Hundreds of pensioners have been hit with tax bills of more than £100,000 after cashing in their retirement savings in an effort to avoid Labour’s so-called “pensions death tax”.
The increase in large pension withdrawals followed Chancellor Rachel Reeves’s announcement that unused pension wealth would become subject to inheritance tax from April 2027.
Between October 2024 and March 2025, almost 400 people withdrew pension pots worth £250,000 or more.
Each of those savers faced a minimum income tax bill of £98,700, according to analysis of Financial Conduct Authority data by Standard Life.
The number of people making withdrawals of that size was around a third higher than during the same six-month period a year earlier, before the inheritance tax changes were announced.
An additional 1,772 people fully withdrew pension pots worth between £100,000 and £249,999 during the same period.
Those savers each faced tax bills of at least £27,400.
Standard Life calculated that pensioners who fully withdrew large pension pots paid a combined minimum of £87million in tax during the six months.
Pensioners face £100,000 tax bills after cashing in pensions to avoid Labour inheritance tax changes
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That represented a 20 per cent increase compared with the previous year.
Under current rules, savers can withdraw up to 25 per cent of their pension tax-free, subject to a maximum of £268,275.
Any money withdrawn above that allowance is taxed as income at the individual’s marginal rate.
Large withdrawals can push annual income above £125,140, meaning savers become liable for the additional rate of income tax at 45 per cent.
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Industry experts warned that withdrawing large pension sums early can create significant tax liabilities while reducing the opportunity for future investment growth.
Mike Ambery, retirement savings director at Standard Life, said: “Tax is becoming an increasingly important part of how people think about their pensions, particularly as inheritance tax changes loom.
“For some, this prospect may lead to decisions about accessing their savings earlier than they otherwise would have.”
He added that taking money out too early could result in higher-than-expected income tax bills and the loss of future investment returns.
Tom Selby, director of public policy at AJ Bell, said demographic trends were also contributing to higher levels of pension drawdown as Britain’s population ages.
Mr Selby said: “Failure to give people certainty over tax-free cash, in particular, has been a problem ahead of the last two Budgets and will be again this year if Andy Burnham’s chancellor doesn’t get a grip early and commit to long-term pensions tax stability.”
Former pensions minister Sir Steve Webb, now a partner at consultancy LCP, urged people to think carefully before making large withdrawals from pension savings built up over many years.
Sir Steve said: “It is very important that those considering taking out large pots, often painstakingly built up over decades, do so carefully and ideally based on expert financial advice.
“Even spreading a withdrawal across two financial years can significantly reduce the overall tax bill.”
A Treasury spokesman said: “How and when pension savings are accessed is a personal financial decision, and people can already take up to 25 per cent of their pension tax-free up to a maximum £268,275.”
Labour has not indicated it intends to reconsider the inheritance tax changes, which are due to come into force from April 2027.