Thousands of pensioners have been hit with unexpected tax bills from HMRC after making a common mistake with their pension withdrawals. The number of savers taking all the money out of their pension has surged by 29% since 2018, according to yearly data from the Financial Conduct Authority (FCA).
Sharp Rise in Full Withdrawals
In 2024-25, the number of people withdrawing their entire pension pot reached 462,160. Dale Critchley, policy manager at Aviva, warned: "While it might be tempting to cash it all in and spend it, or even save it elsewhere, taking a lot of money in one go could mean that you lose a big chunk of your pension to the tax man."
He added: "The reason we save in a pension is to provide ourselves with an income for when we are older and give up work, but we can only spend that saving once. Taking a big lump sum means we won't have as much to spend in old age."
Expert Advice on Managing Tax
Mike Ambery, retirement savings director at Standard Life, advised: "Spreading withdrawals over a number of years, or taking smaller amounts while leaving the rest invested, can help manage the tax you pay and make your savings last longer."
Under HMRC rules, you can take 25% of your pension pot tax-free when you retire. However, any withdrawals beyond this are taxable and could push you into a higher tax bracket. To avoid this, spread your withdrawals over several years throughout your retirement.
Example from HMRC
HMRC provides an example: "Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider will then take off the tax from the remaining £45,000."
When you can take your pension depends on your pension scheme's rules. It is usually 55 at the earliest. You might have to pay Income Tax at a higher rate if you take a large amount from your pension. You could also owe extra tax at the end of the tax year.
