Pension withdrawals jumped sharply last year, with new figures from the Financial Conduct Authority showing savers took out £91 billion in the 2025/26 tax year, up 21.7% from £75 billion the previous year. The year before that, withdrawals stood at just £52 billion.
The number of pension plans accessed for the first time also increased, while more savers with larger pots started taking tax-free cash or moving into drawdown.
Cost-of-living and tax speculation drive withdrawals
Experts said the cost-of-living crisis may explain some of the increase, but many savers also appeared to be reacting to tax changes and speculation about how Labour will target pensioners with tax raids, including on their 25% tax-free cash lump sum.
Since pension freedoms were introduced in 2015, most people have been able to access their pension savings from age 55, rising to 57 from April 2028. The reforms gave retirees far greater flexibility, but also more responsibility.
Inheritance tax changes influencing behaviour
Many industry experts believe looming tax changes are influencing behaviour. From April 6, 2027, most unused pension funds and pension death benefits will fall into family estates on death, and could potentially be liable for inheritance tax.
Andrew Tully, technical services director at Nucleus, said: “The increase in the number of people accessing their pension is likely to reflect the Government’s moves to include pensions within IHT, and wider rumours around the future of the tax-free lump sum as we approached last year’s Budget.”
He added: “This has caused many people to access tax-free cash and income, potentially to gift to family or shelter from IHT.”
Risks of withdrawing too much too soon
Tully warned that regular policy changes, or the threat of them, could have unintended and damaging consequences. “While it may be unwise for people to act purely as a result of speculation, the lack of stability and the regular changes which people have witnessed helps drive this type of poor behaviour.”
One obvious danger is that money withdrawn too early loses some of the generous tax advantages pensions enjoy. Growth inside a pension is generally free of income tax and capital gains tax, and money left invested has more time to benefit from compound growth.
When you eventually take money out, up to 25% can normally be taken tax-free, subject to the £268,275 lump sum allowance, with the remainder potentially subject to income tax.
Impact of early withdrawals
AJ Bell calculated that someone who withdrew £100,000 in tax-free cash and placed it in an ordinary savings account could end up around £51,000 worse off after 10 years than if the money had remained invested in a pension.
AJ Bell public policy director Tom Selby said: “People making decisions about their pensions based on fear is clearly undesirable, particularly as such decisions are irreversible and can lead to significant financial harm.”
Selby added: “This year’s Budget has been mercifully quiet so far, but that doesn’t mean the spectre of pension tax raids has disappeared.”
That doesn’t mean taking money from a pension is always wrong. Many retirees need extra income to meet rising bills, help children onto the property ladder or adapt their home in later life. The key is to think beyond the next few years.
Life expectancy continues to rise, care costs can be substantial, and retirement can easily last 25 or 30 years. Money taken out today is money that won’t be growing inside a pension tomorrow.
Anybody considering a large withdrawal should first ask how much income they’ll need in later life, how much tax they may pay, and whether the money could be left invested for longer. If that all feels too complicated, consider taking advice.
