable income and gains. This is why I always come back to purpose. Would you still want to make this decision if you knew the tax rules were going to stay exactly as they are? If the answer is no, take a breath. Pensions need to be planned over decades, not from one Budget to the next. A stable and predictable tax system helps give people confidence to make those long-term decisions.