Immediate pension withdrawals hit five-year high amid IHT concerns

The number of people accessing their pension savings as soon as they are able to has reached a five-year high, amid growing concerns about upcoming inheritance tax (IHT) changes, research from Lubbock Fine has shown.

The wealth management firm revealed that 116,000 individuals withdrew lump sums from their pensions at age 55 last year, up from 110,000 the previous year.

The total value withdrawn by this group also increased to £2.3bn, compared to £2.1bn a year earlier, highlighting a shift in saver behaviour.

Lubbock Fine chartered financial planner, Andrew Tricker, argued the trend has been driven, in part, by policy changes announced in the Autumn Budget 2024, which confirmed that pensions would fall within the scope of IHT from April 2027.

“As pensions will be dragged into the IHT net, many are rushing to take money out as soon as they can to help mitigate what they see as excessive tax bills for their dependents,” he added.

“What is surprising is that this trend has spread to people who have decades left based on average life expectancy."

Meanwhile, Lubbock Fine chartered financial planner, Nicholas Clark, suggested that withdrawal activity was likely to increase further as the 2027 deadline approached.

“As we get closer to the deadline, more people will tap into their pension pots - particularly those who can do so without creating a big tax liability,” he said.

“Pensions were widely seen as highly ‘tax-efficient’, so many people built and preserved very large pots to pass on wealth to their loved ones free of IHT.

"Some of them have now started to change course, often without fully thinking it through.”

Clark added that some individuals were choosing to pass funds on during their lifetime, taking advantage of gifting rules that allow transfers made more than seven years before death to fall outside the IHT net.

The findings come amid broader concerns across the pensions industry about member behaviour and long-term retirement adequacy, particularly as savers respond to evolving policy and economic pressures.

Recent analysis has shown that while defined contribution (DC) pension outcomes have improved in recent periods, inflationary pressures and rising living costs continue to pose risks to retirement incomes, potentially limiting individuals’ ability to rebuild savings if funds are accessed early.

With this in mind, Tricker warned that withdrawing pension savings too soon could leave individuals financially vulnerable later in life.

“It is worrying that more people are tapping their pension pots so long before the usual retirement age. Some are taking too much, too soon,” he said.

“Without careful planning, they could find themselves short of money in retirement.”

He added that increasing longevity and uncertainty around future health and care costs made it essential for retirees to retain sufficient financial buffers.

“People are living longer, and health and care costs are very unpredictable in retirement," Tricker continued.

"That is why retirees need a financial buffer. Income is much harder to increase once you stop working."

Clark also emphasised that, in many cases, retaining funds within a pension and drawing them down gradually remained the most effective approach.

“Being able to review retirement income over time and adjust as needed is one of the main benefits of the pension freedoms introduced in 2015," he said.

He added that this approach could also support more efficient estate planning, as income drawn from a pension may qualify as ‘surplus income’ and be passed on without triggering an IHT charge.

This article originally appeared in our sister publication Pensions Age.

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