Pension pot withdrawals rise by 60 per cent as people fear an Inheritance Tax bill

In the last 12 months, there has been a 60 per cent rise in pension pot withdrawals. In total, over £18 billion in cash sums have been withdrawn by concerned pensioners and savers.

This rise has likely been caused by the Inheritance Tax (IHT) announcements during the 2024 Autumn Budget, in which the Chancellor Rachel Reeves confirmed unused pension pots will be added to the value of an individual’s estate from 2027.

This has prompted people to plan early and, in many cases, withdraw a percentage of their pension pot early to protect their estate and mitigate the risks of IHT.

Why are more individuals withdrawing from their pension pots?

There are clear signs that the 2024 Autumn Budget has sparked major concerns and prompted individuals to take action to ensure they don’t become liable for an IHT bill.

The figures highlight this as in the six months up to and including March 2025, £10.43 billion was withdrawn, a 36.5 per cent increase on the six months before the 2024 Autumn Budget.

In addition to this, in that very same six-month period up to and including March 2025, the number of individuals withdrawing from their pension pot increased by 33 per cent.

IHT reforms have made their mark on individuals who are tackling the new regulations head-on. The IHT announcements in the last Autumn Budget included the IHT nil-rate band remaining frozen at £325,000 until 2030.

It also included confirmation that unused pensions will be classed as part of an individual’s estate from 2027. We are likely to see more individuals considering withdrawing from their pension, especially with the 2025 Autumn Budget just around the corner, taking place on 26 November.

It remains to be seen what will be confirmed, but expect the Chancellor to possibly look at other IHT reforms as she bids to balance the Government’s books, fill the current economic black hole, and stick to her own tight fiscal rules around tax.

What do I need to consider before withdrawing from my pension pot?

There are plenty of things to consider before you decide to withdraw cash from your pension pot.

It will help ease IHT concerns by reducing the value of your estate. You will need to consider factors such as where to put that cash sum and potentially distributing their inheritance to their beneficiaries.

The big benefit of withdrawing from your pension pot is up to a limit, and it is tax-free, which helps you mitigate IHT challenges. Under law, anyone aged 55 and over can currently withdraw 25 per cent of their pension pot up to the tax-free limit of £268,275.

Withdrawing early also gives you an opportunity to bequeath some of that cash sum to beneficiaries within your estate.

However, you need to be aware of the current seven-year gift rule in place. This law regulates that if you pass away during the seven years following a beneficiary receiving their inheritance, they could be liable to pay some of that back to HM Revenue and Customs (HMRC).

Furthermore, withdrawing early gives you much less to live on long-term, and you need to place that cash somewhere, whether that is a bank account or a savings account.

That in itself brings the risk of a tax charge, and while an Individual Savings Account (ISA) is one option to explore, the maximum you can deposit is £20,000, so you need to carefully consider all the options before taking a significant sum out of your pension pot.

Finance experts can help you make the right choice

Given how important the decision is to withdraw from your pension pot, speaking with a financial expert can help ease any concerns and help you make the right choice.

They will explain to you the IHT laws in place and whether you are potentially liable for an IHT bill in the future. They will also offer tailored advice and support that ensures you understand all the factors involved in deciding to withdraw from your pension.

It’s a crucial decision, and finance experts will support you every step of the way and help you make the right choice.

For tailored tax advice and support, contact us today.