UK pension savers withdrew a record £22.4 billion from their retirement pots in the last tax year, according to new figures from His Majesty's Revenue and Customs (HMRC). Withdrawals in the first quarter of this year alone jumped 18% to £5.9 billion, with the average withdrawal amount at £7,700. The number of individuals accessing their pensions also rose by 15% to 770,000 during the same period.

These figures encompass taxable withdrawals, excluding the 25% tax-free lump sums, as reporting these by pension schemes to HMRC is optional. However, evidence from last summer and autumn indicated a surge in people taking tax-free cash, fueled by speculation of a budget raid that ultimately did not materialize.

Pension experts suggest that the increase in taxable withdrawals could be attributed to a growing number of individuals reaching retirement with defined contribution pension pots. Additionally, persistent cost-of-living pressures are likely compelling savers to access their funds.

For wealthier individuals, accessing pension funds before spring 2027 may also be a strategy to avoid potential inheritance tax liabilities. Many savers who had intended to pass on their pensions tax-free to the next generation are now seeking alternative ways to circumvent the impending 40% levy on such transfers.

Experts caution that these decisions are irreversible and could negatively impact long-term retirement finances, particularly if the funds are not allocated for specific purposes or to clear debt. Withdrawing funds prematurely can also mean forfeiting valuable tax-efficient investment growth, especially if the money is simply placed in a standard current or savings account.

Government Pension Costs and Workplace Savings

The HMRC figures also indicate a rise in the net cost to the government for pension top-ups. Tax relief and National Insurance contributions related to pensions reached £53.8 billion in 2024-2025, an increase from £53.4 billion the previous year. Including employer payments, the total pension-related bill escalated by nearly £5 billion to £83.9 billion.

Current rules allow for unlimited contributions to salary sacrifice schemes, which offer National Insurance savings. However, from April 2029, a £2,000 annual cap will be imposed on these tax-advantaged schemes.

Despite the rising costs, governments have historically been hesitant to reduce generous pension tax relief due to the significant political backlash such a move would likely provoke. The practical implementation of such changes is also considered complex and time-consuming.

Separate data from the Department for Work and Pensions (DWP) shows that approximately 80% of employees were saving into pensions in 2025. The auto-enrollment opt-out rate remains stable, with a slightly higher rate of around 11-12% observed among new scheme members. Total annual workplace pension savings reached £166.1 billion in 2025, a substantial increase from 2012 when adjusted for earnings. Savings in private pensions also grew to £15.9 billion in 2024-2025, up from £14.6 billion the prior year.

Expert Concerns on Withdrawal Sustainability

David Brooks, head of policy at pensions consultancy Broadstone, noted that the continued growth in taxable withdrawals is expected given the increasing number of people retiring with defined contribution pots. However, he highlighted the 18% year-on-year increase in withdrawals during the first quarter of 2026 as particularly striking, suggesting that financial pressures are influencing savers' decisions.

Brooks expressed concern about the lack of conclusive evidence regarding how savers are accessing their pensions and whether these withdrawals are sustainable. He emphasized that while pension freedoms offer flexibility, they also increase the risk of savings being depleted too rapidly, especially if individuals underestimate their retirement duration.

Maurice Titley, commercial director at pension services firm Lumera, echoed these concerns, stating that while some withdrawals are part of planned retirement strategies, others may not fully consider the long-term impact on retirement income. He also pointed to a potential tax trap where a large lump-sum withdrawal could push individuals into a higher tax bracket, resulting in an unexpectedly large tax bill.

Steve Webb, a partner at pensions consultant LCP and a pensions columnist, commented on the impact of frozen tax thresholds, which have pulled millions more individuals into higher income tax rates. This, he explained, increases the tax relief individuals receive on pension contributions, contributing to the rising cost of tax relief for the government. However, he downplayed the likelihood of significant government cuts to pension tax relief before the next election, citing political difficulties and the complexity of implementing such changes.