Retirees cash out 100,000 more pensions in full – should you take the money?

Pensioners are completely cashing in more than 100,000 more pensions today than they were seven years ago when records began, according to new analysis.

Data published annually by the Financial Conduct Authority (FCA) shows since the tax year 2018/19, the number of people cashing their pensions in full each year has increased 29% – or by 105,038.

Withdrawing a pension in full – rather than just taking the 25% tax-free lump sum and then sticking to the 4% rule or even the 6% rule – can seem attractive, but it can be costly.

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For one thing it can trigger unexpectedly large income tax bills – the withdrawal is treated as income, so it can push savers into a higher tax bracket in a single year (and potentially fall foul of the 60% tax trap). This means a significant portion of their retirement pot may end up going straight to the taxman.

Georgie Edwards from TPT Retirement Solutions, a workplace pension provider that carried out the analysis, said the data “highlights the need for better guidance so retirees don’t erode their savings – or pay more tax than they need to”.

We look at ways to reduce your tax bill in retirement in a separate article.

Small pension problem

If more people are cashing their pensions in full, it suggests that increasingly the amount people have saved at the point of retirement simply isn’t big enough to offer meaningful income via pension drawdown.

By pot size, more than 300,000 pension pots withdrawn in full in 2024/25 were worth less than £10,000. A further 112,526 were worth between £10,000 and £29,000, the analysis found.

Looking across age brackets, there has been a 75% increase in 65 to 74-year-olds withdrawing their pensions in full between 2018 and 2025. For those aged 55 to 64, the rate of pensions being withdrawn in full rose by a lesser 15% over the same over this period.

Source: FCA

Edwards said: “The rise in people cashing in their pensions in full is a worrying signal about retirement adequacy in the UK. For many, it’s not a strategic choice but a sign their savings aren’t sufficient – and some may also be reluctant to consolidate pots, missing the chance to build a more sustainable income.”

Ad hoc withdrawals have also increased. The number of pension plans from which an ad hoc partial withdrawal was made in 2018/19 was 163,335. In 2024/25, this had reached 328,419 – marking a 101% increase. These types of withdrawals can also incur large tax bills.

“In some cases, savers are stuck in legacy products that don’t offer flexible options like phased drawdown or regular uncrystallised funds pension lump sum (UFPLS), effectively forcing higher withdrawals than they’d prefer and increasing their tax exposure,” Edwards added.

Source: FCA

Things to consider before withdrawing all of a pension

Withdrawing all of a pension in one go is a big decision. The money typically can’t be put back and there are often several tax implications. Ian Futcher, financial planner at Quilter, explains what you should consider before cashing in your retirement pot.

1. Higher income tax

As already mentioned, taking a whole pension pot may provide immediate access to cash, but many people underestimate the potential tax consequences. “Although 25% can usually be taken tax free, the remaining balance is taxed as income in the year it is withdrawn, which can unexpectedly push someone into a higher or additional rate tax band,” Futcher said.

2. Danger of running out of money

Pensions are designed to provide an income over what could be a retirement lasting 20 or 30 years. Fully withdrawing savings too early can leave people more financially exposed later in life, particularly as inflation and care costs remain ongoing concerns, Futcher pointed out.

3. Wealth taxes

“Money left within a pension continues to benefit from a tax-advantaged environment. Of course, some of those benefits can be retained if funds are moved into other wrappers such as ISAs. But, said Futcher, “large one-off withdrawals will often leave at least part of the money outside those protections and potentially exposed to income tax, dividend tax or capital gains tax over time”.

4. Managing inheritance tax

Pensions will fall within estates for inheritance tax purposes from 2027. However, that does not automatically mean emptying pension pots early is the right response, said Futcher: “Keeping funds within a pension can still offer valuable tax efficiency and long-term planning flexibility.” For example, those focused on passing on wealth can consider other options, such as gifting from surplus income.