There has been a surge in people withdrawing money from their retirement pots, amid fears of Budget changes and pensions being brought into the scope of inheritance tax in 2027.
Savers have withdrawn over £91bn from their pensions in the past year, according to figures from the Financial Conduct Authority (FCA), which found a record number of pension savers withdrew from their retirement pots in 2025-26.
There has also been a large jump in the number of people taking their pension lump sum with over 20 per cent more cash being withdrawn in this way.
Experts says the move is likely in response to speculation that former chancellor Rachel Reeves was going to reduce the amount of tax-free cash savers could withdraw ahead of her last Budget last year – something that did not come to fruition.
Some would also have been spurred to withdraw from their pensions ahead of changes coming in April next year that will see pots be included in a person’s estate when IHT is calculated.
Experts say the large number of withdrawals is concerning as it could have significant financial consequences in the future.
Andrew King, retirement specialist at wealth management firm Evelyn Partners, said: “We would encourage all pension savers to think twice before making major withdrawals from their pots, especially in anticipation of rumoured policy changes that might not materialise.”
Steve Webb, formers pension minister and partner at pension consultants LCP, added: “It is very worrying that uncertainties about government policy on tax and pensions seems to have driven very high levels of withdrawals from pension pots.
“We desperately need a period of stability in government tax policy, as continuing uncertainty is destabilising and distorts people’s financial planning.”
We asked experts what the risks of withdrawing your pension too soon can be – and what might be a better option instead.
Taking your tax-free cash
You can usually take up to 25 per cent of your pension as a tax-free lump sum, capped at £268,275 once you reach 55.
From April 2024 to March 2026, some £40.38bn was withdrawn in lump sums – a 109 per cent increase on the £19.3bn from April 2022 to March 2024.
Sarah Coles, head of personal finance at AJ Bell, said taking your lump sum, when you have no specific reason, means you have less now than if you had waited.
For example, if your pension pot is worth £400,000 when you turn 55, you would be able to take out £100,000 tax-free. But if you were to leave your pot untouched until you turned 65 and it grew at 6 per cent a year, your pot could be worth £716,339, at which point you could have taken £179,085 tax-free.
Sarah said: “There’s also a risk that people mentally account for this cash differently to the rest of their pension and see it as money to spend on today’s priorities, without fully considering the impact on tomorrow. If you were to take out your lump sum and spend it, it can have a horrible impact on your overall pension pot.”
If you have a smaller pension pot, you need to consider whether taking your tax-free cash will leave you short.
Withdrawing in an unsustainable way
Withdrawing more from your pension upfront can be a great way of dealing with any expenses that come up at the beginning of retirement such as to pay off the remaining balance on your mortgage, debts or other substantial outgoings.
However, Adrian Murphy, chief executive of financial advice firm Murphy Wealth, said large numbers of people withdrawing from their pensions could be a concern if they are doing it in an unsustainable way which leaves them short in retirement.
With the upcoming changes coming to IHT and pensions, Murphy said he had seen more people looking to spend their pot on enjoying time with their family instead of leaving it to the taxman. But he warned people to be wary of how this would impact the longevity of your pension pot.
“If you retire in your 60s, you could quite feasibly still have decades of life ahead, and your pension may be your principal source of income – in fact, it will likely be the first source for many people, now inheritance tax is a factor.
“Your pot needs to be large enough to sustain your income over a long period of time, and taking out too much as cash upfront will affect the pot’s ability to do that.”
A general rule of thumb is, the longer you can leave money in your pension the greater flexibility you will have for longer.
For example, say you have a pension pot of £500,000 and you plan to withdraw £30,000 every year and the pot continues to grow at an average of 4 per cent.
Taking an extra £100,000 in the first year would mean it would last around 19 years before you run out of money. But, if you only withdraw the £30,000 annually for the whole time with no upfront cash, it could last 27 years instead.
Tax considerations
Jemma Slingo, pensions and investment specialist at Fidelity International, highlighted there were big tax considerations to withdrawing large sums from your pension.
Once you take your 25 per cent lump sum, the remaining 75 per cent is taxed as income in the year you withdraw it.
She said: “Money held inside a pension can grow free from UK capital gains tax and income tax. Once you’ve withdrawn it, you lose that protection – and it won’t necessarily be possible to put the money back in the account.”
You also need to think about your income tax band because if you make a large taxable withdrawal, you could be pushed into a higher tax band and end up with a needlessly big bill.
“It is often sensible to stagger withdrawals across different tax years rather than taking a large sum in one go,” Slingo added.
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