October 9, 2026/
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Taking money out of a pension can feel like a sensible response to changing tax rules. But a withdrawal made to avoid a future inheritance tax charge could create an immediate income tax bill or leave less money to fund retirement.
The Financial Conduct Authority (FCA) reports that the total value withdrawn from pension pots reached £91.2bn in the year to 31 March 2026, up 21.7% on the previous year. Most unused pension funds and pension death benefits are due to enter the scope of inheritance tax from 6 April 2027. The FCA figures show how much was withdrawn; they do not establish why individual savers made those decisions. FCA
The value withdrawn rose from £74.99bn in 2024/25 to £91.24bn in 2025/26. Just over 1.04 million pension plans were accessed for the first time, an increase of 7.4%. These are plans, not individual savers: one person can hold several pensions.
Among plans entering drawdown, 64.5% involved a pension commencement lump sum, commonly called tax-free cash, compared with 61.9% a year earlier. Only 30.8% of plans accessed for the first time involved a plan holder who had taken regulated advice. The data cannot tell us whether tax concerns, retirement needs or other circumstances drove the rise. FCA
From 6 April 2027, most unused pension funds and pension death benefits will be included when calculating a deceased person’s estate for inheritance tax (IHT). That does not mean every inherited pension will face a 40% charge. The result depends on the whole estate, available allowances and exemptions, and who receives the benefits. Death-in-service benefits from registered pension schemes are excluded under the published measure. GOV.UK
Beneficiaries may face a separate income tax charge. Where a pension holder dies aged 75 or over, inherited pension payments are generally subject to income tax when paid to a beneficiary. Depending on the circumstances, both IHT and income tax may therefore be relevant. Simply adding their headline rates together will not produce a reliable tax bill. GOV.UK
Families with farms or qualifying business interests should also review the changes to agricultural and business property relief that took effect on 6 April 2026. Those reliefs have their own conditions and need to be considered alongside the pension position. gov.uk
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There is no general rule requiring you to take tax-free cash before turning 75 or before April 2027. Under current rules, you can usually take up to 25% of your pension tax-free, subject to an overall lump sum allowance of £268,275 for most people. Individual protections can change that amount. The April 2027 IHT measure does not itself announce a cut to the lump sum allowance. gov.uk
Consider a saver who takes £100,000 of tax-free cash and leaves it in a bank account. The withdrawal may be free of income tax, but the cash may form part of their estate for IHT. If they give it away, the gift rules, including the potential seven-year period, need checking. Taking taxable pension income can also increase their income tax bill and, in some cases, restrict future tax-relieved pension contributions. GOV.UK
The planned salary sacrifice change is separate. From April 2029, the National Insurance advantage on pension contributions made through salary sacrifice will be limited to the first £2,000 a year. It concerns contributions, not the April 2027 treatment of pension death benefits. gov.uk
Start with what your pension needs to provide throughout retirement. Then model the IHT position of your whole estate, the income tax effect of each proposed withdrawal, your available tax-free cash allowance and any gifts you intend to make. Business owners and farmers should also check whether their assets qualify for the relevant IHT reliefs.
Tax advice should be coordinated with regulated pension and investment advice where a decision involves drawdown, annuities or investment suitability. A large withdrawal may be right for a particular family, but the national figures alone are not a reason to make one.
The £91.2bn figure shows a substantial rise in pension withdrawals. The question for each saver is whether taking cash now improves their position after accounting for retirement income, income tax, IHT and family circumstances. Review those figures before changing your pension strategy.
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Taking money from a pension can change what is included in your estate when you die. Cash withdrawn and kept in a bank account will generally form part of your estate. From 6 April 2027, most unused pension funds and pension death benefits will also be brought into scope of inheritance tax (IHT). The outcome depends on your total estate, available allowances, exemptions and who inherits. www.gov.uk
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be included when calculating the deceased person’s estate for IHT. That does not mean every pension will incur a 40% charge. The estate’s value, reliefs and exemptions matter. Death-in-service benefits payable from a registered pension scheme are excluded under the published measure. www.gov.uk
Review your position before making a large withdrawal, arranging a substantial gift or changing your retirement income plan. The pension IHT change takes effect for deaths from 6 April 2027, but that date is not a deadline to withdraw tax-free cash. A review should cover your expected retirement spending, other assets, beneficiaries and the income tax that any withdrawal could trigger. www.gov.uk
Potentially, but taking tax-free cash and giving it away does not automatically remove it from your estate. An outright gift may become exempt from IHT if you survive seven years, while exemptions can apply sooner in particular circumstances. You must also consider whether you can afford the gift and whether you retain any benefit from it. Record the amount, recipient and date before acting. www.gov.uk
Not every withdrawal requires regulated financial advice, but a large or irreversible decision deserves careful review. A tax advisor can model income tax and IHT consequences; an authorised financial adviser can assess drawdown, annuities, investment suitability and retirement income needs. The FCA reports that only 30.8% of pension plans accessed for the first time in 2025/26 involved a plan holder who had taken regulated advice. www.fca.org.uk
An early withdrawal may replace a future, uncertain IHT exposure with an immediate income tax bill or reduce the funds available for retirement. Tax-free cash retained in a bank account can still form part of your estate. Taking taxable income may also push you into a higher tax band and trigger the money purchase annual allowance, restricting future tax-relieved contributions. Compare the overall outcome before withdrawing. www.gov.uk
You can usually take up to 25% of your pension as tax-free cash, subject to a lump sum allowance of £268,275 across your pensions for most people. A protected allowance or previous pension benefits can change what remains available to you. Check all your pension records before requesting a lump sum; each pension does not have its own separate £268,275 allowance. www.gov.uk
Yes. From 6 April 2027, a pension may be included in the deceased person’s estate for IHT, while a beneficiary may also pay income tax when drawing inherited funds, particularly if the pension holder died aged 75 or over. Whether either tax is due depends on the estate, the type of benefit and how it is paid. Simply adding headline tax rates will not give you a reliable estimate. www.gov.uk
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