Flexible pension withdrawals reached a record £22.4 billion in the 2025/26 tax year, according to HMRC. This marks an increase of £3.8 billion from the 2024/25 financial year and £7.1 billion since 2023/24.
The rise in withdrawals comes ahead of new rules taking effect from 6 April 2027, which will see most unspent pensions passed on included in the estate for inheritance tax (IHT) purposes, potentially taxed at 40%.
Many over-55s are reportedly withdrawing pension money sooner, often to assist younger generations. More than half of first-time buyers received financial help from family in 2025, totalling £8.3 billion, according to Savills. A May 2026 Rathbones survey also found that 67% of parents and grandparents funding private school or university costs are motivated by the IHT change to provide further financial support during their lifetime.
However, financial experts are advising caution against making hasty decisions. Michelle Holgate, director and wealth manager at RBC Brewin Dolphin, noted that the upcoming inclusion of pensions in estate calculations is already influencing planning conversations, but stressed the importance of considering various factors.
Key considerations include potential issues with care costs, as giving away lump sums could affect eligibility for local authority support. Nick Clark, chartered financial planner at Lubbock Fine Wealth Management, warned that money given away cannot be retrieved later if needed.
Withdrawing large amounts can also lead to significant income tax bills. While up to 25% of a withdrawal may be tax-free, the remainder is added to other income, potentially pushing individuals into higher tax brackets of 40% or 45%. This can also reduce tax-free savings allowances and, for those with taxable income exceeding £100,000, lead to an effective 60% tax rate on income between £100,000 and £125,140. Taking more than the 25% tax-free allowance can also trigger the Money Purchase Annual Allowance, limiting future annual contributions to £10,000.
Inheritance tax rules, including the seven-year rule for gifts, also require careful consideration. Sean McCann, chartered financial planner at NFU Mutual, highlighted that lump sum gifts remain in the estate for seven years and effectively use up the £325,000 tax-free allowance first. Gifts from regular income that do not impact the normal standard of living are immediately IHT-free, provided good records are kept.