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New figures have revealed an unprecedented rush by UK pension savers to access their 25% tax-free cash, with £18.08 billion withdrawn in the last financial year.
In many cases the withdrawals have been driven by fears over potential government tax changes and new rules on inheritance tax.
The surge has been described as a “slightly panicked dive into pensions,” with experts warning that some savers could be putting their long-term financial security at risk.
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The statistics for the 2024/25 financial year paint a startling picture. The total value of tax-free lump sums (technically called pension commencement lump sums, or PCLS) taken soared by over 60% compared to the previous year.
The key figures show:
Emma Sterland, chief financial planning officer at Evelyn Partners, who gained the figures from the Financial Conduct Authority, called the figures “quite startling”.
She said: “That withdrawals soared 72% more than £10 billion in the second half of the last financial year is an extraordinary increase... it seems certain some of this was prompted by changes, both actual and feared, to government policy on the taxation of pensions.”
Two main factors appear to be spooking pension savers.
The first, and most significant, is the ongoing speculation that the government could reduce the 25% tax-free cash allowance from its current maximum of £268,275. For years, this has been a popular benefit. The rumour, which spiralled in the run up to last year’s Budget and has resurfaced again this year, has caused anxiety among those yet to access their pot.
Some experts have warned that this change would be complex, unlikely to raise cash straight away, and might disproportionately affect public sector workers on defined benefit pensions.
But others point to the fact that pensions minister, Torsten Bell, who is also advising Rachel Reeves on the upcoming budget, has previously described the tax-free lump sum as “very generous, very regressive, and a strange incentive not to stagger your retirement income.” That was in a 2019 report, when he was chief executive of the Resolution Foundation think-tank.
Some savers may not have realised that it's unlikely that the right to tax-free cash would be removed completely. In 2024 Treasury officials explored what the impact would be of reducing the maximum amount to £100,000, before deciding not to make the change. A cap of £100,000 would only affect people with pots worth more than £400,000 - which is far more than the average pension pot. Office for National Statistics figures for 2020-2022 show that the average pension pot for those aged 55-64 is £137,800, and for those aged 65-74 it's £145,900.
The second driver of withdrawals is the change to inheritance tax (IHT) rules. Currently, most pensions sit outside of your estate for IHT purposes, making them an extremely tax-efficient way to pass on wealth, but this will change from April 2027. This has prompted some to withdraw money from their pension to gift to loved ones now.
As Sterland explains: “These concerns must have been a big driver behind the acceleration of PCLS withdrawals... on top of the incentive to draw down on pension pots that has been created by the inclusion of unspent pension assets in IHT liabilities from April 2027.”
While the fears driving this behaviour are understandable, experts warn of the significant dangers of reacting hastily without proper advice or guidance.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Tax-free cash can play a vital role in people’s retirement strategy - for instance, people may plan to use it to pay off a mortgage. However, it’s really important that you have a plan for how you are going to take it rather than as a knee-jerk reaction to speculation about what may happen in the Budget.
“Taking the cash solely in response to Budget speculation may be an action you later come to regret. If you are going to take tax-free cash then you need to have a plan for what you are going to do with it. Pensions are an enormously tax-efficient environment to grow your money and you need a long term view as to how you take it.”
Research from Legal & General has highlighted a ‘lottery effect,’ where sudden access to a large sum of money can lead to impulsive or unsustainable spending.
The study, published earlier this year, found that:
Taking large lump sums out of your pension could have severe consequences, even if it's tax-free. The research suggested that by doing this, many people could empty their pension pot by their late 70s, on average nine years before the end of their life.
Dr. Emma Hepburn, a clinical psychologist who worked on the research, explains: “Our biases can influence what we do with our money... if we view our money as a reward or bonus, we may be more likely to spend it, which can lead to what has been dubbed ‘the lottery effect’.
“Perceptions of risk also often come into decision making, and we tend to favour decisions that feel more certain. As a result, we can feel that having or using money in the here and now is less risky than waiting to access it, even though this may actually create more risk for our future selves.”
Withdrawing your tax-free cash is an irreversible decision, and taking cash out of its tax-efficient wrapper comes with consequences. Any money taken from a pension and held in a bank account or investment account could become subject to tax on savings interest, dividend tax, or capital gains tax, if you’re above your annual allowances. It would also potentially form part of your estate for IHT purposes.
Morrissey says: “In the run-up to the last Budget people rushed to take their tax free cash and then the change did not happen. Many thought they could simply cancel their instruction only for HMRC to confirm that they would not be able to do so - while reinvesting it back into their SIPP leaves them at risk of falling foul of pension recycling rules that could leave them with a nasty tax bill.
“Some will have been able to reinvest in a stocks and shares ISA but there will have been many who found themselves with money that they didn’t need to take and were now wondering what to do with it.”
For those considering a withdrawal now, Sterland offers a rule of thumb: “If you have a clear purpose for your tax-free cash and were thinking of taking it shortly anyway, then – if you believe there is a chance of it being restricted – there might not be much harm in accelerating that step by a year or two.“
She strongly advises against withdrawing the money if you don't have a plan for it. “Taking tax-free cash early, without a particular need for it, means that you are taking funds that are growing in a tax-protected environment to one where they could be subject to... taxation.”
The key message from all experts is clear: do not make a knee-jerk reaction. Before making any decisions about your pension, it is crucial to seek independent financial advice to understand the full implications for your personal circumstances.
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