A new analysis of Financial Conduct Authority (FCA) figures show that from October 2023 to March 2024, 292 people cashed in pension pots of £250,000 or more, resulting in significant tax liabilities.
For many, the decision to withdraw their pension pots is prompted by the desire for easy access to cash, but experts warn that the tax hit can often overshadow the benefits of keeping sums invested to grow.
These high withdrawals are leading to tax bills in the region of £98,700 per person, or more, depending on other income sources, according to the figures.
For those taking amounts closer to the £174,500 midpoint of that range, the tax burden is even steeper – a minimum of £64,700.
People can usually take up to 25 per cent of the amount built up in any pension as a tax-free lump sum. The most you can take is £268,275.
“It’s impossible to know whether their individual circumstances warranted them taking such a big tax hit, but for the vast majority of people, it’s something they’ll want to avoid.”
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This shift means that those encashing larger pots are now subject to a higher tax burden.
Mr Ambery said: “This change in the tax threshold has had a significant impact on those withdrawing larger pots, especially those in the higher income brackets.Pension pots are treated as income by HMRC once the 25 per cent tax-free cash is taken, so those with substantial pots could face a tax hit that wipes out years of hard-earned savings.”
Strategies to avoid excessive tax payments
One of the easiest ways to minimise tax payments is to work within your annual personal allowance, which for the 2025/26 tax year stands at £12,570. Mr Ambery said: “The simplest way to avoid paying too much tax is to only take out what you need.
2. Combine tax-free and taxable withdrawals
Another way to keep taxes under control is by combining taxable and tax-free portions of your pension pot. You don’t have to take all of your tax-free lump sum in one go – you can usually take it in chunks over a number of months or years.
Those with ISAs should consider tapping into these funds first before touching their pension pot. Unlike pensions, ISAs are not taxed when withdrawals are made. By using ISA savings in the early years of retirement, individuals can avoid drawing on their pension and incurring a tax hit.
4. Consult a pension provider or financial adviser
HM Treasury spokesperson said: “This Government is on the side of pensioners and savers. That’s why we encourage pension saving by providing around £70bn a year in pension tax relief to help ensure that people have an income, or funds on which they can draw, throughout retirement.
“For the majority of savers, pension contributions made from income during working life are totally tax-free. It’s also why last month we raised the state pension, which is worth around £1,900 over the next five years.”
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