December 5, 2025

What Should You Do with Your Tax-Free Lump Sum Now That It Has Been Withdrawn?

by David Pegler

in Financial Planning Insights Lifestyle

In the months leading up to the Autumn Budget, thousands of people withdrew funds from their pensions amid speculation that the rules around tax-free lump sums might change. HMRC data shows that more than £10bn was withdrawn in the 2024/25 tax year, with a noticeable surge immediately before the Budget.

For many, it was a precautionary move.

But now the dust has settled, a new question has emerged:

Now that the funds are out of the pension – what should you do with your tax-free lump sum?

And importantly, can you simply put it back?

1. Once the money is withdrawn, you cannot easily reverse the decision

A pension is one of the most tax-advantaged places to hold wealth. Once cash is withdrawn:

• It enters your taxable estate, increasing potential future inheritance tax (IHT).
• It loses the tax-sheltered investment growth available inside pensions.
• Returning it may not be possible – annual allowance limits, tapering, or the Money Purchase Annual Allowance (MPAA) may restrict contributions.

This is why so many people are now sitting on large sums of cash and wondering how to position it for the long term.

2. Cash left idle carries hidden risks

A large cash balance can feel reassuring, but there are downsides:

• Inflation erodes real value.
• Interest income is taxable.
• Long-term opportunities for compounding may be missed.
• You may inadvertently crystallise a future IHT liability.

The question is no longer “Should I take the money?”

It is now “What should I do with the money I have taken?”

3. What are the smart next steps?

There are several planning approaches designed to give people control, flexibility, and long-term tax efficiency when holding funds outside a pension. These may include:

Tax-Deferred Investment Structures

For individuals who cannot rebuild pension contributions, tax-efficient wrappers such as offshore insurance bonds can defer tax, allow gross roll-up of investments, and offer planning opportunities through:

• The 5% tax-deferred annual withdrawal allowance
• Assignments to lower-tax family members
• Use within trust structures

Creating a Sustainable Income Strategy

A lump sum can form the basis of a long-term income plan without triggering unnecessary tax early in retirement.

Estate Planning Considerations

If IHT is a concern, gradual gifting strategies, trust planning, or long-term structuring can help reduce future liabilities while retaining access or income where needed.

The key point is this:

There are far better options than leaving your lump sum sitting as cash.

4. You are not alone – and this is a timely moment to act

There is now a sizeable group of individuals who:

• Withdrew funds pre-Budget,
• Do not need the cash now,
• Are unsure of the consequences,
• Are holding money in accounts that are no longer tax efficient.

If this sounds familiar, this is an ideal moment to take stock and reassess.

5. Want to explore your options? We would be delighted to help

Whether you simply want to sense-check your current position or explore long-term planning options, our role is to help you make informed decisions that:

• Protect your wealth
• Improve tax efficiency
• Create sustainable income
• Support your family planning goals

If you have withdrawn a tax-free lump sum and are wondering what to do next, let us help you map out a strategy that works for your future.

For context on the broader policy landscape, you can also read our full
Autumn Budget 2025 Insights and 10-page report.