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Over-55s withdrew £2.3bn from their pensions in 2025, a five-year high, as growing numbers rushed to access their savings ahead of upcoming inheritance tax (IHT) changes.
According to Lubbock Fine Wealth Management, 116,000 people took lump sums as soon as they reached 55, the earliest age at which most can currently access their pension (this is rising to 57 from 2028). Withdrawals were up from £2.1bn the previous year, suggesting worries about future tax bills may be prompting more people to act.
Andrew Tricker, Chartered Financial Planner at Lubbock Fine Wealth Management, said: “As pensions will be dragged into the IHT net, many are rushing to take money out as soon as they can to help mitigate what they see as excessive tax bills for their dependents.”
“What is surprising is that this trend has spread to people who have decades left based on average life expectancy.”
Here, we explain what the inheritance tax changes could mean for you, and why rushing to take money out of your pension as soon as you can could have serious consequences for your retirement income later on.
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If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
What’s happening with pensions and inheritance tax?
Currently, pensions usually sit outside your estate for inheritance tax purposes. But from April 2027, unused pension funds and certain death benefits are expected to be included when calculating IHT, with this change announced by the Chancellor Rachel Reeves in her 2024 Budget.
This means some families could face a 40% tax charge on pension savings above the £325,000 threshold.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “However, it’s important to point out that the vast majority of estates are not expected to pay inheritance tax even after this change and there are an array of thresholds and gifting allowances that can help you manage any potential bill.”
You can find out more in our article Inheritance tax and pensions: what’s changing in 2027.
How can I reduce any potential inheritance tax (IHT) bills?
If you’re worried about leaving your loved ones with an IHT bill when you die, there are several ways you might be able to reduce any potential liability.
First, making gifts during your lifetime can help reduce the value of your estate. You can give away up to £3,000 each year tax-free, with larger gifts becoming exempt if you live for seven years after giving them. Learn more in our guide Which gifts are exempt from Inheritance Tax?
Second, if you aren’t already doing so, it may be worth considering saving into ISAs alongside pensions. While pensions offer upfront tax relief, ISAs provide tax-free growth and withdrawals, and may become more attractive for those concerned about passing on wealth. Read our article Is it better to save into an ISA or a pension? to find out more about the pros and cons of each.
Finally, it’s worth reviewing how and when you draw income from your pension, as from 2027, it could make more sense to use some of your pension savings earlier to reduce the value left in your estate. However, think very carefully before taking out a big lump sum, as there are several downsides that could catch you out.
Risks of taking money out of your pension early
One of the biggest risks of taking lump sums out of your pension is paying more tax than expected. While 25% can usually be taken tax-free, any additional withdrawals are treated as income. This can push you into a higher tax bracket, meaning a much larger portion of your withdrawal is lost to tax.
Another key issue is the impact on future pension savings. If you withdraw more than your tax-free lump sum, the amount you can pay into your pension reduces significantly from £60,000 to £10,000 as the Money Purchase Annual Allowance (MPAA) is triggered. This makes it much harder to rebuild your pension later. Find out more about the MPAA in our article What is the Money Purchase Annual Allowance?
However, perhaps the most obvious risk is that you’ll have less money to live on in retirement. Withdrawing funds early reduces the size of your pension pot and means you miss out on potential investment growth over time. This can significantly affect your long-term financial security. Learn more in our articles Four big risks of dipping into your pension and Six questions to ask yourself before taking money out of your pension.
Nicholas Clark, Chartered Financial Planner at Lubbock Fine, said: “In many cases, it makes sense to keep funds within the pension and draw them down gradually, being able to review retirement income over time and adjusting as needed is one of the main benefits of the pension freedoms introduced in 2015.
“Keeping funds within the pension also allows people to make greater use of the ‘gifts out of surplus income’ exemption. Income drawn from a pension can qualify as surplus income, meaning it can be passed on to loved ones without triggering an inheritance tax bill.”
A final thought…
While inheritance tax changes in 2027 may warrant a review of your plans, rushing to withdraw your pension savings could do more harm than good. Taking advice and looking at your finances as a whole is likely to be a far more effective approach, ensuring that you won’t run out of money too soon, and that you keep tax bills to a minimum.
Advertisement
If you’re considering seeking professional financial advice on the options available to you, nationwide advice firm HUB Financial Solutions is offering you a free initial consultation with an expert retirement specialist. There’s no obligation; it’s to help you understand your options and how our services work. If you choose to receive paid-for regulated advice, we’ll explain how that works and the fees involved.
HUB Financial Solutions is rated ‘Excellent’ on Trustpilot (Mar 2026). With investing, your capital is at risk.
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