Ten Years of Pension Freedoms

Ten years ago, in April 2015, pension freedoms fundamentally changed the way people in the UK access their retirement savings. For the first time, savers over 55 were given genuine flexibility over what to do with their defined contribution pension pots: take lump sums, draw a regular income, purchase an annuity or combine all three. It was widely welcomed as a positive reform. A decade on, however, research is beginning to reveal some concerning patterns in how people are using that freedom.

Many are deciding without advice

A survey conducted by YouGov on behalf of Royal London in December 2024 found that 18 per cent of those eligible to withdraw from their pension did so without consulting anyone at all, not even family or friends. Only 20 per cent of those aged 50 or over with a defined contribution or personal pension made use of the government-backed Pension Wise guidance service.

The proportion who sought professional financial advice before making a withdrawal was only 39 per cent. That means the majority of people making one of the most significant financial decisions of their lives are doing so without independent guidance.

Tax implications are being overlooked

One of the most important practical issues is tax. Only 37 per cent of those surveyed considered how a lump sum withdrawal might affect their tax position or push them into a higher tax bracket. Taking a large sum from a pension can trigger an unexpectedly large income tax bill, and in some cases permanently reduces the amount you can contribute to a pension in future (the money purchase annual allowance). These are not obscure technical points; they are the kind of outcomes that proper advice is specifically designed to help people avoid.

The rush to access savings at 55

The research also highlights a worrying trend of people accessing their pension as soon as they reach the minimum qualifying age. Around one in twelve eligible savers withdrew their tax-free lump sum within six months of their 55th birthday. This is not necessarily wrong, but in many cases it reflects an impulse decision rather than a considered plan.

Pension freedoms offer genuine choice. But choosing well requires understanding what each option means over the long term, not just at the point of access.

What people are doing with their money

The survey found that 55 per cent of eligible individuals took the maximum 25 per cent tax-free lump sum available to them. Of those, 32 per cent used the funds to clear debts (including 15 per cent paying off a mortgage), 26 per cent deposited the money into a savings account, 19 per cent spent it on home improvements and 8 per cent used it to support family members.

There is nothing inherently wrong with any of these uses, but some of them may have been better served by leaving the money invested. Savings accounts rarely keep pace with inflation. Clearing certain types of debt with pension funds may have tax consequences. These are exactly the kinds of trade-offs that a financial adviser can help you think through properly before you act.

What this means if you are approaching retirement

If you are in your 50s or early 60s and beginning to think about how and when to access your pension, the key message from a decade of pension freedoms is this: having options is only useful if you understand them. The flexibility is real, but so are the risks of making the wrong call.

Key questions to think through include how different withdrawal strategies affect your income tax position, whether your pension savings are likely to last the full length of your retirement, what happens to your remaining fund if you die, and whether taking money early affects any other benefits you may be entitled to.

We advise individuals and business owners across Worcestershire and Warwickshire on retirement planning at every stage, including how to make confident, well-informed decisions about accessing pension benefits. If you are approaching this stage, we would be glad to help you understand 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.

Frequently asked questions

What are pension freedoms?

Pension freedoms are the rules introduced in April 2015 that gave people with defined contribution pensions much greater flexibility over how and when they access their savings. Before 2015, most people were effectively required to buy an annuity at retirement. Since then, you can draw income flexibly, take lump sums, purchase an annuity or combine all three. The flexibility is genuine, but so are the risks of making the wrong call without proper guidance.

Do I need to take financial advice before accessing my pension?

You are not legally required to take advice before accessing most pension benefits, though regulated advice is required before transferring away from a defined benefit scheme worth £30,000 or more. However, research consistently shows that people who access pension savings without professional guidance are more likely to face unexpected tax bills, lose benefit entitlement or draw down savings faster than intended. Given the sums typically involved, independent advice tends to be money well spent.

Can taking a large pension lump sum affect my tax bill?

Yes, significantly. While 25 per cent of most pension pots can be taken tax-free, amounts above that are taxed as income in the year they are received. A large withdrawal in a single tax year can push your total income into a higher band, sometimes dramatically increasing the tax owed. Research found that only 37 per cent of those making lump sum withdrawals had considered how this might affect their tax rate. Spreading withdrawals over several years is often more efficient.

What is the money purchase annual allowance and how does it affect me?

Once you begin flexibly accessing pension benefits — including drawing any income through drawdown — your annual allowance for future pension contributions falls from £60,000 to £10,000. This is the money purchase annual allowance. For anyone still working or planning to return to work, triggering this limit prematurely can significantly constrain the ability to rebuild pension savings in future. Taking tax-free cash alone, without entering drawdown, does not activate the money purchase annual allowance.

Can pension withdrawals affect my entitlement to means-tested benefits?

Yes. Withdrawing pension savings can affect eligibility for means-tested benefits. Research found that a quarter of respondents had been unaware of this, and over one in ten said accessing their pension had directly affected their benefits. For those in their mid-to-late 50s who currently receive or may later need means-tested support, this is an important factor to consider carefully before making any withdrawal.

Many are deciding without advice

Tax implications are being overlooked

The rush to access savings at 55

What people are doing with their money

What this means if you are approaching retirement

Frequently asked questions

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