Withdrawing pension at 55. Last year, 120,000 people made lump-sum withdrawals from their pensions early.  This is an increase of 10% from the previous year,

Consequently, the total value of these withdrawals by those aged 55-56 hit a five-year high.  Notably, totalling £2.2bn, up 10% from £2bn.

Accordingly, the rising cost-of-living is a likely reason for people wishing to access their pensions early.  Subsequently, this raises concerns that many could run out of money later in life.  With increased life expectancy and growing healthcare costs.

Similarly, a total of £15.3billion was withdrawn as lump sum payments, by all age groups, over the same period.

Inheritance tax increase could increase trend of early withdrawals

The trend for lump sum withdrawals from pensions may increase further due to changes to IHT rules. From April 2027, most unused pensions and death benefits will be included in the value of an individual’s estate. Moreover, this makes pensions a less effective tool for passing on wealth.   

Since Inheritance Tax (IHT) isn’t due on gifts made seven years before death. This may encourage individuals to withdraw money from their pensions early and gift it to their family or friends. Furthermore, this will reduce their estate’s value, and consequently their IHT bill.

People should be aware of the tax consequences, particularly the Money Purchase Annual Allowance (MPAA). The MPAA is triggered when taxable income is taken from a defined contribution pension using a flexible payment option.

If taxable income is taken in addition to the available 25% tax-free lump sum allowance, then the MPAA applies and the annual allowance is reduced to £10k (from £60k or 100% of earnings, whichever is lower). This lower allowance also applies to employer pension contributions.

People dipping into their pension pots at 55 must do so with extreme care. Triggering the MPAA can drastically reduce what you can contribute to a pension moving forward – something that often catches people out later in life.

Increasingly more people are withdrawing from their pensions age 55. This is due, in part, to cost-of-living pressures. See the Table below.

Withdrawing Pension at 55. For help with your retirement planning, contact us today. Call 01603 957599 for your free initial consultation.