Last year savers cashed in £2.3 billion from their pensions as soon as they were able to, amid fears over the chancellor’s raid on retirement pots.
From next April pensions will become liable for inheritance tax for the first time, meaning that one in five families could face tax bills on money left by parents or grandparents.
It has led to a surge in the number of savers taking their tax-free lump sums early to protect their wealth. You can usually take 25 per cent of a pension tax-free from the age of 55 (rising to 57 in 2028).
Some 116,100 55-year-olds took out some or all of their tax-free lump sum in the 2024-25 tax year, up 38 per cent from the 84,200 in 2020. The total withdrawn was £2.26 billion, up from £2.1 billion the year before.
The 25 per cent tax-free lump sum is capped at £268,275 and there were rumours ahead of her past two budgets that the chancellor, Rachel Reeves, could reduce the cap to £100,000. The inheritance tax change on pensions was announced in her 2024 budget.
At the moment pensions can be passed on to children or other relatives free of inheritance tax. If you die before 75, they will also be free of income tax for your beneficiary. From April 6, 2027, however, pensions left to anyone other than a spouse or civil partner (who can inherit all your assets inheritance tax-free) could be taxed at 40 per cent.
The first £325,000 value of an estate is usually exempt from inheritance tax — £500,000 if the estate is worth less than £2 million and includes a main home left to a direct descendant. Gifts made seven years before death also generally fall out of the inheritance tax net.
Andrew Tricker from the financial adviser Lubbock Fine Wealth Management said: “With pensions being dragged into the inheritance tax net, many are rushing to take money out of their pensions as soon as they can to help mitigate what they see as excessive tax bills for their dependants.
“What is surprising is that this trend has spread to people who have decades left to live, based on average life expectancy.”
Nicholas Clark, also from Lubbock, said: “As we get closer to the deadline, more people will tap into their pension pots, particularly if they can do it without creating a big tax liability. Pensions were widely seen as highly tax-efficient, so many people built and preserved very large pots that they could pass on to their loved ones free of inheritance tax. Some have now started to change course, often without fully thinking it through.”
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The Times’s Smarter With Money campaign is calling for ministers and political parties to make long-term commitments not to tinker with the tax rules on savings, pensions and investments to avoid savers being spooked into making detrimental financial decisions.
Tricker said: “It is worrying that more people are tapping into their pension pots so long before the usual retirement age. Some are taking too much, too soon. Without careful planning, they could find themselves short of money in retirement. People are living longer, and health and care costs are very unpredictable in retirement. That is why you need a financial buffer. Income is much harder to increase once you stop working.”
HMRC said: “The government wishes to encourage pension saving, to help ensure that people have an income, or funds on which they can draw, throughout retirement. This is why, for the majority of savers, pension contributions are tax-free.”