Key takeaways
- The lump sum allowance is £268,275 for 2026/27, the same cash figure as 2025/26 and 2024/25, and GOV.UK and HMRC still carried it on 18 October 2026.
- A cap only reaches a pot bigger than four times itself. An illustrative £100,000 cap takes nothing from a £250,000 pot and £168,275 from a £1,073,100 one.
- Cash that loses tax-free status isn't lost, it's deferred: £25,000 of it costs £5,000 in Income Tax at 20% and £10,000 at 40%, paid when you draw it.
- Putting £125,000 back into a pension takes 6.25 years of full ISA allowance, or about 34.7 years if you've stopped earning and the £3,600 limit applies.
- From 6 April 2027 unused pension funds sit inside your estate, so moving £125,000 into a bank account doesn't change the £50,000 of Inheritance Tax on it.
Nothing has changed, and £268,275 is still the ceiling
You want to know whether to take your 25% now, before 28 October, in case the Chancellor caps it. Here's the position as it actually stands.
The Office for Budget Responsibility announced on 31 July 2026 that it had been commissioned to produce its next forecast "on Wednesday 28 October 2026", alongside the Budget. That date is confirmed. What is not confirmed, and had not been announced as of 18 October 2026, is any change to the tax-free lump sum. GOV.UK still says you can "usually take up to 25% of the amount built up in any pension as a tax-free lump sum" and that "the most you can take is £268,275". HMRC's own rates page shows that same £268,275 for 2026 to 2027, for 2025 to 2026 and for 2024 to 2025.
So every figure below runs on confirmed rules. Where a lower cap appears, it's an illustration with no proposal behind it, chosen because it's a round number, and labelled as such. Reporting of what a Budget might contain is reporting, not arithmetic, and it can't be the basis of a calculation.
One more confirmed thing matters here, because it cuts against the obvious move. An HMRC policy paper published on 26 November 2025 states that "the government will bring most unused pension funds and death benefits into scope of Inheritance Tax from 6 April 2027". That measure has a published policy paper and a start date, and it changes the shape of the question.
What a lower cap would take from a £100,000, £250,000, £500,000 and £1,073,100 pot
Tax-free cash is the lower of two things: 25% of the pot, and the lump sum allowance. Today the allowance only binds once a pot reaches £1,073,100, because 25% of £1,073,100 is exactly £268,275. Below that, the 25% is what limits you, not the allowance.
Here's what each pot gets today, and what it would get if the allowance were lower. The last three columns are illustrative. No cap at any of these levels has been announced.
| Pot | Today (£268,275 allowance) | If the cap were £150,000 | If the cap were £100,000 | If the cap were £40,000 |
|---|---|---|---|---|
| £100,000 | £25,000 | £25,000 | £25,000 | £25,000 |
| £250,000 | £62,500 | £62,500 | £62,500 | £40,000 |
| £500,000 | £125,000 | £125,000 | £100,000 | £40,000 |
| £1,073,100 | £268,275 | £150,000 | £100,000 | £40,000 |
Read the top row first, because it's the one most people are in. A £100,000 pot gets £25,000 of tax-free cash under all four regimes. A cap reaches it only if it's set below £25,000, which is lower than any column here.
The £250,000 pot loses nothing until the cap falls to £40,000, at which point it gives up £22,500. The £500,000 pot gives up £25,000 at a £100,000 cap and £85,000 at £40,000. The £1,073,100 pot is the one with real exposure: £118,275 at a £150,000 cap, £168,275 at £100,000, £228,275 at £40,000. The chart above shows the same rule drawn across seven pot sizes, and you can see the line go flat at £268,275 once the allowance takes over from the 25%.
A cap only bites a pot bigger than four times itself
That table has a single rule underneath it, and it's worth more than the table. Because tax-free cash is 25% of the pot, a cap of £C changes nothing at all until the pot reaches £4C. It also settles the tax free lump sum before Budget question for most people in one line.
