Pensioners could be caught out by a tax rule when accessing their retirement savings, potentially leading to a hefty bill from HMRC. Retirement experts at Standard Life warn that key thresholds must be considered when drawing down from pensions.
Risk of Higher Tax Bands
Mike Ambery, retirement savings director at Standard Life, said: "Life doesn't always follow a set path, and when people reach the point of accessing their pension, there are often a lot of competing priorities." He added: "For some, taking a larger amount upfront will feel like the simplest option, but it can come with a sting in its tail in the form of a higher tax bill than many expect."
A key danger is unknowingly moving into a higher tax rate. Ambery explained: "What catches people out is how quickly a single withdrawal can push them into higher tax bands. In some cases, a decision that feels straightforward in the moment can mean a significant portion of the money they've worked hard to build up ends up going to tax."
Five-Figure Tax Bills
Standard Life analysed Financial Conduct Authority data from October 2024 to March 2025 for people who fully cashed in a pension pot worth £100,000 or more. There was a 20% increase in HMRC tax take from these withdrawals compared to the same period a year earlier.
Almost 400 people cashed in pension savings worth at least £250,000, likely facing at least £98,700 in income tax. Another 1,772 people fully cashed in pots worth between £100,000 and £249,000, with an HMRC bill of at least £27,400.
Tax Thresholds to Remember
Ambery pointed to two key figures: "Income above £50,270 moves into higher-rate tax, and above £125,140 into additional rate (although the banding works differently in Scotland). What we often see is that a single withdrawal can push people across both thresholds in one go, which significantly increases the amount of tax they pay."
In England, Wales and Northern Ireland, income above the higher rate threshold is taxed at 40%, up from the basic rate of 20%. Income above the additional rate is levied at 45%. Once income exceeds £100,000, for every £2 earned above that, £1 of the personal allowance is lost. The personal allowance means zero tax on the first £12,570 of income. This allowance tapers to zero at £125,140.
Advice for Savers
Ambery encouraged a long-term approach to avoid surprise tax bills. He said: "Taking a step back and working out how a withdrawal fits alongside your other income can help avoid this. Spreading withdrawals across tax years is one of the simplest ways to manage this more effectively. Importantly, pension flexibility means tax-free cash doesn't have to be taken as a single event. Taking your time and seeking guidance or advice where possible can help you make the most of the options available and manage your tax position more effectively."
