A notable increase in the number of UK savers opting to withdraw their entire pension pots has been observed, with data from the Financial Conduct Authority (FCA) revealing a significant shift in retirement planning behaviour. In the 2024-25 tax year, over 462,000 pensions were fully cashed in, marking a 29% rise compared to the 357,000 withdrawals recorded in 2018-19. This trend highlights a growing preference among some individuals to take their retirement savings as a single lump sum rather than through other methods such as annuities or drawdown.
The FCA's findings indicate that a substantial portion of these full withdrawals involve relatively modest sums. More than 300,000 of the pensions fully cashed out in 2024-25 were valued at less than £10,000, with an additional 112,526 pots ranging between £10,000 and £29,000. This suggests that for many, these lump sums may not represent a primary retirement income source but perhaps funds to address immediate financial needs or to consolidate smaller pension holdings.
Age demographics also show a shift, with a 75% increase in full pension withdrawals among 65 to 74-year-olds between 2018 and 2025. For those aged 55 to 64, the rate of full withdrawals rose by 15% over the same period. This suggests a broader trend across pre-retirement and early retirement age groups towards accessing pension funds upfront. Workplace pension provider TPT Retirement Solutions commented that this data could indicate that some individuals have not accumulated sufficient savings to generate a meaningful income through traditional pension drawdown methods.
While the option to take up to 25% of a pension pot tax-free (up to a combined limit of £268,275 across all pensions) remains, the remaining 75% is subject to income tax. This means that withdrawing a significant sum in one go could push individuals into a higher tax bracket, resulting in a larger tax bill than if the money were taken over several years. For example, cashing in a £30,000 pension would see £7,500 tax-free, but the remaining £22,500 would be taxable, potentially leading to a tax liability if it exceeds the personal allowance or pushes the individual into the 40% higher rate band.
Financial experts caution that while a lump sum can offer immediate flexibility, it carries several risks. These include the potential for running out of money later in retirement, the erosion of purchasing power due to inflation if the money is not invested, and the inability to typically pay the money back into a pension without facing penalty tax charges under 'pension recycling' rules. Furthermore, increasing income or savings through a large withdrawal could impact eligibility for certain state benefits.
The earliest age at which a defined contribution pension can typically be accessed is 55, a threshold set to rise to 57 from April 2028. Savers have various options, including purchasing an annuity for a guaranteed income, moving funds into drawdown to remain invested while taking an income, or taking some or all of the pot as cash. Each option has different implications for tax, investment growth, and long-term financial security.
Source: Financial Conduct Authority