With their £250,000 pensions, thousands of savers choose cash over tax-free funds and worry about IHT

With a record £70 billion taken out of pensions in the year ending March, experts are worried that savers are acting rashly and without consulting others, which could have an impact on their long-term wealth

According to new data, thousands of older adults with larger pensions have taken money out of their pots since Labour came to power because they were worried about changes to inheritance tax laws and restrictions on access to tax-free money.

According to Financial Conduct Authority (FCA) data released today (16 September), there was a spike in the number of people accessing their pensions in the 12 months leading up to March 2025, particularly those with a pension pot exceeding £250,000.

The number increased specifically during the six months from April to September 2024, which coincided with concerns that the first budget of the new Labour government would include measures like capping or eliminating tax-free pension lump sums.

However, the number increased once more between October 2024 and March 2025, presumably in response to the budget's announcement that pensions would be subject to the inheritance tax (IHT) net starting in April 2027.

When pension pots were moved into drawdown but not completely emptied out, a total of over 53 billion was taken out in the 12 months ending March 2025.

For the first time, the total amount of pension withdrawals (including those from individuals who purchased an annuity or cashed out their entire pot, which is more common for smaller pots) exceeded 70 billion in the year ending March. This represents a 36% increase over the previous year.

"These figures graphically demonstrate how uncertainty about pensions and taxation can move the market," stated Steve Webb, partner at pensions consultants LCP. It is extremely disheartening that public policy uncertainty is having such a significant impact on consumer behavior, considering that pensions ought to be a long-term enterprise.

FCA & LCP are the source.

According to Rob Hillock, head of personal financial planning at independent financial services firm Broadstone, while demographic shifts would indicate that pension funds will be accessed in greater amounts each year, the magnitude of this year's jump indicates that there may be more behavioral shifts at work.

"Reforms like the inclusion of pension assets in inheritance tax may be encouraging more savers to front-load withdrawals or spend their pension," he continued.

Cash withdrawals that are tax-free double.

According to data released by the Financial Conduct Authority, pension withdrawals of tax-free money have more than doubled over the past two years.

During 2024 - 2025, 18.3 billion in tax-free cash was taken out. In comparison to the 11.3 billion recorded in 2023 - 2024, this represents a 63 percent increase and more than doubles the 8 billion withdrawn in 2022 - 2023, a rate that had been steady for the preceding five years.

According to Stephen Lowe, group communications director at retirement specialist Just Group, "Pension savers view tax-free cash as a very valuable benefit, but there is obviously a factor causing withdrawal rates to rise.

One could argue that as living expenses rise, more people may be forced to use their pension funds to cover their expenses. There may also be some worry that governments seeking to increase tax revenue to strengthen their national coffers may find it easy to target tax-free money.

Hurry in order to drawdown.

According to FCAs Retirement Income Market data, sales of income drawdown plans increased by 25% to almost 350,000 in 2024 - 2025. Approximately 60% of these plans were used to access tax-free funds without turning on the ability to actually withdraw an income from the pot and use the funds in retirement.

According to AJ Bell's head of public policy, Rachel Vahey, the drawdown numbers "may reflect that more wanted to bank their tax-free cash under the current rules before any possible tax regime changes were introduced."

"The fact that 60% of those going into drawdown decided to keep their cash but not make any withdrawals indicates that the majority did not have an urgent need for income," she continued.

At 88,430, an annuity sales increase of 8% was also recorded, the highest since the FCA began releasing the data ten years ago.

Out of the 962,000 pensions accessed during the year, 462,000 (48 percent) were full cash withdrawals. On average, the value was 12,300, but 712 had pensions worth more than 250,000, and about 20,000 had pensions worth more than £50,000.

Additionally, the percentage of people receiving large sums of money from their drawdown pots has gone up. 53 percent of pots are currently paying out income rates greater than 8 percent of their value, up from 48 percent the previous year.

What's perhaps most concerning is the ongoing decline in the use of professional assistance, such as regulated financial advice or even the free, independent, and unbiased Pension Wise service. "Accessing pensions is a significant life decision, and it is alarming that so many people are doing so without official assistance," Lowe stated.