Savers race to withdraw pension lump sums over tax concerns
UK pension savers rushed to withdraw their tax free cash over the past financial year, as they braced themselves for possible changes to tax rules on retirement funds.
The amount withdrawn from UK pensions in tax-free lump sums rose more than 60 per cent in the 2024/25 financial year to £18.1bn, up from £11.25bn the prior year, according to a freedom of information request submitted by wealth manager Evelyn Partners to the FCA.
Emma Sterland, chief financial planning officer at Evelyn Partners said, “These are quite startling figures showing that the country’s pensions savers have been in an unprecedented rush to take their tax-free lump sums.”
“You can’t help feeling that much of this increase is a slightly panicked dive into pensions sparked by uncertainty over policy change.”
Pension lump sum concerns
The striking surge came after the government announced pensions would be subjected to inheritance tax by April 2027 in the last October Budget, upending many savers’ financial plans for retirement.
The total amount taken by all savers in the six months leading up to and including March 2025 was £10.43bn, a 36.5 per cent increase on the £7.65bn taken in the six months preceding the Budget.
Similarly, the number of savers withdrawing their tax free lump sum surged by 33 per cent during the six months leading to and including March 2025, to 111,869.
Sterland said, “It seems certain some of this was prompted by changes, both actual and feared, to government policy on the taxation of pensions, as well as pressures such as the cost of living and higher interest rates.”
Tax choice and 2025 forecast
The government estimates that its decision to bring pensions within inherited estates will raise a total of £1.5bn with the Treasury by 2030.
It also believes it will bring roughly 1.5 per cent more estates within the scope of death duties, on top of the current 4 per cent.
However, with an estimated black hole of more than £20bn in public finances, the Treasury is scrambling to find where even more revenue could be raised ahead of looming Autumn Budget on 26 November.
This includes speculation that the government will reduce the size of the tax-free lump sum of £268,275 for 25 per cent of funds that retirees can withdraw after the age of 55.
Sterland said, “A reduction in tax-free cash would feel to many who have yet to take their PCLS, whether they are retired yet or not, like the goalposts have been moved halfway down the pitch and would be deeply unpopular.”
“A danger for the government is that tinkering with tax-free cash could weaken pension saving at a time when they have launched a commission to look at how it can be stimulated.”