FTAdviser reports that during the 2024/25 tax year, 462,160 pension plans were fully withdrawn on the first occasion they were accessed. The figure marked an increase of 100,000 compared to 2018/19.

There are many reasons why you might be tempted to withdraw your entire pension fund, including:

• For peace of mind, knowing the full value of your pension is safe and secured
• To provide easy access to much-needed cash as living costs rise
• As lifetime gifts for loved ones to lower the value of your estate.

However, complete withdrawals can also expose your wealth to higher rates of tax and leave you vulnerable to a retirement shortfall, especially if funds are accessed earlier than originally planned.

Keep reading to learn more about the true cost of withdrawing your full pension pot, as well as how financial planning can help you build secure retirement savings and make them last.

Even full withdrawals of smaller pots can have significant tax implications and require careful consideration

According to FTAdviser, more than 300,000 of the pension pots withdrawn in full in 2024/25 were worth less than £10,000. A further 112,000 were worth between £10,000 and £29,000.

Generally, pension lump sums are taken as 25% tax-free cash, with the remaining 75% subject to Income Tax. Taking smaller pension pots will likely have less significant tax implications than taking larger pots (see below), but if other income streams mean you’re already close to a threshold, a pension lump sum could push you into a higher rate of tax.

Thinking about the timing of withdrawals is key, as is having a clear plan for the money.

Lump sums sitting in a high street bank account could lose real-terms value over time, so it might be worth delaying a withdrawal until you are ready to spend it. Certain withdrawals are taxed using a Week 1 indicator, which means HMRC assumes you’ll receive the lump sum amount each month. This usually leads to extra tax being taken. It can be claimed back, but the process might be lengthy and delay time-sensitive purchases, so bear this in mind.

Finally, withdrawing even small pension funds in full could trigger the Money Purchase Annual Allowance (MPAA). This reduces the tax-efficient pension contributions you can make to £10,000, an important point to note if you want to access one pension pot but keep paying into another.

If your pension fund is large, a full withdrawal could expose you to higher rates of Income Tax

As we have seen, when you withdraw pension wealth, a portion of it will usually be taxed as income. The larger the pension fund you withdraw, the higher your Income Tax bill is likely to be. Significant withdrawals could even push you into a higher tax bracket.

For example, if you fully withdrew your £500,000 pension pot in one go, you might take 25% of it tax-free (£125,000, which is below the Lump Sum Allowance for 2026/27 of £268,275). The rest would be liable for Income Tax.

Provided you took the amount in one go and in a single tax year, and earned no other income that year, your Income Tax bill would be almost £155,000. Nearly £250,000 of your pension fund would be taxed at the additional rate of 45%.

Smaller withdrawals could keep you below the additional or higher rate thresholds and allow you to pay a much lower rate of tax (dependent on your other income sources).

3 ways financial planning can boost your pension fund to create longer-lasting retirement wealth

Your pension wealth is designed to provide lasting income throughout retirement. While fully withdrawing your pension wealth might help satisfy short-term goals, it could also increase your Income Tax bill and lead to budgeting headaches further down the line.

Financial planning is designed to ensure that your wealth works for you and supports your dreams. Here are three strategies that might help you secure lasting retirement wealth.

1. Consider consolidating your pension pots

According to the Pensions Policy Institute (PPI), there are around 3.3 million lost pension funds in the UK, amounting to £31.1 billion. The average size of lost pots held by 55-75-year-olds is £13,620.

Finding and consolidating your smaller funds could boost your pension and help your wealth benefit more from compound growth. You might also find your charges are reduced and that you have more investment choice and flexibility.

2. Increase your pension tax efficiency

Your pension is tax-efficient. Pension contributions benefit from tax relief at the basic rate, and extra relief can be claimed if you’re a higher- or additional-rate taxpayer, via Self Assessment.

You can contribute up to the Annual Allowance (£60,000 for 2026/27) or 100% of your income, whichever is lower, before a tax charge becomes payable.

It’s worth remembering that the MPAA reduces your Annual Allowance, which might also be lower if you are a high earner.

3. Create an effective withdrawal strategy

Just as it’s important to have an effective savings and investing strategy to help you build wealth, it’s also important that you have one to guide your spending in retirement.

Lump sums are perfect for covering one-off or big-ticket expenses, but taking your whole fund in one go puts the onus for budgeting on you for the rest of your life.

Drawdown allows you to withdraw a flexible income, as and when you need it. An annuity, meanwhile, provides a guaranteed income for life, which could be useful for budgeting and for covering regular, known expenses.

Combining lump sums and a more stable income could help provide financial security, but financial advice can help you decide on exactly the right mix for you.

Get in touch

Email info@thepensionplanner.co.uk or call 0800 0787 182 to find out how The Pension Planner can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The Financial Conduct Authority does not regulate tax planning.