Pensioners in the United Kingdom are facing the risk of substantial tax liabilities when withdrawing large lump sums from their retirement savings, according to recent data and expert analysis. New figures reveal that nearly 400 retirees incurred tax bills approaching £100,000 last year after fully cashing in pension pots valued at £250,000 or more.

Analysis of Financial Conduct Authority data for the six months ending March 2025 shows that 392 individuals who fully encashed pension pots of at least £250,000 each faced minimum estimated income tax bills of £98,700. Additionally, 1,772 people who withdrew from pension pots between £100,000 and £249,000 paid at least £27,400 in tax. These minimum estimates represent only those who withdrew entire pension pots of £100,000 or more.

Mike Ambery, retirement savings director at Standard Life, cautioned that taking large upfront lump sums can unexpectedly push retirees into higher income tax brackets, such as the 40% or 45% rates, resulting in bigger bills than anticipated. He noted that while retirees can usually take up to 25% of their pension tax-free—subject to the standard lump sum allowance of £268,275—further withdrawals are taxed as income and can quickly elevate total taxable earnings.

Ambery outlined several strategies aimed at helping pensioners reduce the risk of large tax charges. Among these were monitoring one’s tax bands carefully, as combining pension withdrawals with state pensions, earnings, or other income can push taxable income over personal allowance thresholds. He also advised factoring in the state pension, which counts towards taxable income and reduces the available tax-free allowance for private pension withdrawals.

Ambery recommended avoiding lump-sum withdrawals taken all at once, suggesting instead that pensioners spread smaller withdrawals over multiple tax years to better manage their tax liabilities. He also noted that the 25% tax-free cash component does not have to be accessed in full upfront and can be taken gradually.

Lastly, he warned retirees to pause before making significant decisions, as taking taxable income from pensions can trigger the Money Purchase Annual Allowance, which limits future pension contributions benefiting from tax relief to just £10,000 annually.

Looking ahead, Ambery highlighted the importance of tax planning, especially with upcoming changes from April 2027, when pensions could become liable for inheritance tax upon death. While withdrawing pension funds ahead of this date might reduce future inheritance tax exposure, it may also result in immediate income tax charges.

Overall, these developments underscore the complexity of pension withdrawals and the need for careful management to avoid unexpectedly large tax bills.