Did you withdraw your tax-free lump sum early and now regret it? These are the

Savers in their droves were panicked into pulling tax-free cash out of their pensions before the Budget for fear of a clampdown on the perk.

Rumours of a raid were finally quashed some weeks before the Budget, but that came too late for some as once you take your lump sum the decision is irreversible.

People over 55 can withdraw 25 per cent of their pension tax-free up to a £268,275 cap.

There was a rush to access this money over fears the maximum could be slashed to £100,000 or even lower, according to pension companies and financial advisers.

For some, taking the cash could pay off, especially if they planned to do so anyway in the next year or so and want to spend the money for a specific purpose – paying off debt, such as a mortgage, or carrying out home renovations.

Also, some savers are pulling out cash to give away to family members following last year’s announcement that unspent pensions will be liable for inheritance tax from April 2027.

If you gift money away and survive seven years it typically falls outside of the inheritance tax net – although money experts warn you should not do this if it harms your own retirement.

Others who had no specific financial goal in mind will be looking at the new stack of cash in their bank or savings account and wondering what to do now.

Some savers are pulling out cash to give away to family members following last year’s announcement that unspent pensions will be liable for inheritance tax from April 2027

A big risk is that you can miss out on investment growth under the tax protection of a pension in future. This could leave you thousands of pounds worse off. Another is that if you try to put the money back in your pension, you could fall foul of strict rules.

Gary Smith, senior partner at wealth managers Evelyn Partners, says: ‘Taking tax-free cash without a plan can turn a useful benefit into a tax headache. Having taken funds out of a tax-protected growth environment, it’s important to protect lump sum cash from tax and inflation.’

Here are some options to ensure you make best use of your lump sum – and the pitfalls to avoid.

Where to put the cash

Chances are you initially had your lump sum transferred to a current or a savings account. You might be tempted to keep it in an ordinary savings account or Isa at a good rate of interest, but it is still likely to be eaten up by inflation.

Historically, returns from investing have also far outstripped interest on cash savings, so if you have no plans to spend the money in the next five-plus years then just letting it sit there is likely to leave you worse off in the longer run.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: ‘It may be tempting to take the cash and leave it in your bank while you decide what to do with it.

‘However, if it’s too easily accessible, you risk frittering it away over time. You may also see your purchasing power nibbled away at by inflation.’

If you are dead set on keeping your lump sum in savings, or have firm plans to spend it in the next few years, make sure you get as much of it as possible into an Isa at a top rate.

You can find the best savings rates at thisismoney.co.uk/save.

Bear in mind that if you are under 65 the cash Isa limit will be slashed to £12,000 from April 2027.

You might need to spread your lump sum across multiple accounts so it is protected in full if your savings provider goes bust.

The Financial Services Compensation Scheme protects deposits up to £85,000, rising to £120,000 from December 1. Six-month temporary high balance cover will rise from £1 million to £1.4 million.

Get shot of mortgage?

If you made a rushed decision to withdraw tax-free cash, you might not be at the right point in your mortgage deal to overpay substantially or pay it off entirely.

It might be worth stumping up an early repayment charge but you would have to do careful sums on this to determine if it makes financial sense or if you’re better waiting to the end of the term.

Smith says: ‘Someone halfway through a five-year fixed loan, for instance, might have limited overpayment options.

‘Four years is potentially a long time to hang on to a substantial lump sum, and tax-efficient cash savings options might be limited.

‘Those who do need to park their cash for a few years will need to keep a close eye on tax exposure, especially as the relatively short timeline might rule out some investment options.’

Gift the money early

With pensions becoming liable for inheritance tax from spring 2027, many families are considering the size of their estates and whether to make gifts now.

If you survive seven years after making a gift, it automatically becomes free of inheritance tax.

It’s otherwise levied on a sliding scale – starting at the full whack of 40…