Fears of inheritance taxes cause a five-year high in the rush to take an early pension

Before the retirement funds were subject to inheritance tax last year, thousands more 55-year-olds took billions more from their pensions as soon as they could

A Freedom of Information (FOI) request to HMRC indicates that the number of people taking their tax-free pension lump sums as soon as possible has reached a five-year high.

The earliest age at which you can receive your tax-free pension lump sum is currently 55 (it will rise to 57 in April 2028). According to FOI data, up to 116,000 British citizens over 55 chose to do this in 2024 - 2025 in an attempt to avoid impending changes to inheritance tax (IHT) regulations.

This represents a five-year high for the earliest possible withdrawals of the pension tax-free lump sum, up from 110,000 in 2023-2024.

In 2024-2025, the total amount taken out by individuals over 55 also hit a five-year high of 2.3 billion, up from 2.1 billion the year before.

Inheritance tax pension rule change.

According to Andrew Tricker, chartered financial planner at Lubbock Fine Wealth Management, which filed the FOI, more people have been withdrawing lump sums from their pensions after it was announced in the 2024 Autumn Budget that unused pensions would be subject to inheritance tax of up to 40% starting in April 2027.

"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, as pensions will be dragged into the inheritance tax net," stated Tricker. The "

The fact that this trend has extended to people who, according to average life expectancy, have decades left is unexpected.

The UK's life expectancy at birth is approximately 83 years for women and 79.1 years for men, according to data from the Office for National Statistics for the years 2022 to 2024. For women, life expectancy at age 65 is approximately 21.2 years, while for men, it is approximately 18.7 years.

However, Nicholas Clark, a chartered financial planner at Lubbock Fine, predicted that as the new IHT changes approach, the number of people taking money out of their pot early will probably increase even more, despite the risks of outliving their pensions.

"As the deadline approaches, more people will access their pension funds, especially those who can do so without incurring significant tax obligations," stated Clark.

Many people created and maintained enormous pots to transfer wealth to their loved ones without paying IHT because pensions were thought to be very tax-efficient. Now, a few of them have begun to veer off course, frequently without giving it much thought. The "

To lower their IHT bills, some are opting to transfer these funds to their families while they are still alive, Clark continued.

The seven-year inheritance tax rule states that gifts made more than seven years prior to death are typically exempt from inheritance tax.

Warning about pension withdrawals.

However, people over 55 are cautioned not to decide to move money elsewhere without careful planning because it can be challenging to return money taken out of a pension.

"It is concerning that more people are using their pension funds so long before the typical retirement age," stated Tricker. Too much is being taken too soon by some. They might not have enough money in retirement if they don't plan ahead. A "

"People are living longer, and retirement health and care expenses are highly erratic. Retirees require a financial cushion because of this. Increasing income after you stop working is much more difficult. The "

Maintaining funds within the pension, comparing drawdown providers, and gradually withdrawing funds can often make sense. One of the primary advantages of the pension freedoms implemented in 2015 is the ability to monitor retirement income over time and make necessary adjustments.

"Maintaining pension funds also enables individuals to utilize gifts from surplus income exemption more extensively. Pension income may be considered surplus income, which means it can be transferred to family members without incurring inheritance taxes, as noted by Clark.

"We continue to incentivize pension savings for their intended purpose of funding retirement instead of being openly used as a vehicle to transfer wealth," an HM Treasury spokesman stated. "After these and other changes, more than 90 percent of estates each year will continue to pay no inheritance tax." A "