A £150,000 cap starts to bite at £600,000. A £100,000 cap starts at £400,000. Even a £40,000 cap does nothing below £160,000. Today's £268,275 allowance starts at £1,073,100, which is why most people have never met it.
That arithmetic tells you how many people a cap could reach. The FCA has collected data from all regulated firms that provide retirement income products since April 2018, and in the year ending 31 March 2026, 8.6% of pots accessed for the first time were worth £250,000 or more, up from 7.2% the year before and 4.8% in the year ending 31 March 2024. In the same year 1,047,008 plans were accessed for the first time, and £91,236m was withdrawn from pension pots in total. The large pots are a growing minority, and they're the only group a cap in the ranges above would touch.
What taking your tax free lump sum before Budget day actually costs
The question "should i take my tax free lump sum before the budget" has an arithmetic on the other side, and it's rarely shown. Four costs are confirmed and datable.
The money loses its wrapper. GOV.UK is explicit that interest from "bank and building society accounts" is interest "you pay tax on", while interest inside an ISA is not. In 2026/27 the Personal Savings Allowance is £1,000 at basic rate, £500 at higher rate and £0 at additional rate, with a separate starting rate for savings worth up to £5,000 of interest if your other taxable income is under £17,570. At the Bank Rate of 3.75%, held on 17 September 2026, £26,667 of cash on its own exhausts a £1,000 allowance. £125,000 of cash earns about £4,688 a year at that rate, which costs £738 in tax at basic rate and £1,675 at higher rate if the allowance is otherwise unused.
Re-sheltering it is slow. The ISA limit is £20,000 for 2026/27. Moving £125,000 into ISAs takes 6.25 years of using the whole allowance and nothing else; £268,275 takes 13.4 years. The pension money was already sheltered. The ISA queue is the price of leaving.
It can't go back in on the same terms. HMRC limits relief on contributions to the higher of two things: 100% of your UK taxable earnings, or £3,600 for 2026/27. If you've stopped working, £3,600 gross a year is the ceiling, and GOV.UK puts your own share of that at "£2,880 if you have no earnings in that year". At that rate, putting £125,000 back takes roughly 34.7 years. Even with earnings, the annual allowance is £60,000 for 2026/27.
Some withdrawals cut your annual allowance by £50,000. GOV.UK gives two examples of flexibly accessing a pension: taking "cash or a short-term annuity from a flexi-access drawdown fund", and taking "cash from a pension pot ('uncrystallised funds pension lump sums')". Either drops the money purchase annual allowance to £10,000 from £60,000 for 2026/27. Taking the tax-free lump sum and designating the rest to drawdown without drawing income isn't among those examples, and the page says the list is illustrative, so it's a distinction worth checking with your own provider before anything moves.
From 6 April 2027 the pension is in your estate anyway
This is the part that inverts the usual case for taking cash out early.
The HMRC policy paper brings most unused pension funds and death benefits into the scope of Inheritance Tax from 6 April 2027, which is itself the clearest indication that they aren't in scope before it. Inheritance Tax is charged on "the estate (the property, money and possessions) of someone who's died", the threshold is £325,000 (unchanged since 6 April 2009) and the rate above it is 40%. So £125,000 of pension money becomes £125,000 inside the estate, carrying up to £50,000 of Inheritance Tax.
Now notice what withdrawing does. Cash in a bank account is in your estate too. Take £125,000 out as tax-free cash and leave it in savings, and from 6 April 2027 the Inheritance Tax position is identical. Before that date, the withdrawal actively moves money from outside the estate to inside it. Spending it or giving it away is different, and the gift rules have their own timetable: gifts can be taxed if you "give away more than £325,000 and die within 7 years".
The 2027 measure also gives personal representatives the power to direct a scheme to "withhold 50% of the taxable benefits for up to 15 months from the date of death" while the tax is settled, and it exempts "funds under £1,000", continuing annuities and death in service benefits. Our guide to pension inheritance tax 2027 works the combined bill through at each pot size.
