Rush to take pension lump sum early hits five year high over inheritance tax fears
Thousands more 55 year olds took billions more from their pensions as soon as they could last year before the retirement pots become subject to inheritance tax from next April. We look at what to consider if you are cashing in.
The number of people taking their tax-free pension lump sums as early as they can has hit a five year high, according to a Freedom of Information (FOI) request to HMRC.
Currently the earliest you can take your pension tax-free lump sum is age 55 (rising to 57 in April 2028). As many as 116,000 Brits aged 55 years old opted to do this in 2024/25, the FOI data, as they rushed to beat incoming inheritance tax (IHT) rule changes.
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The total value withdrawn by those aged 55 also reached a five-year high of £2.3bn in 2024/25, up from £2.1bn the previous year.
Inheritance tax pension rule change
More people have been taking lump sum withdrawals from their pensions following the announcement in the 2024 Autumn Budget that unused pensions will face inheritance tax of up to 40% from April 2027, said Andrew Tricker, chartered financial planner at Lubbock Fine Wealth Management, which submitted the FOI.
Tricker said: “As pensions will be dragged into the inheritance tax net, many are rushing to take money out as soon as they can to help mitigate what they see as excessive tax bills for their dependents.”
“What is surprising is that this trend has spread to people who have decades left based on average life expectancy.
Based on 2022 to 2024 Office for National Statistics data, life expectancy at birth in the UK is around 83 years for women and 79.1 years for men. Life expectancy at age 65 is around 21.2 years for women and 18.7 years for men.
But despite the risks of outliving their pensions, the number of people withdrawing money from their pot early is likely to rise further as the new IHT changes draw closer, said Nicholas Clark, chartered financial planner at Lubbock Fine.
Clark said: “As we get closer to the deadline, more people will tap into their pension pots – particularly those who can do so without creating a big tax liability.
“Pensions were widely seen as highly ‘tax-efficient’, so many people built and preserved very large pots to pass on wealth to their loved ones free of IHT. Some of them have now started to change course, often without fully thinking it through.”
Some are choosing to pass these funds on to their families during their lifetime to reduce IHT bills, added Clark.
Gifts made more than seven years before death generally fall outside inheritance tax, known as the seven year inheritance tax rule.
Pension withdrawal warning
But over-55s are being warned to avoid making decisions to transfer funds elsewhere without proper planning, as money withdrawn from a pension is difficult to put back.
Tricker said: “It is worrying that more people are tapping their pension pots so long before the usual retirement age. Some are taking too much, too soon. Without careful planning, they could find themselves short of money in retirement.”
“People are living longer, and health and care costs are very unpredictable in retirement. That is why retirees need a financial buffer. Income is much harder to increase once you stop working.”
In many cases, it can make sense to keep money within the pension, shop around for the best draw down provider, and draw it down gradually. Being able to review retirement income over time and adjust as needed is one of the main benefits of the pension freedoms introduced in 2015.
“Keeping funds within the pension also allows people to make greater use of the ‘gifts out of surplus income’ exemption. Income drawn from a pension can qualify as surplus income, meaning it can be passed on to loved ones without triggering an inheritance tax bill,” Clark pointed out.
A spokesperson for HM Treasury said: “We continue to incentivise pension savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth – more than 90% of estates each year will continue to pay no inheritance tax after these and other changes.”
