The rule change has prompted many savers to reconsider their withdrawal strategies. Under current rules, once people hit the age of 55, they’re entitled to take out 25 per cent of their pot tax-free
Amidst rising living costs and political uncertainty, UK households are in a rush to dip into their pension pots early, with hundreds of thousands withdrawing a whopping £2.2bn last year. Official HMRC figures have highlighted a significant surge, showing that 120,000 people between the ages of 55 and 56 made taxable withdrawals from their pensions in 2023 – 24, marking an 18 per cent increase over the past five years.
Under current rules, once people hit the age of 55, they’re entitled to take out 25 per cent of their pension pot tax-free, subject to a ceiling of £268,275. Beyond this threshold, any further withdrawals incur taxation as income.
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Investment expert Jason Hollands from Bestinvest commented on the trend, suggesting: “Demographic patterns will be a factor. But other possible influences are a rise in business exits and second property disposals ahead of the election enabling more people to take early retirement.”
From the perspective of wealth management, Daniel Hough of RBC Brewin Dolphin pointed out: “Retirement is lasting longer for people – by accessing their pensions at 55, there will be more pressure on providing a sustainable income throughout retirement, however long it may last.”
Highlighting potential risks associated with this behaviour, Andrew Tricker from Lubbock Fine Wealth Management, who procured the data, saod: “The large number of savers withdrawing from their pensions before actually retiring is very concerning. Many of them are withdrawing too much – and too early.”
Financial specialists also cautioned that savers might feel impelled to overspend from their pension funds to sidestep inheritance tax charges stemming from new regulations introduced by the Labour Party government.
Kate Smith from the pensions outfit Aegon commented: “The expectation is that those individuals with large estates will access their pensions earlier to avoid inheritance tax, and later life tax planning will become increasingly important.”
Mr Hough expressed that the proposals sparked “concern and some confusion” for those approaching retirement age, reports Birmingham Live.
Chancellor Rachel Reeves had previously broadcast the discontinuation of inheritance tax reliefs on pension savings come 2027.
At present, Britons are at liberty to bequeath their pension wealth devoid of tax, yet this policy alteration has incited many to revisit their strategies for drawing down their pensions.
