.png)
Savers withdraw £91bn from pension pots after IHT fears
Withdrawals from pension pots hit £91bn in a single year as pension savers pulled out £91bn as concerns about inheritance tax and possible curbs on tax free withdrawal limit mount.
The total value withdrawn from pension pots increased by 21.7% to £91.2bn in the year ending 31 March 2026, up from £74.9bn in 2024-25, show latest figures from the Financial Conduct Authority (FCA). What is most stark is this number is up 70% on the 2023-24 figure of £53.6bn.
Tax free cash withdrawals hit £22bn in 2025-26, up from £18.3bn the previous year, and double the amount withdrawn over the previous two-year period.
Changes to inheritance tax (IHT) with pension pots drawn into the 40% net are spurring savers to make earlier decisions about their withdrawals, with the tax free nature of the excess funds going to be taxed from next April, just six months away. Meantime owner managed businesses and farms also lost their IHT tax breaks to a great extent due to changes to business and agricultural property relief (BPR/APR).
The total number of pension plans accessed for the first time increased by 7.4% to 1.04m in the last tax year, compared with 974,990 the previous year, the FCA added, but warned only a third of people took regulated financial advice.
Nearly two thirds (64.5%) of those who entered drawdown took tax free cash via a pension commencement lump sum (PCLS), up 2.6% from 61.9% the previous year.
The proportion of pots accessed with a value of £250,000 or more also increased, reaching 8.6%, compared with 7.2% the previous year, and 4.8% in the year ending 31 March 2024, before Labour came into government.
When former chancellor Rachel Reeves put in motion plans to strip back the benefits of salary sacrifice pension arrangements in the last Budget, with a new cap of £2,500 due to come into effect from April 2029, this just pushed savers to review their pension planning.
Andrew King, retirement specialist at Evelyn Partners, said the level of withdrawals of tax-free cash lump sums was ‘startling’.
‘What is interesting and revealing is the outsized growth in “pension commencement lump sum” withdrawals – taking your tax-free cash - since April 2024,’ he said.
‘If we add these two most recent years together and compare them to the previous two years, the results are startling. From April 2024 to March 2026, some £40.38bn was withdrawn in tax-free cash lump sums – a 109% increase on the £19.30bn from April 2022 to March 2024.’
The number of pots where only tax-free cash was taken increased 60.8% over the same period, compared to a 23.8% in the overall number of pots accessed for the first time.
The combination of future tax concerns about the government’s general direction of travel on tax and impact of new rules set to take effect in less than six months is creating concern, and shaping pension savers’ decisions. But there are serious tax implications if the wrong decisions are taken.
While billions of pounds is being withdrawn tax free, there are potential tax risks.
King warned: ‘Unplanned or ill-conceived pension withdrawals can be subject to big tax charges, can remove funds from an advantageous tax and investment environment, and could reduce your future standard of living in retirement, especially if they involve selling investments amid a market downturn.
‘However, with the possible double-taxation of a pension pot inherited from someone aged 75 or older from April 2027 – as the beneficiary could also pay income tax at their marginal rate as they withdraw cash – it must be recognised that a major incentive will exist among some savers to spend down or to gift their pension pots. And it can certainly make sense for many of this age to take their tax-free cash as this benefit would disappear at death and would not be available to the beneficiary.’
Analysis by NFU Mutual found that some estates could pay IHT and income tax combined bills of up to an effective tax rate of 91% depending on the age of the inheritor.
Sean McCann, chartered financial planner at NFU Mutual, said: ‘The changes from April will mean some families will be hit with a triple tax blow, through a combination of inheritance tax on the pension, loss of the tax break on the family home and additional income tax if their loved one dies after age 75.
‘There are steps you can take to mitigate the impact, including ensuring you take your tax-free lump sum before age 75; while it may still be subject to inheritance tax it will avoid an additional income tax charge.’
The FCA also highlighted an increase in interest in annuities, with purchases up 13%, fuelled by higher values and wider tax concerns.
Useful reading
How to avoid a large tax bill when cashing in pensions | 29 Jul 2026
Tax on multiple pension pots will create admin chaos | 22 Apr 2026
Comments