Research conducted by Opinium for Legal & General in December 2024, surveying 3,000 UK adults aged over 50, found a pattern that financial advisers see regularly in practice: people making significant pension decisions without fully understanding the consequences.
One in five of those who had accessed a cash lump sum from their pension did so as soon as they turned 55. Nearly half — 46 per cent — admitted they withdrew funds simply because the option was available, rather than because they had identified a specific need for the money. These are not necessarily wrong decisions, but they are ones that deserve careful thought before being made.
The tax implications are more complex than they appear
The most immediate risk for many people taking pension lump sums is an unexpected tax bill. While 25 per cent of most pension pots can be taken as a tax-free lump sum, amounts above that are taxed as income in the year they are received.
A large withdrawal in a single tax year can push you into a higher tax bracket, sometimes significantly. Only 37 per cent of those surveyed had considered whether their withdrawal might affect their tax rate. For those who had not considered it, the outcome could have been a tax liability they were not prepared for.
Means-tested benefits can be affected
A quarter of respondents — 24 per cent — said they were not aware that withdrawing pension savings could affect their eligibility for means-tested benefits. A further 11 per cent said accessing their pension had already directly affected their benefits entitlement.
This is a particularly important consideration for those in their mid-to-late 50s who may be receiving, or may later need to rely on, benefits such as Pension Credit. Taking pension money out of a tax-efficient environment and placing it into savings or investments can inadvertently disqualify someone from support they would otherwise have been entitled to.
Withdrawing from a pension reduces future flexibility
Money taken out of a pension is no longer sheltered from income tax and is no longer growing in a tax-efficient environment. For those who withdrew their pension into cash savings, the interest earned may be taxable, and the real value of those savings will be eroded by inflation over time.
There is also the money purchase annual allowance to consider. Once you begin flexibly accessing pension benefits — including taking income from drawdown — your annual allowance for future pension contributions is reduced from £60,000 to £10,000. For anyone still working or who may return to work, this can significantly limit the ability to top up pension savings in future.
The regret data
Approximately 18 per cent of those surveyed said that, with hindsight, they would have taken out less or avoided withdrawing a lump sum at all. That figure likely understates the true level of regret, as many people do not connect later financial difficulties to decisions made years earlier.
Two-thirds of those who took lump sums kept within the 25 per cent tax-free limit, which suggests most are aware of the basic structure. But being aware of the limit is different from understanding the full range of implications — for tax, for benefits, for long-term income and for the flexibility of the overall plan.
What to consider before making a withdrawal
Before accessing pension savings, it is worth thinking through a few key questions. What will the money actually be used for, and is a pension withdrawal the most efficient way to fund that need? What will the tax position look like in the year of withdrawal? Could withdrawing now affect your benefits? Will taking money out affect your ability to contribute in future? How does this fit with your overall plan for retirement income?
These are not always simple questions, and the answers depend on your specific circumstances. But working through them — ideally with independent advice — significantly improves the likelihood of making a decision you are comfortable with over the long term.
We work with individuals and families across Worcestershire and Warwickshire on pension planning at every stage, including helping people think through the implications of accessing benefits. If you are approaching this decision, we would be glad to help you consider your options.
A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. Tax treatment depends on individual circumstances and may be subject to change. This article is for information only and does not constitute personal financial advice.