Pension withdrawals have spiked in the wake of the Government’s announcement of a tax raid on inherited pots.
The amount taken out of retirement funds jumped by almost a quarter to £5billion in the first three months of this year, according to latest official figures.
There was also a 13 per cent increase in the number of people making taxable withdrawals – meaning over and above their 25 per cent tax-free lump sums – to 672,000 compared with 2024.
Rachel Reeves said in last autumn’s Budget that unspent money in pension pots is going to become liable for inheritance tax like other assets, such as property, savings and investments, from spring 2027.
Inheritance tax is levied at 40 per cent on estates above a certain size. Scroll down to find out if you will leave your beneficiaries enough to be affected.
Inheritance tax raid: The Chancellor announced in last autumn’s Budget that money remaining in pension pots is going to be hit by death duties
Those who die after the age of 75 will see their pots hit by both inheritance tax and income tax levied on beneficiaries.
This is because their beneficiaries are still going to have to pay their normal income tax rate of 20 per cent, 40 per cent or 45 per cent on pension withdrawals too.
For higher rate taxpayers, the total tax will be 64 per cent for pension pots charged 40 per cent death duties and 40 per cent income tax on withdrawals.
The new HMRC figures revealed a marked rise in the amount people in their 80s – who are most likely to be impacted by inheritance tax changes, taking cash out of pensions in in 2024-25.
People aged 65-plus took more cash out of their pensions across the board in the year to April 2025, but older people were more likely to do so, the HMRC figures show.
Among octogenarians here was an 80 per cent jump in the amount taken to £360million, compared with a more modest rise 25 per cent rise the year before.
The sum withdrawn by people aged 75-80 rose 50 per cent to £1.3billion last year, also versus a 25 per cent increase the year before.
The Government has said it wants wants pensions to be used for their intended purpose of funding retirement, not transferring wealth.
And the recent withdrawal trends are likely to reflect a change in behaviour by people who had built up pensions intending to pass them to the next generation, who have decided to start spending or gifting the money now instead – especially if they are older already.
But there are fears that in future people might withdraw cash unnecessarily, or be deterred from paying into pensions, potentially damaging their retirement prospects due to the inheritance tax changes.
The latest pension contribution figures pre-date Chancellor Rachel Reeves’s announcement of an overhaul of inheritance tax, and show a 13 per cent annual rise to £14.6 billion in 2023-24.
‘The amount contributed to pensions has continued to increase – that is encouraging, given the UK’s well-publicised retirement savings gap,’ says Adrian Murphy, chief executive of Murphy Wealth.
‘But it’s worth remembering that these statistics are from before the Government’s decision to include pensions in people’s estate for inheritance tax purposes.
‘It is quite likely we may see these figures plateau, or potentially decline, in the next set of figures.’
He noted the increase in the number of people opting to flexibly access their pension, and says while it is good they have the scope to do this as they want, it’s important to do it in a sustainable way to fund your whole retirement.
Murphy says pensions are still the most effective way to save for retirement so savers should continue to contribute whatever they can afford.
Claire Trott, head of advice at St. James’s Place, says: ‘While it’s positive to see that the amount of overall pension contributions across the wider population has increased, the slight decline in the number of individuals contributing is rather worrying.
‘Ultimately, people will only continue to contribute to their pensions if they continue to trust the pensions system.
‘Constant speculation and changes to pension tax rules are damaging and can impact savers’ views of pensions as long-term, stable savings vehicle.
‘Looking forwards, maintaining the current tax reliefs and allowances will be crucial to ensure that more individuals have adequate savings for their future.’
