Hundreds of thousands of pension savers are putting their finances at risk, it is being warned.
New figures show 462,160 pension plans were withdrawn in full when first accessed during the 2024-25 tax year, up from 357,122 in 2018-19 – a rise of almost 30%. The trend has prompted warnings that some retirees could face unexpected tax consequences and restrictions on future pension saving if they take too much money too quickly. Under current rules, most people can benefit from tax relief on pension contributions worth up to £60,000 a year, known as the annual allowance.
However, once someone flexibly accesses taxable income from a defined contribution pension, they can trigger the Money Purchase Annual Allowance (MPAA), reducing that limit to £10,000 a year. The restriction is designed to stop people withdrawing pension money and then recycling it back into a pension to gain further tax relief.
Figures from the Financial Conduct Authority’s show the number of pension pots being fully withdrawn has increased by more than 100,000 a year since 2018-19. More than 300,000 of the pots cashed in during 2024-25 were worth less than £10,000, while a further 112,526 were valued between £10,000 and £29,000.
Georgie Edwards, DC proposition associate director at TPT Retirement Solutions, said the figures “highlight the need for better guidance so retirees don’t erode their savings – or pay more tax than they need to”.
The warning echoes long-standing guidance from consumer champion Martin Lewis, who has repeatedly urged savers not to treat pension withdrawals as “free money” and to understand the tax consequences before taking large lump sums.
While up to 25% of a pension can usually be taken tax-free up to a maximum of £268,275, the remainder is treated as taxable income.
This means withdrawing an entire pension pot in one tax year can push some savers into higher tax bands and leave them facing a larger bill from HMRC.
There is one notable exception to the MPAA rule. Pension pots worth £10,000 or less can generally be withdrawn under the “small pots” rules without triggering the reduction in future pension allowances.
The FCA’s wider retirement income figures show pension freedoms continue to be heavily used. Nearly one million pension plans were accessed for the first time in 2024-25, while the total value withdrawn from pension pots rose to £70.9bn.
Experts say anyone considering cashing in a pension should carefully weigh the benefits of an immediate lump sum against the potential loss of future retirement income, tax-efficient investment growth and pension tax relief.
Which? Money has identified the key things to consider when taking tax free cash out of a pension pot.
The money typically can’t be put back
If you change your mind and wish to pay money back into your pension, you could be hit with a penalty tax charge for breaching ‘pension recycling’ rules.
You could face a large tax bill
You can take 25% of your pension tax-free, but the remaining 75% is taxed as income. Depending on how much you withdraw, you could be pushed into a higher tax bracket, leaving you with an even bigger tax bill.
You could run out of money
Taking too much cash now could leave you financially vulnerable later on in retirement.
Your money could be eroded by inflation Leaving the money invested inside a pension gives it the potential to grow tax-free and keep pace with rising costs.
Your benefits could be affected
Taking money from your pension will increase your income or savings, which could affect any state benefits you’re entitled to claim. More information can be found here.
Antonia Medlicott, Founder and Managing Director of financial education specialists Investing Insiders, has shared her thoughts on people withdrawing their lump sums, explaining why pension withdrawals are not always the best idea financially.
“Whether or not cashing out your pension is the right move varies dramatically depending on personal circumstances,” Antonia explains.
“For smaller pots, where you have other sources of income for retirement, cashing them out can often be the simplest and quickest approach.
“With pots that have much higher values, that’s when things start to get more complicated. In these situations, cashing them out isn’t often the best decision for your money. Instead, you should be thinking about how you can withdraw the money in the most tax-efficient way possible, whilst ensuring that you’re set up for the rest of your retirement.”