Across the UK, more people are dipping into their pension pots before retirement than at any point since the 2015 pension freedoms. The number of lump sum withdrawals has climbed sharply, driven by fears that tax rules could change and reduce access to the 25% tax-free portion. For someone with £200,000 saved, that tax-free entitlement is worth £50,000 today. If the rate dropped to 20%, the same saver would lose £10,000 to tax — money that can’t be put back once it’s gone.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
The rush to withdraw is understandable, but it carries a cost that only becomes clear years later. Once money leaves a pension, it loses its tax advantages and any future investment growth. Retirement often lasts 20 to 30 years, and drawing too much too soon can leave a shortfall that the State Pension alone won’t fill. With the full new State Pension rising to £241.30 per week from April 2026, and the State Pension age increasing to 67 for those born after March 1961, the timing of withdrawals matters more than ever.
What tends to get overlooked in the rush is how pension income interacts with tax thresholds, means-tested benefits, and the inheritance tax rules coming in 2027. People who’ve been through it often say they wish they’d understood these connections earlier. If you’re approaching the point where you can access your pension, understanding how to make your money last starts with knowing what the withdrawal rules actually mean in practice. Here’s what you actually need to know.
The 2015 pension freedoms gave anyone aged 55 or over the right to access their defined contribution pension pot however they chose — take it all, draw it down gradually, or buy an annuity. Before that, most people were forced into buying an annuity with their savings. The freedom to choose sounds simple, but the research shows that over half of adults contributing to a defined contribution pension have low or very low engagement with their pension. What I tend to notice is that people focus on the lump sum they can take now and underestimate how the rest of the picture — tax, benefits, longevity — changes the outcome over 20-plus years.
The figures that catch most people out
The numbers that matter most for pension withdrawal decisions aren’t the ones in the headlines. They’re the thresholds that determine how much tax you pay, when you can access your money, and what you’re entitled to on top of your pension. Here’s how they stack up.
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| Threshold or Rule | Current Figure | Why It Matters for Withdrawals |
|---|---|---|
| Full new State Pension (weekly) | £241.30 (from Apr 2026) | Annual income of £12,548 — just £22 below the tax threshold |
| Personal allowance | £12,570 (frozen to 2028) | Any withdrawal on top of State Pension may be taxed at your marginal rate |
| Pension access age | 55 (rising to 57 in 2028) | Earliest point you can take money from a private pension |
| Tax-free lump sum | 25% of pot | At risk of reduction in future rule changes — no guarantee it stays |
| Pension Credit (single guarantee) | £227.10/week (from Apr 2026) | 38% of eligible people do not claim — worth checking even with savings |
The gap between the State Pension and the personal allowance is the single most consequential detail in this entire picture. At £22, it’s less than the cost of a weekly food shop. But it means that anyone drawing even a small amount from a private pension — say £1,000 a year from a drawdown pot — will have part of that income taxed. For a basic-rate taxpayer, that’s £200 in tax on a withdrawal that felt modest.
The pension access age is another figure that shifts depending on when you were born. Currently 55, it rises to 57 from April 2028. Anyone born after 5 April 1973 will need to wait until 57 to access their private pension. That matters for anyone planning to retire before the State Pension age, which itself is rising from 66 to 67 between May 2026 and March 2028. Those born between 6 April 1960 and 5 March 1961 will have a State Pension age between 66 and 67, while those born on or after 6 March 1961 will reach it at 67. If you’re planning to bridge the gap between stopping work and claiming the State Pension, avoiding the common pitfalls around early access means knowing exactly when each of your pension doors opens.
Where the system trips people up
The research points to several places where people routinely make decisions they later regret. Each has a mechanical consequence that compounds over time.
Taking too much tax-free cash without a plan for the rest
The 25% tax-free lump sum is the most visible feature of the pension freedoms, and it’s the one that drives the most withdrawals. But taking the maximum tax-free cash doesn’t mean you should. Once that money is out of the pension, it stops growing tax-free and becomes part of your estate for inheritance tax purposes immediately — not just from 2027. A person who withdraws £50,000 tax-free from a £200,000 pot and puts it in a savings account earning 3% will pay tax on the interest if it exceeds their personal savings allowance. Inside the pension, that same £50,000 could have grown tax-free. The difference over 10 years can run into thousands.
Missing Pension Credit because pension income looks too high
Pension Credit is the most underclaimed benefit in the UK, with an estimated 38% of eligible pensioners not receiving it. The single guarantee credit rises to £227.10 per week from April 2026, and the couple guarantee to £346.60. Many people assume that having a small private pension or some savings disqualifies them. But the means test is more nuanced than most realise. Savings under £10,000 are ignored entirely. Between £10,000 and £16,000, every £500 of savings counts as £1 of weekly income. Above £16,000, you’re generally excluded. A person with a £12,000 pension pot and £8,000 in savings could still qualify for Pension Credit, which unlocks free TV licence for over-75s, Warm Home Discount, housing benefit, and council tax reduction. The total package is worth far more than the cash top-up alone.
Not accounting for the State Pension tax trap
The £22 gap between the full State Pension and the personal allowance means that anyone with any additional income — from a part-time job, a rental property, or a private pension withdrawal — will pay income tax on part of it. What people don’t always factor in is that the State Pension itself counts as income for tax purposes. If you’re drawing £5,000 a year from a private pension on top of the full State Pension, your total income is £17,548. After the personal allowance, £4,978 of that is taxable at 20%, costing £995.60 in tax. Many retirees don’t realise this until HMRC adjusts their tax code, often a year after the withdrawal.
