Pension Withdrawals on the Rise – What You Should Think About Before Taking Cash Out

More people are dipping into their pensions than ever before. In 2024/25, pension savers withdrew around £18.1 billion in tax-free cash — almost 60% more than the year before. Rising household costs and concerns over changing rules have driven many to take money sooner rather than later.

While that might feel like a quick fix, it’s a decision that can affect your retirement for decades.

What “Tax-Free Cash” Really Means

From age 55 (rising to 57 in 2028), you can usually take up to 25% of your pension pot as a tax-free lump sum. But anything above this is treated as income — which means a withdrawal could suddenly push you into a higher tax bracket, leaving you with a bigger bill than expected.

The Hidden Risks

• Less for later – pensions are designed to support you for 20–30 years in retirement. Taking too much too soon reduces that safety net.

• Tax shocks – a large withdrawal in one go could move you into a higher rate of tax without you realising.

• Changing rules – from 2027, pension pots will be included in inheritance tax calculations. Future changes could alter how withdrawals are treated.

Why People Miscalculate

It’s easy to slip up when:

• assuming allowances or tax rules will stay the same

• underestimating how long the money needs to last

• forgetting that future withdrawals may be taxed differently

• rushing decisions due to rising costs or fear of rule changes

Smarter Ways to Take Money Out

• Go steady – smaller, regular withdrawals often work better than one big lump sum.

• Mix income sources – combining pensions with ISAs or savings can help keep tax bills down.

• Think long term – leaving money invested can give it more time to grow.

• Plan ahead – good financial planning now can avoid nasty surprises later.

Looking After Your Future

Taking money out of your pension isn’t just another financial decision — it’s one that shapes your future security. Before withdrawing, think about both the tax impact today and the income you’ll need tomorrow. A careful approach now can give you flexibility in the short term and peace of mind in retirement.