More than 2,100 retirees who fully withdrew large pension pots have been hit with substantial HMRC tax bills, new analysis by Standard Life shows. The figures, drawn from Financial Conduct Authority (FCA) data, reveal that 392 people who cashed in pots of £250,000 or more faced minimum income tax bills of £98,700 each. A further 1,772 individuals withdrawing between £100,000 and £249,000 paid at least £27,400 each.
Combined, these withdrawals generated at least £87.2m in tax over a six-month period. Standard Life said the estimates are minimum figures, meaning the actual tax paid could be considerably higher for savers who had other taxable income.
The true cost of cashing in a pension
The 392 largest withdrawals, each exceeding £250,000, triggered a minimum estimated tax bill of £98,700. For those withdrawing between £100,000 and £249,000, the minimum tax charge was £27,400. In total, the 2,164 people in these two groups paid an estimated £87.2m in tax, according to the analysis.
These figures highlight how a single pension withdrawal can push savers into higher tax brackets, leaving them with far less than they might have expected from their retirement savings.
Why a simple withdrawal can sting
Mike Ambery, retirement savings director at Standard Life, said: “Life doesn’t always follow a set path, and when people reach the point of accessing their pension, there are often a lot of competing priorities.” He added: “For some, taking a larger amount upfront will feel like the simplest option, but it can come with a sting in its tail in the form of a higher tax bill than many expect.”
Ambery explained that a single withdrawal can quickly push people into higher tax bands. “What catches people out is how quickly a single withdrawal can push them into higher tax bands,” he said. “In some cases, a decision that feels straightforward in the moment can mean a significant portion of the money they’ve worked hard to build up ends up going to tax.”
How pension withdrawals are taxed
Under current rules, pension savers can take 25% of their pot as a tax-free lump sum. The remaining 75% is subject to income tax, with the first £12,570 of any taxable pension income also tax-free under the personal allowance.
Beyond that, basic rate taxpayers earning up to £50,270 a year pay 20% income tax. Income between £50,271 and £125,140 is taxed at the higher rate of 40%, while anything above £125,140 attracts the additional rate of 45%. Because a large pension withdrawal is added to other income in a single tax year, it can push a retiree into the 40% or 45% bands much faster than they might expect.
Inheritance tax changes could drive early withdrawals
Ambery also pointed to upcoming changes to inheritance tax, due to come into force in April 2027, as a factor that may encourage some people to access their pensions earlier. “For some, this prospect may lead to decisions about accessing their savings earlier than they otherwise would have,” he said.
However, he cautioned that early access can bring forward income tax liabilities. “It’s important to weigh it up carefully – taking money out sooner can mean bringing forward income tax liabilities, and in some cases paying more than expected.”
What retirees should consider
The analysis serves as a reminder that pension withdrawals are not tax-free beyond the 25% lump sum and personal allowance. Anyone considering drawing a large amount from their pension should model their likely tax position for the year, taking into account all other income. Taking smaller amounts across multiple tax years can reduce the overall tax charge, as can staggering withdrawals to stay within the basic rate band.
Standard Life’s findings come amid growing awareness of pension tax rules. With the inheritance tax changes on the horizon, more savers may face difficult decisions about when to access their retirement savings – and the tax consequences of doing so.
