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A sharp rise in pension withdrawals has sparked concerns that some savers may be at risk of running out of money later in life.
The overall value of money withdrawn from pension pots increased to £70.88 billion in 2024/25, according to the Financial Conduct Authority’s latest annual retirement income data, up from £52.15 billion in 2023/24 – an increase of 35.9%.
Andrew King, retirement specialist at wealth management firm Evelyn Partners, said: “You would expect there to be some year-on-year increase in the amounts taken from defined contribution pension pots as the population ages and more people each year are reaching retirement, or at least the point where they want to access their pension.
“However, the 36% increase from 2023/24 to 2024/25 is substantially greater than increases seen in previous years. For instance, the amount taken in 2023/24 was 20.6% higher than in 2022/23. This surge in pension withdrawals looks like it has been driven by some factors outside of the demographic and structural.
“First, concerns among savers over the Labour government’s intentions around the taxation of pensions after it came to power in July 2024. Second, the measure announced at the October 2024 Budget is to bring unspent pension assets into the scope of inheritance tax from April 2027.”
There were also fears that the Chancellor would announce further changes to pension taxation in last year’s November Budget, although fortunately these proved unfounded.
Separate HMRC data published in summer 2024 showed that seven out of 10 people taking flexible payments from their pensions were younger than 65.
Alice Guy, head of pensions and savings at Interactive Investors, said: “The raising of the State Pension age means people often have a gap between winding down in the workplace, perhaps going part-time, and receiving the State Pension. We sadly see that many people in their mid-sixties are struggling to make ends meet before they receive the State Pension. This means that many older workers are facing a huge dilemma, often needing to focus on immediate needs over long-term financial goals.”
Worryingly, thousands of pension withdrawals were performed without people seeking financial advice. Those thinking about withdrawing from their pension pots need to be aware of the significant financial risks they face in doing so.
Stephen Lowe, group communications director at Just Group, said: “We really don’t know how many people understand the longer-term consequences of taking their first flexible payment. So, there’s one simple piece of advice for everybody considering dipping into their pension pot – either seek professional, regulated advice or take advantage of the free, independent and impartial pensions guidance from government-backed Pension Wise.”
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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 are the downsides of withdrawing my pension early?
If you’re planning to take money out of your pension earlier than you’d planned to cover rising living costs, or for any other reason, make sure you’re fully aware of the potential financial consequences of doing so.
You could be hit with higher tax bills
Those aged 55 or over (rising to 57 from 2028) can withdraw 25% of their pension pot free of tax – but for any withdrawals over this amount, pension withdrawals are considered part of your income and taxed accordingly.
Not only does this mean the value of your withdrawal will be cut down by the taxman, but combined with your current income, it could even push you into a higher bracket and subject you to a higher rate of income tax altogether.
For example, John is 60 years old and earns £35,000 a year. He decides to take £50,000 out of his pension which is valued at £100,000. This is how much tax he’d have to pay:
| Salary | £35,000 |
| Pension: taxable part | £37,500 |
| Total income | £72,500 |
| Take off: personal allowance | -£12,570 |
| Taxable amount, after allowances | £59,930 |
Then, applying tax:
| First £37,700 @ 20% (basic rate) | £7,540 |
| Remaining £22,230 @ 40% (higher rate) | £8,892 |
| Total tax bill | £16,432 |
If John hadn’t cashed in his pension, he would have paid only £4,486 in income tax for the year. So, the extra tax he’ll have to pay as a result of his pension withdrawal amounts to £11,946.
Bear in mind that if your income exceeds £100,000, you will also start to lose your £12,570 tax-free allowance for that year – it goes down by £1 for every £2 you earn over the £100,000 threshold, and at £125,140 or more, it disappears completely.
Make sure you have done the maths and have fully considered the tax implications of any pension withdrawals you may be considering. If you are 55 or over and are thinking about taking a tax-free lump sum from your pension, read our article Should I take my tax-free pension cash at 55? for more information.
You could lose your Annual Allowance
If you take more than your tax-free lump sum from your pension, then you will see your Annual Allowance – the amount you can contribute to your pension each year and still benefit from tax relief – drop from £60,000 to £10,000, known as the Money Purchase Annual Allowance (MPAA).
This could be a roadblock to anyone planning to take some of their pension now and rebuild their retirement savings later on, once they are more financially stable, as it enormously reduces the rate at which you can grow your pension.
Stephen Lowe of Just Group said: “The underlying worry is that people may be taking more out of their pension but are unaware of the long-term consequences. They may have plans to increase their savings in the future to make up for what they’ve withdrawn, but by triggering the MPAA, they significantly limit the tax relief future pension savings will attract – making that saving much harder work.”
Read more about pension allowances in our articles What is the Money Purchase Annual Allowance? and How do pension allowances work?
You could end up leaving your loved ones a bigger inheritance tax bill
Any money that is left in your pension when you die – for now at least – is normally free of inheritance tax. As a general rule, other savings and investments are subject to inheritance tax, but pensions aren’t.
That means if you have a defined contribution pension and you die before you reach the age of 75, you can usually pass your pension tax-free to a nominated beneficiary. If you have not started taking money from your pension, this can be taken as a lump sum payment.
If you were taking an income from your pension using flexible drawdown or flexi-access drawdown at the time, your dependents can still receive a tax-free income from the remainder of your pension. If you die when you’re over the age of 75, your pension pot will still transfer tax-free, but your dependents will have to pay income tax at their marginal rate of income tax, on any income they receive from it, in the same way as you would have.
However, these rules are set to change from April 2027, when pensions will be brought into the scope of inheritance tax for the first time. The pension pots being targeted by the inheritance tax proposals currently include both defined contribution benefits being paid as income to a dependant through an annuity or via drawdown and defined benefit pension lump sum death benefits.
According to Standard Life, one in five (21%) pension savers are considering taking out an annuity in retirement to navigate the changes planned for 2027, whilst 31% are thinking about making financial gifts to family more regularly to avoid an IHT charge on their pension. You can find out more about these in our article Which gifts are exempt from Inheritance Tax? and about how annuities work in our guide Is now a good time to buy an annuity?
Find out more in our guide What happens to my pension when I die?
You’ll have less to live on in retirement
The most obvious risk involved with taking money out of your pension early is simply that you will have less to live on during your retirement. Not only can it be really hard to rebuild a depleted pension thanks to the MPAA, but having less money in your pot means that you lose out on the benefits of compound interest.
Compound interest is when income is reinvested to generate more income and gains grow on gains.
Rather than dipping into your retirement savings, you might want to look at ways you can cut costs and boost your income. Our article 21 ways to cut costs has lots of suggestions that may help you reduce your outgoings, while you should also ensure you are claiming any benefits you are entitled to. Read more about the logistics and risks of taking some of your pension early in our article Should I use my pension to boost my income?
Where to seek financial advice
It’s undoubtedly an extremely difficult time for many, and the current uncertainty surrounding what might – or might not – be included in November’s Budget isn’t making things any easier.
Mr King, of 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.
“Unplanned or ill-conceived pension withdrawals can be subject to big tax charges, can remove funds from an advantageous tax environment, and could reduce your future standard of living in retirement, especially if they involve selling investments amid a market downturn.
“So at the very least do a lot of research, but ideally seek professional advice, especially if you are dealing with a large pot of savings.”
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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.
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