Retirees withdrew over £22 billion from their pensions in tax-free lump sums in the 2025/26 tax year, up more than 20% compared to the previous tax year.
Pensioners took over £40 billion in tax-free lump sums in the last two tax years alone, Financial Conduct Authority data shows.
Under pension tax-free cash rules, you can normally withdraw up to 25% of your pension pots free from tax.
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Experts at AJ Bell say the boom in withdrawals may have been driven by fears of increased taxation at Labour’s first two Budgets when rumours circulated that then-chancellor Rachel Reeves would increase taxation on pensions.
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Between 2018/19 to 2022/23, FCA data shows the total taken in tax-free pension lump sums never exceeded £8.7 billion, but rose to just over £10 billion in the 2023/24 tax year, and then soared to £18.3 billion in 2024/25.
Despite speculation of a tax raid, Reeves left pension tax-free cash untouched in the 2025 Autumn Budget.
Michael Summersgill, chief executive of AJ Bell, said: “These figures should end any doubt about the real-world consequences of allowing pension tax speculation to run unchecked. The rush to take tax-free cash began in 2024 and the latest FCA data confirms another repeat around the 2025 Budget, just as pension providers warned.
“This trend is bad for households and bad for the economy – pulling billions of pounds out of pensions prematurely reduces the capital available for long-term investment.”
AJ Bell has urged the new chancellor John Healey to publicly commit to not making any major changes to pension tax-free cash and tax relief to avoid a similar rush before this year’s Budget.
“A chancellor focused on putting households on sound financial footing and boosting growth should see this as an open goal. Confirming pension tax stability would solve the problem overnight without a penny of new Treasury spending, while clearly signalling the government stands behind its promises to savers,” added Summersgill.
How tax-free pension lump sums work
You can usually take up to 25% of your pension pot out without having to pay any tax on the money, up to a maximum of £268,275. The minimum age you will be given this option is 55, although this is set to rise from April 2028, and you are able to withdraw your tax-free lump sum in one large payment or multiple smaller ones.
The 25% maximum is calculated from the total money you have in any of your pensions, not just one. For example, if you had £50,000 in one pension and £50,000 in another, the maximum lump sum you could take from either would be £25,000.
Income from the lump sum is not included in your tax-free personal allowance. Any money withdrawn from your pension over the 25% tax-free portion or £268,275 maximum will be taxed according to the tax band you are in.
The risks of withdrawing your pension lump sum
Having the option to take up to 25% of your pension pot as a lump sum can give you more freedom in retirement. But while the option being available can be useful, you should know the risks of taking money out of your pension too early.
Sarah Coles, head of personal finance at AJ Bell, said: “The vast majority of people take some tax-free cash from their pension, and millions do so before they reach retirement age.
“There will be some people who have drawn up their plans carefully, for whom this makes perfect financial sense. However, there are others taking it purely because of worries about what might lie in the Budget – particularly in the past two years – who could be doing immeasurable damage to their retirement income.”
For example, having a large pension pot means the effects of compound interest are stronger, and if you take money out of the pot, the returns you get from compound interest are lower, meaning your pension pot will grow slower.
Coles said: “If, for example, you had a pot of £400,000 at the age of 55, which grew untouched at 6% for 10 years, the pot could grow to £716,339. If you took the £100,000 and spent it, your £300,000 could grow to just £537,254 over a decade.”
She said other risks included taking a lump-sum too early because people “don’t trust the government not to mess with tax-free cash in the Budget”, and spending it before thinking about whether you would like an annuity instead.
Withdrawing and spending a quarter of your pension pot also means you will have less money to use later on in your retirement which increases the risk of outliving your retirement savings.
Meanwhile, Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The FCA’s data shows the enormous impact Budget speculation can have on people’s behaviour. Many people took money they didn’t need and when the anticipated announcement failed to materialise, they were left with few options.”
She warned that once you take the tax-free lump sum, you will not be able to put the money back into your pension without incurring extra tax if you have second thoughts.
That means if you have already used up your other tax-free allowances like your annual ISA allowance then the money you have taken out may be subject to capital gains and dividend tax. Meanwhile, leaving the money in cash means it will slowly be eroded away by inflation.
Morrissey said: “Building a pension takes years of disciplined investing and planning and this should not be put at risk by short term speculation. Pensions are the ultimate long-term investment, and people need a stable tax framework that allows them to make informed decisions and build their retirement pot with confidence.”
