Thinking about taking your pension lump sum? Here’s what to consider

Reaching the normal minimum pension age (NMPA) doesn’t necessarily mean you’re ready to leave the workforce. However, a growing number of people are accessing their pensions as soon as they become eligible.

A Freedom of Information request to HMRC, reported by MoneyWeek, found that 116,000 55-year-olds took pension lump sums in 2024/25, the highest number in five years.

Together, they withdrew £2.3 billion, up from £2.1 billion the previous year.

Usually, you can take 25% of your pension tax-free, subject to the standard Lump Sum Allowance of £268,275 as of 2026/27.

Accessing this money sooner than planned could significantly affect your long-term retirement income.

As such, it’s vital to understand what may be causing the recent increase in withdrawals and the potential effects of taking your lump sum early.

Continue reading to find out more.

Several upcoming changes may be encouraging people to access their pensions sooner

While there isn’t one single reason why more 55-year-olds are taking pension lump sums, several recent developments could be contributing to the trend.

Perhaps the biggest factor driving more lump-sum withdrawals is the upcoming change to the Inheritance Tax (IHT) treatment of pensions.

Indeed, from 6 April 2027, most unused pension funds and death benefits will be included in the value of your estate for IHT purposes.

HMRC estimates that around 10,500 estates that previously wouldn’t have faced a charge could become liable for IHT in 2027/28, while a further 38,500 could pay more, the government website reports.

This may encourage some people to withdraw pension funds earlier to reduce the amount exposed to IHT with the intention of later gifting it.

The NMPA (which stands at 55 in 2026/27) is also set to increase to 57 from 6 April 2028.

So, people approaching 55 may be tempted to draw from their pensions sooner rather than later, as they may have to wait longer to access the funds if they don’t.

Some people may also be speculating about the future of pensions ahead of government Budgets, and withdrawals ahead of key fiscal events are not uncommon.

Read more: Pre-empting the prime minister: 3 lessons from previous changes at Number 10

For instance, before the 2025 Budget, rumours suggested the 25% tax-free entitlement might be reduced or capped.

Research reported by FTAdviser found that 41% of retirees withdrew tax-free pension cash ahead of the 2025 Budget. 61% later said they regretted doing so.

Taking your lump sum early could reduce your future retirement income

Any money you leave inside your pension will typically remain invested, giving it the potential to grow over time. Of course, investment returns aren’t guaranteed, and your pension could fall in value as well as rise.

Still, if you take a large lump sum at 55 but don’t intend to fully retire until your 60s, you could be removing money from your pension several years before you realistically need it.

This could become increasingly important as you spend longer in retirement.

According to the Office for National Statistics, a woman aged 65 in 2024 could expect to live for another 22.7 years on average, while a man of the same age could expect another 20 years. By 2049, these figures are projected to rise to 24.6 and 22 years, respectively.

As such, your pension may need to support a 20-, 30-, or even 40-year retirement. Taking a sizeable lump sum early could leave less wealth to fund your lifestyle later in life.

Inflation can also erode the purchasing power of your wealth over time, but market investments can have a stronger chance of beating inflation over the long term.

While investment returns are never guaranteed, withdrawing too much too early could mean your wealth has less chance to keep pace with inflation.

A financial planner could use sophisticated cashflow modelling to help you compare different withdrawal amounts and see how they might affect the sustainability of your retirement income.

It’s worth considering the tax consequences before you withdraw from your fund

While you typically can take up to 25% of your pension without incurring tax, other withdrawals may be subject to Income Tax.

For instance, the remaining 75% could be added to your taxable income, and an especially large withdrawal may push some of your income into a higher tax band.

It’s also vital to note that if you start drawing from your pension and then make further contributions, you could trigger the Money Purchase Annual Allowance (MPAA).

This effectively limits your Annual Allowance for tax-efficient contributions from £60,000 to £10,000 as of 2026/27. The rule is designed to stop you from withdrawing funds from your pot and reinvesting them to benefit from further tax relief.

If you’re considering some form of phased retirement (where you continue working but on reduced hours) but intend to continue contributing to your pension, the MPAA could lead to an unexpected tax charge or restrict your future contributions.

You could face similar issues if you feel you need to withdraw from your pension at 55 due to Budget worries or tax efficiency.

The 2027 Inheritance Tax changes don’t necessarily mean you should withdraw your pension

The upcoming IHT pension changes are likely the key driver behind the spike in withdrawals and could understandably encourage you to consider accessing your pension sooner. However, withdrawing money won’t automatically reduce the value of your estate.

For example, if you take £100,000 from your pension and simply move it into a savings account, the money will typically still form part of your estate for IHT purposes.

You might instead consider gifting some of the money, but this comes with its own rules. Crucially, you also need to ensure you don’t gift too much and affect your own standard of living.

Read more: Gifting your wealth in 2026? 4 gifting allowances that could mitigate your Inheritance Tax bill

Rather than focusing solely on a potential IHT bill, it’s essential to consider your pension within your wider estate and retirement income needs.

Your long-term plans should ideally guide when you access your pension

Understandably, you might feel tempted to access your pension as soon as you can, especially when tax rules are changing, and speculation around future Budgets can make waiting feel risky.

However, the right decision will depend on what you want your money to achieve, when you expect to retire, and how taking a lump sum could affect the rest of your finances.

Your J Edward Sellars financial planner can help you look at these factors together as part of your bespoke plan.

We can also use cashflow modelling to compare different withdrawal amounts and timings, showing how each option could affect your future income and tax position.

This could help you decide whether taking your lump sum now supports your long-term goals, or whether leaving more of your pension untouched for now may be more appropriate.

Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about how we can support 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.

The Financial Conduct Authority does not regulate estate planning, tax planning, or cashflow planning.

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.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.