Overlooking the 2027 inheritance tax change
From April 2027, unused defined contribution pension pots will be included in your estate for inheritance tax purposes. Currently, pensions are generally outside your estate for IHT, making them one of the most tax-efficient ways to pass on wealth. The change means that estates combining pension wealth with other assets may cross the nil-rate band (£325,000) and residence nil-rate band (£175,000) more easily. Someone with a £200,000 pension pot, a £200,000 house, and £50,000 in savings would have an estate of £450,000 — above the combined nil-rate bands if the residence nil-rate band applies fully. The IHT bill at 40% on the excess could be significant. This doesn’t mean you should withdraw everything now, but it does mean the old assumption that “pensions are IHT-free” no longer holds for deaths after April 2027.
How pension withdrawals actually work in practice
The tax-free lump sum: how it works and what’s at risk
You can take up to 25% of your defined contribution pension pot as a tax-free lump sum once you reach the pension access age (55, rising to 57 in 2028). The remaining 75% is taxable as income when you withdraw it. The tax-free amount is capped at £268,275 for most people (25% of the old lifetime allowance of £1,073,100), though the lifetime allowance was abolished from April 2024. What’s at risk is the rate itself. Policy rumours about reducing the tax-free percentage to 20% have circulated for years, and the sharp rise in withdrawals suggests many people are acting on that fear. If the rate did drop to 20%, someone with a £200,000 pot would see their tax-free entitlement fall from £50,000 to £40,000 — a £10,000 difference. But withdrawing purely to protect the tax-free amount means losing the tax-free growth on that money for the rest of your life. The trade-off is real, and there’s no single right answer.
Drawdown: taking income while keeping the pot invested
Drawdown lets you take money from your pension while leaving the rest invested. It’s the most common alternative to taking the whole pot or buying an annuity. The money you don’t withdraw continues to grow tax-free inside the pension. But drawdown introduces two risks that annuities don’t. The first is investment risk — if your investments perform poorly, your pot shrinks faster than expected. The second is sequencing risk — if you start withdrawing during a market downturn, you lock in losses and reduce the pot’s ability to recover. The Money Purchase Annual Allowance (MPAA) also kicks in once you start flexible drawdown, limiting future contributions to £10,000 per year. That matters if you plan to keep working while drawing pension income. If you’re weighing up whether drawdown or an annuity suits your situation, the pros and cons of different retirement income approaches depend heavily on your other assets and how long you expect to live.
The State Pension bridge: what to do between 55/57 and 67
If you stop working before you reach State Pension age, you need to fund the gap. The State Pension age is rising to 67 for those born after March 1961, and the pension access age is 55 (57 from 2028). That leaves up to 12 years to cover. The options include drawing from a private pension, using ISA savings, or continuing to work part-time. Each has different tax implications. Drawing from a pension before the State Pension starts means your total income is lower, so you may pay less tax on withdrawals. But it also means your pension pot has less time to grow. One approach that tends to work well is to use ISAs or savings in the early years of the gap and delay pension withdrawals until the State Pension kicks in, keeping your taxable income lower for longer.
What the 2027 IHT change means for withdrawal planning
The inclusion of unused pension pots in your estate from April 2027 changes the planning landscape. If you expect your estate to exceed the nil-rate bands, withdrawing money from your pension and gifting it during your lifetime may reduce the IHT bill, provided you survive seven years after the gift. Alternatively, leaving the pension untouched and spending other assets first could mean more of your pension goes to heirs, but with IHT due on it after 2027. The right approach depends on your total estate value, your health, and your beneficiaries’ tax positions. For anyone with a combined estate approaching £500,000 or more, it’s worth getting a clear picture of how the new rules affect your specific numbers. A financial adviser can help model the interaction between pension withdrawals, IHT, and your other assets.
Frequently asked questions about pension withdrawals
If I take my 25% tax-free lump sum, can I still contribute to a pension? ▾
Does taking a pension withdrawal affect my State Pension? ▾
What happens to my pension if I die before 75? ▾
Can I withdraw from my pension if I’m still working? ▾
Is the 25% tax-free lump sum guaranteed to stay? ▾
What’s the difference between taking my whole pot and going into drawdown? ▾
What the next few years mean for your pension
The convergence of several changes — the State Pension nearing the personal allowance, the State Pension age rising to 67, the inclusion of pensions in IHT from 2027, and the pensions dashboard going live in late 2026 — means that the old rules of thumb about pension withdrawals no longer apply. The decision that looks right today may look different in three years when the tax and inheritance rules have shifted. What people who’ve been through it tend to say is that they wish they’d taken the time to understand the full picture before making a withdrawal, rather than acting on fear or a headline.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Is £1 million really enough to retire comfortably in the UK?.
Sources and Further Reading
The psychological impact of retirement: how prepared are Britons? — Explores how financial readiness affects wellbeing in retirement, a useful companion to the withdrawal decisions covered here.
How to reinvent yourself in retirement: inspiring stories from the UK — Looks at what retirees actually do with their time and money after leaving work.
PoundSense (2025). Pension changes April 2026. 🔗
Regulated Advice (2025). Sharp rise in UK pension lump sum withdrawals over tax concerns. 🔗
Broadstone (2025). What’s changing in UK pensions in 2026? 🔗
GOV.UK (2025). Pension Schemes Act 2026: guided retirement guiding principles. 🔗
