Thousands of savers with £250k pensions take cash over tax-free money and IHT fears

Thousands of over-55s with larger pensions have pulled money out of their pots since Labour took power, over fears about limits to access to tax-free cash and changes to inheritance tax rules, new figures have suggested.

There was a surge in people accessing their pensions – especially those with more than a £250,000 pension pot – in the 12 months to March 2025, according to Financial Conduct Authority (FCA) data released today (16 September).

Specifically the number went up in the six months between April and September 2024 – coinciding with fears the first Budget of the new Labour government would include measures such as capping or scrapping tax-free pension lump sums.

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But the number went up again in October 2024 to March 2025, seemingly in response to the Budget announcement pensions would be included in the inheritance tax (IHT) net from April 2027.

Overall more than £53 billion was taken out in the 12 months to March 2025 in cases where pension pots were moved into drawdown but not fully emptied out.

The total figure for pension withdrawals during the year to March – which includes for people who bought an annuity or who cashed out their entire pot, which is more typical for smaller pots – surpassed £70 billion for the first time, a 36% increase on last year.

Steve Webb, partner at pensions consultants LCP said: “These figures show graphically how uncertainty about pensions and tax can move the market. Given that pensions should be a long-term business, it is deeply disappointing that consumer behaviour is being driven so profoundly by uncertainty around public policy.”

Source: FCA & LCP

Rob Hillock, head of personal financial planning at independent financial services consultancy Broadstone, said while demographic changes would suggest that increasing amounts of pension money will be accessed year-on-year, the size of this year’s jump suggests additional behavioural changes may well be at play.

“Reforms such as the inclusion of pension assets in inheritance tax may be encouraging more savers to spend their pension or front-load withdrawals,” he added.

Withdrawals of tax-free cash double

Withdrawals of tax-free cash from pensions have more than doubled in the last two years, the figures from the Financial Conduct Authority have also revealed.

A total of £18.3 billion of tax-free cash was withdrawn in 2024/25. This is a 63% rise on the £11.3 billion recorded in 2023/24 and more than double the £8bn withdrawn 2022/23 – a rate that had been consistent for the previous five years.

Stephen Lowe, group communications director at retirement specialist Just Group, said: “Tax-free cash is considered a hugely valuable perk by pension savers but there is clearly something driving withdrawal rates higher.

“On the one hand, rising living costs could be forcing more people to dip into their pension money to pay the bills. There may also be an element of concern that tax-free cash may be an easy target for governments wanting to boost the tax take to boost the country’s coffers.”

Rush for drawdown

The FCA’s Retirement Income Market data also revealed sales of income drawdown plans rose by 25% to nearly 350,000 in 2024/25, about 60% of them to access tax-free cash without switching on the facility to actually draw down an income from the pot and use the money in retirement.

Rachel Vahey, head of public policy at AJ Bell, said the drawdown figures were “perhaps reflecting that more wanted to bank their tax-free cash under the current rules before any possible tax regime changes were introduced”.

“This is borne out by 60% of people entering drawdown choosing to take their cash but no drawdown withdrawals, suggesting most had no immediate need for an income,” she added.

Annuity sales also rose 8% to 88,430, the highest since the FCA started publishing the data a decade ago.

Full cash withdrawals made up 462,000 (48%) of the 962,000 pensions accessed during the year. Although the average value was £12,300, some 20,000 were pensions worth more than £50,000 and 712 were pensions worth more than £250,000.

The proportion taking high levels of income from their drawdown pots has also increased. Now 53% of pots are paying out income rates of more than 8% of their value, compared to 48% paying out that level of income last year.

“Perhaps most worrying is that use of professional help such as regulated financial advice or even the free, independent and impartial Pension Wise service is continuing to slip. Accessing pensions is a major life decision and it is concerning so many are doing it with no formal support,” Lowe said.