Pension savers have been warned to think carefully before taking their tax-free cash, as research suggests many are accessing their pensions before they stop working. Investment firm AJ Bell says people can suddenly find themselves able to get their hands on “tens of thousands of pounds overnight”, but taking the money without considering the consequences could affect their retirement income.
Research findings on pension withdrawals
Research from AJ Bell found that 76% of people aged between 55 and 64 had already taken the tax-free lump sum from their pension. However, just 30% of those who took a lump sum used their first pension payment to cover living costs.
Instead, 26% spent the money on home improvements, while 21% used it for holidays. Another 19% used it to pay off debt and 16% spent it on a new car. The research also found that 26% took their first pension payment while they were still working. Among people who did no work during retirement, 23% had taken money from their pension before giving up work altogether.
Expert warning on risks
Sarah Coles, head of personal finance at AJ Bell, said: “The tax-free lump sum is everyone’s favourite part of the pension. People with little or no interest in pensions overall hit the age of 55 and realise they can get their hands on tens of thousands of pounds overnight.
“However, there’s a risk some of them are doing so without considering the impact on their overall retirement income.”
Ms Coles added: “It’s technically known as the Pension Commencement Lump Sum, but it’s known to most people as tax-free cash. The vast majority of people take this money, but this research rings alarm bells over how they’re doing it, and what they’re spending the money on.”
Speculation and calls for change
AJ Bell has also raised concerns that speculation about possible changes to pension tax-free cash around the Budget could encourage some savers to take money earlier than they otherwise would. Its analysis of Financial Conduct Authority data estimated that people withdrew £14 billion more from pensions during 2025/26 than they would have without speculation over a possible change. That followed an estimated £10 billion in additional pension withdrawals the previous year.
The concern comes as the Pensions Commission has estimated that 14.6 million people are not saving enough for retirement. The Pensions Commission estimated that figure would rise by a further two million if people took their tax-free cash and spent it.
The investment firm is now calling for Chancellor John Healey to introduce a “pension tax lock”, which it argues would prevent further speculation from encouraging withdrawals that could undermine people's retirement incomes.
