Large pension withdrawals trigger hefty tax bills as savers rush to beat inheritance tax changes
Savers withdrawing large pension pots in one go are facing unexpectedly high tax bills, with new analysis revealing they collectively paid £87.2 million in tax between October 2024 and March 2025.
That amount represents a 20 per cent increase from the year before, according to research by Standard Life, which analysed official data on people who fully cashed in pensions worth £100,000 or more.
The findings suggest many retirees may be withdrawing funds to avoid upcoming inheritance tax changes, but are inadvertently pushing themselves into higher tax brackets and limiting their ability to benefit from pension tax relief in future.
Five-figure tax bills hitting pension savers
Some 392 people paid at least £98,700 each in tax after cashing in pots over £250,000, Standard Life found after examining Financial Conduct Authority figures. A further 1,772 people who fully withdrew pots worth £100,000 to £249,000 would have paid at least £27,400 each.
The analysis did not include tax paid on full withdrawals from smaller pots or regular withdrawals, meaning the true tax take is likely considerably higher.
Standard Life noted that final tax bills depend on someone's wider income, so many people could have paid more than these figures suggest. Someone fully withdrawing a pot worth £174,500 might face a tax bill of around £64,700 before factoring in any additional income, the firm said.
Inheritance tax changes driving withdrawal behaviour
The pending inheritance tax changes appear to be influencing withdrawal decisions. The Government announced in the autumn 2024 Budget that pensions would become liable for inheritance tax, like other assets such as Isas and property, starting in spring 2027.
The Finance Act 2026 received Royal Assent on 18 March 2026, formally bringing the reforms into effect for deaths on or after 6 April 2027. Government estimates suggest 10,500 estates—around 1.5 per cent of total UK deaths—will become liable for inheritance tax on pensions where this would not previously have been the case, with approximately 38,500 estates paying more inheritance tax than they would have previously.
Inheritance tax is payable at 40 per cent on estates valued above the nil rate band of £325,000, with an additional residence nil rate band of up to £175,000 for estates where a home is passed to direct descendants.
Multiple tax traps await unwary savers
Any withdrawal above the 25 per cent tax-free lump sum is usually treated as income, which can quickly push savers into higher and additional rate tax bands. Income above £50,270 moves into the higher rate band of 40 per cent, while income above £125,140 is taxed at 45 per cent.
The tax trap is made worse by frozen thresholds. The UK personal allowance, basic rate limit and higher rate threshold have been frozen at £12,570, £37,700 and £50,270 respectively since April 2022. Originally due to end in April 2026, the freeze was extended to April 2031, and is estimated to pull 4.8 million more people into the higher rate band by 2030/31.
A further complication affects those earning between £100,000 and £125,140. The personal allowance is reduced by £1 for every £2 of income above £100,000, reaching zero at £125,140. This creates an effective marginal tax rate of around 60 per cent on income between these two thresholds, as taxpayers lose their tax-free allowance while simultaneously paying 40 per cent higher-rate tax.
State pension compounds the problem
The full new State Pension for 2026/27 is £241.30 per week, or £12,548 annually. This uses up over 99 per cent of the personal allowance of £12,570, leaving very little tax-free headroom for other income.
As a result, additional withdrawals from a private pension could be taxed from the first pound for those receiving the full state pension.
Future pension contributions severely restricted
Savers who start tapping a defined contribution pension pot for any amount over and above their 25 per cent tax-free lump sum trigger the Money Purchase Annual Allowance. This restricts future pension contributions to just £10,000 a year while still automatically qualifying for valuable tax relief.
The MPAA was introduced in April 2015 alongside pension freedoms to prevent savers from getting tax relief twice by withdrawing pension savings only to pay that money straight back into their retirement pot. The £10,000 MPAA cannot be carried forward, and savers cannot use carry-forward from previous years once triggered.
By contrast, the standard pension annual allowance for 2026/27 is £60,000, representing the maximum amount savers can contribute and still receive tax relief, up to 100 per cent of earnings.
Taking only the 25 per cent tax-free cash does not trigger the MPAA, but taking any taxable withdrawals such as uncrystallised funds pension lump sums or flexi-access drawdown income does trigger the £10,000 restriction.
Expert advice: pause before withdrawing
Mike Ambery, retirement savings director at Standard Life, said life doesn't always follow a set path, and when people reach the point of accessing their pension, there are often competing priorities.
For some, taking a larger amount upfront will feel like the simplest option, but it can come with a sting in its tail in the form of a higher tax bill than many expect. What catches people out is how quickly a single withdrawal can push them into higher tax bands.
Ambery added that as inheritance tax changes loom, for some this prospect may lead to decisions about accessing savings earlier than they otherwise would have. However, he warned it is important to weigh it up carefully, as taking money out sooner can mean bringing forward income tax liabilities, and in some cases paying more than expected.
Fully withdrawing also means potentially losing out on investment returns, depending on what is done with the money next, he said.
Ambery urged savers to pause and check before making a withdrawal, noting that decisions about pensions can be difficult to reverse. He recommended considering guidance or advice before making decisions, including using the Government's Pension Wise service which offers free appointments.
