This article was last updated July 2026. Tax rules and pension regulations are subject to change. Always check current HMRC and government guidance before making decisions.

Tax-free lump sum pension withdrawals rose more than 60% in the 2024/25 financial year to £18.1bn, compared to £11.25bn the previous year, Financial Conduct Authority figures show. Full figures for 2025/26 are not yet published. Many savers took their tax-free cash ahead of the Autumn Budget 2025, amid speculation that the rules might change.

Currently, pensions can be accessed from age 55. The minimum pension age is scheduled to rise to 57 on 6 April 2028, which may be relevant for those approaching 55 in the next two years. Individual circumstances vary and the timing of any withdrawal decision is a significant one. Regulated financial advice is recommended before acting.

For many, this represents a vital source of cash to pay off mortgages, cover living costs or help adult children with property deposits.

But first-time withdrawals are often taxed using an emergency code, which assumes the individual will continue drawing the same amount every month. This can mean paying too much tax at first. You can claim it back using an HMRC form (P55, P53Z or P50Z, depending on your situation), or HMRC will adjust it at the end of the tax year. In 2025, HMRC repaid about £187 million to people who claimed back overpaid tax on pension withdrawals, and more than £1.5 billion since 2015.

Pension inheritance rules add another layer of complexity. Currently, pots passed on after death can usually be taken tax-free if the saver dies before 75. If death occurs later, beneficiaries must pay income tax at their own rate.

From April 2027, unused pension pots will count towards your estate for inheritance tax. This became law in the Finance Act 2026. Personal representatives will be responsible for working out and paying any inheritance tax due. Death-in-service benefits are excluded.

Following the Autumn Budget 2025, the 25% tax-free lump sum remains capped at £268,275 for the 2026/27 tax year (Source: gov.uk, Autumn Budget 2025). This limit was maintained despite speculation ahead of the Budget that it might be reduced.

Emma Sterland, chief financial planning officer at Evelyn Partners, which uncovered the figures in a Freedom of Information request, said the rush was “unprecedented”, adding: “You can’t help feeling that much of this increase is a slightly panicked dive into pensions sparked by uncertainty over policy change.”

What are the risks of withdrawing early?

While taking money now locks in the 25% tax-free entitlement under current rules, there are downsides:

• You could push yourself into a higher income tax bracket by taking more than you need.

• Withdrawn money may lose its tax-advantaged growth if not reinvested.

• Accessing a pension early could affect entitlement to some benefits.

• Taking cash too soon could leave you short later in retirement.

The chart below shows The State Pension compared with the Retirement Living Standards for a minimum, moderate and comfortable retirement, for single people and couples.

What if rules do change?

The next Budget is on 28 October 2026. Even if changes are announced, they may not take immediate effect. In the past, major pension reforms have included transition periods. However, with the public finances under strain, a sudden change can’t be ruled out.

Savers unsure about whether to withdraw funds now should seek regulated financial advice.

Read more:

• The amount of inheritance tax charged on gifts, year by year – and how to give money tax-free

• Pension tax 'disgrace' as £1bn overpaid by people withdrawing lump sum - how to claim refund

• Lost pensions: how to find yours