According to HMRC, £5bn was withdrawn from pensions in the first three months of 2025 – a 23 per cent increase on the same period last year.
This sharp uptick follows Rachel Reeves’ decision in last autumn’s Budget to make unspent defined contribution (DC) pensions liable for inheritance tax (IHT) from spring 2027. It will bring pensions in line with other assets such as property, ISAs and savings.
Many appear to be acting now to avoid saddling their families with a 40 per cent tax charge on any leftover funds after death.
Craig Rickman, head of personal finance at interactive investor (ii), said retirees with more than enough to fund their own retirement are rethinking their estate planning.
“So they are raiding their pots sooner than previously intended and presumably either gifting the money or spending it.”
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But he warned that drawing money too early could backfire as only up to 25 per cent of a pension – capped at £268,275 – can usually be taken tax-free, while further withdrawals are taxed as income.
A similar shift in behaviour is being seen across the industry. Jon Greer, head of retirement policy at Quilter, said many people are now treating pensions not just as a source of retirement income but as part of a broader inheritance strategy.
However, he cautioned that acting too soon can be costly if the tax charge never materialises. Without proper planning, there’s a danger people undermine their own long-term financial security, he warned.
Mr Greer added: “The general sentiment toward IHT is largely negative. Consequently, the Government must be careful not to erode confidence in pensions as a safe, stable way to save for retirement.”
He explained: “In 2009, only 37 per cent of private sector employees had a workplace pension. That had risen to 79 per cent last year.”
While more people holding pensions naturally means more people drawing from them, not all withdrawals will be motivated by inheritance tax planning.
Financial advisers are urging savers not to act in haste. Greer said those worried about future tax charges should get tailored advice rather than rely on instinct.
The Government has been contacted for comment.
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