Pension savers in the UK are tapping into their retirement funds at a record pace, withdrawing a total of £22.4 billion in the last tax year, according to new figures from His Majesty's Revenue and Customs (HMRC).

The first quarter of the current year saw a notable surge, with withdrawals climbing 18% to £5.9 billion. This period also witnessed a 15% increase in the number of individuals accessing their pensions, reaching 770,000, with the average withdrawal amounting to £7,700.

These figures primarily represent taxable withdrawals. It is important to note that the 25% tax-free lump sum option is not always reported to HMRC by pension schemes, meaning the total amount accessed could be higher. There was anecdotal evidence of a rush to take tax-free cash in the preceding summer and autumn, fueled by speculation of a budget raid that ultimately did not materialize.

Contributing Factors to Increased Withdrawals

Pension experts suggest that the rise in taxable withdrawals can be attributed to several factors. The growing number of individuals reaching retirement with defined contribution pension pots is one reason. However, persistent cost-of-living pressures are also believed to be a significant driver, compelling savers to access their funds to meet immediate financial needs.

For wealthier individuals, another motive may be to withdraw funds from pensions to spend or gift to family members before new inheritance tax rules take effect in spring 2027. These upcoming changes could make pension funds liable for a 40% levy, prompting some to seek ways to avoid it. Many individuals had intended to pass down their pension pots tax-free to the next generation, but the impending rule change has altered these plans, leading them to explore alternative strategies.

Financial advisors have warned that the decision to take early pension withdrawals is irreversible and could negatively impact long-term retirement finances, particularly if the funds are not earmarked for specific purposes or invested wisely. Tapping into pensions early can mean missing out on valuable tax-efficient investment growth, especially if the money is simply placed in a standard current or savings account.

Government Costs and Pension Landscape

The increasing withdrawals coincide with a rise in the net cost to the government of supporting pensions. Tax relief and National Insurance top-ups for pensions reached £53.8 billion in the 2024-2025 financial year, up from £53.4 billion the previous year. When employer contributions are included, the total government expenditure on pensions soared by nearly £5 billion to £83.9 billion.

Currently, there is no upper limit on contributions made through salary sacrifice schemes that benefit from National Insurance savings. However, this perk is set to be capped from April 2029, limiting contributions to £2,000 via these schemes. While past Chancellors have shied away from reducing pension tax relief due to the potential revenue gains versus the significant political backlash and implementation complexities, the rising cost may present future challenges.

Separate data from the Department for Work and Pensions (DWP) indicates that approximately 80% of employees were saving into pensions in 2025. The auto-enrolment opt-out rate has remained stable, though it stands at around 11-12% for new savers. Total annual workplace pension savings in 2025 reached £166.1 billion, a substantial increase from 2012 when adjusted for inflation. Savings in private pensions also saw an increase, rising to £15.9 billion in 2024-2025 from £14.6 billion the prior year.

David Brooks, head of policy at pensions consultancy Broadstone, commented that while the growth in taxable withdrawals is partly expected due to more people retiring with defined contribution pots, the 18% year-on-year increase in the first quarter of 2026 is notable. He expressed concern about the lack of conclusive evidence on how savers are accessing their pensions and whether these methods are sustainable, warning that pension freedoms, while flexible, increase the risk of savings being depleted too rapidly if individuals underestimate their retirement duration.

Maurice Titley, commercial director at pension services firm Lumera, added that while some access their pensions as part of a planned strategy, others may not fully consider the long-term impact on their retirement income. He also highlighted a potential tax pitfall, where taking a large lump sum could inadvertently push an individual into a higher tax bracket, resulting in a substantial tax bill.

Steve Webb, a partner at pensions consultant LCP, noted that frozen tax thresholds and allowances have led to more people paying higher rates of income tax, which in turn increases the tax relief received on pension contributions and drives up the overall cost of tax relief for the government. He also pointed out that frozen personal allowances have contributed to a steep rise in the number of pensioners paying income tax, significantly increasing their tax burdens. Webb downplayed the likelihood of immediate government action to curb pension tax relief, citing the political difficulties and technical complexities involved, suggesting the government may need to accept the rising cost for the time being.