The strongest objection: the allowance is already being cut
Everything above argues that a cap would reach far fewer pots than the question implies. Here's the best case against that reading, and it's a real one.
The £268,275 allowance is a cash figure, not an indexed one. HMRC's rates page shows it unchanged across 2024 to 2025, 2025 to 2026 and 2026 to 2027. With inflation at 3.1% at the September 2026 decision, a single year at the same cash figure costs about £8,317 of real purchasing power on a full allowance. Holding it level across three tax years has already cut it in real terms, with no announcement to react to. Anyone waiting for a visible cap has arguably missed a cut that's already running.
The second half of the objection is about distribution. A cap would land on a group whose numbers are growing: the £250,000-plus share of pots accessed has gone from 4.8% to 8.6% in two years. And 64.5% of those entering drawdown in the year to 31 March 2026 took a Pension Commencement Lump Sum, so tax-free cash is the normal route, not an edge case. For someone at £1,073,100, £168,275 of exposure at an illustrative £100,000 cap is a large number to hold on the view that nothing may happen.
The counterweight is that a cap, if one ever came, would not vaporise the money. Cash above the allowance is taxed as income when drawn, not confiscated: GOV.UK says you'd "pay Income Tax on the extra amount". On £25,000 that's £5,000 at the 20% basic rate and £10,000 at the 40% higher rate. On £168,275 it's £33,655 at 20% and £67,310 at 40%. Those are the real stakes, and they're a fraction of the headline loss. How a large withdrawal is spread across tax years changes that bill, which is what our note on tax on a pension lump sum withdrawal measures.
The limitations of these cap figures
These numbers cannot tell us what the Budget contains. The three cap levels are arbitrary illustrations; no figure of any kind has been announced, and the Institute for Government argued in a paper on 7 September 2026 that pre-Budget speculation should avoid asset taxes precisely because people react to it.
Three further limitations are worth naming. The FCA data counts plans, not people, and someone with four pots appears four times. The pot sizes here are round numbers rather than a distribution, so your own figure is the one that matters, not the nearest row. And the interest figures assume cash held at Bank Rate, which is a reference rate, not an offer from your bank.
One thing is not a limitation but a fact of the mechanics. GOV.UK states that a pension commencement lump sum "counts towards your lump sum allowance", so once it's paid that part of the allowance is used and the money is outside the pension. The FCA found that 30.8% of plans accessed for the first time in the year to 31 March 2026 were accessed by plan holders who took regulated advice. The Money and Pensions Service, which GOV.UK says replaced Pension Wise, "provides free and impartial debt advice, money guidance and pension guidance to members of the public", and a regulated adviser can model your own pot. LedgerTouch tracks the pension and non-pension side of a balance sheet in one place, which is where the £20,000 ISA queue above becomes visible.
Money can be taken from most pensions "usually after you're 55", and the choice of when is not the same question as the choice of how much. The arithmetic of phasing it is in our comparison of tax-free lump sum vs drawdown, and the wrapper question itself in ISA vs pension.
What would change this
Whether to take a tax free lump sum before Budget day turns, on these figures, on one number: four times whatever cap you're worried about. Three things would change that.
A cap announced on 28 October with immediate effect would make the whole calculation retrospective, and the only people it would have reached are those above four times the cap. A cap announced with a lead-in date would turn this into a timing question with a deadline, which is a different and much easier problem than guessing.
A change to the 25% fraction rather than the £268,275 cash figure would be the version that reaches everyone, including the £100,000 pot that every column above leaves untouched. Nothing in the confirmed rules points that way, and it's the scenario that would invalidate the four-times-the-cap rule entirely.
And if the allowance stays at £268,275 through a fourth tax year, the real-terms cut continues at roughly £8,317 a year at current inflation, with no announcement to react to. That is the outcome worth watching, because it's the one that needs no Budget at all.
This article is for informational purposes only and is not financial advice.