Tax treatment depends on your circumstances and is subject to change
Pensions are designed to provide benefits for life. But the latest data from the Financial Conduct Authority (FCA) shows that more people are taking big decisions about their retirement pots without advice – and sometimes withdrawing far too much, far too soon.
In its 2024/25 Retirement Income Market Review, the FCA reported that:
· Over 960,000 pension plans were accessed for the first time in 2024/25 – an 8.6% increase on the previous year
· Withdrawals rose sharply, with £70.9 billion taken from pensions (up from £52.2bn)
· Only 30.6% of plans were accessed with advice – meaning nearly 7 in 10 people acted without it
· A large proportion of smaller pots are still being fully cashed out at first access, while among larger pots a significant number are being drawn down at 8% or more a year
These numbers highlight both opportunity and risk. Pensions are flexible, but with flexibility comes responsibility. The choices you make at and during retirement can have lasting effects, not just on your income today, but on your tax position, benefits, and financial security for years to come.
Based on the FCA’s data, we believe there are three key lessons for anyone thinking about accessing their pension – and why advice can make such a difference.
When reading this article, please bear in mind that tax treatment depends on your circumstances and is subject to change.
For many people with small pension pots, particularly those under £30,000, the temptation is to take the whole lot in one go. It feels simple, clean, and convenient. The FCA data shows that this behaviour is still widespread, especially for pots under £10,000. But there are risks:
Tax traps
Taking a pension as a lump sum could push you into a higher tax bracket for that year. For example, someone earning £30,000 who withdraws a £20,000 pension pot in one go would have £5,000 tax-free, but £15,000 added to their income. That pushes their taxable income to £45,000, still in the basic-rate band, but it means an extra £3,000 in tax that could have been spread across years. A larger withdrawal, say £40,000, would push income to £60,000, tipping almost £10,000 into the 40% higher-rate bracket.
Lost growth
Once it’s out of the pension, it’s no longer growing tax-free. For those not needing the money immediately, this can mean losing years of potential investment returns
Benefit interactions
Cashing in can affect means-tested benefits, potentially reducing entitlement just when you need support.
Contribution limits
Taking taxable withdrawals can also trigger the Money Purchase Annual Allowance (MPAA), permanently reducing how much you can contribute tax-efficiently in future.
In short, encashment can be right in some cases (especially with very small pots, or where debts must be cleared), but it shouldn’t be the default. The FCA’s figures underline how common it is, but also why it needs careful thought.
For those choosing drawdown or Uncrystallised Funds Pension Lump Sums (UFPLS)1, the FCA data paints another warning sign: withdrawals at 8% or more a year are common for smaller pots and still happen with larger pots (FCA: Retirement income market data 2024/25 – size of drawdown by pot size at 2025 Q1).
· Around 79% of pots under £30,000 are drawn at 8%+ annually
· This drops to 34% of pots between £100k and £249k, and nearly 14% of pots over £250k
1When you enter pension drawdown, you take your 25% tax-free allowance first, and subsequent withdrawals are taxed at your marginal rate. With UFPLS, you do not have to enter drawdown. Instead, 25% of each withdrawal you make is tax free with the remaining 75% taxed at your marginal rate.
On paper, 8% withdrawals might sound manageable, but in practice they can be unsustainable. Unless markets perform strongly year after year, portfolios drawn at that level risk running down too quickly. It also creates the potential for poor outcomes if withdrawals coincide with market falls.
The alternative is to plan withdrawals around your income tax band and spending needs. For example:
· A basic-rate taxpayer may be able to draw a set annual amount without breaching higher-rate thresholds
· Staggering UFPLS payments across tax years can reduce lifetime tax bills
· Blending drawdown with other income sources (such as ISAs or annuities) can give flexibility without excessive tax
The data shows that too many people are still drawing in ways that risk both tax inefficiency and long-term sustainability. Good advice can help you find the right balance.
The FCA’s review makes it clear: the majority of people are still making major pension decisions without regulated advice. With only 30.6% taking advice at first access, that means hundreds of thousands are choosing drawdown, annuities, or cash without professional input.
Why does this matter?
· Tax efficiency: Advice can prevent unnecessary higher-rate tax charges and ensure allowances are used wisely.
· Withdrawal strategy: Advisers help align withdrawals with long-term sustainability and lifestyle needs, not just short-term desires.
· Benefit protection: Interactions with means-tested benefits, the MPAA, and other allowances are often overlooked.
· Peace of mind: Beyond the numbers, knowing you have a plan – and someone monitoring it – reduces stress at a stage of life where financial security really matters.
In our view, the FCA’s data highlights that too many people are going it alone. That can work for some, but for many, it increases the risk of costly mistakes.
The FCA’s Retirement Income Market Review confirms what advisers see every day: pensions are more flexible than ever, but that flexibility comes with pitfalls.
· Cashing out in one go can mean losing money to tax and missing future growth.
· Withdrawing too much, too fast, risks eroding retirement savings too soon.
· Acting without advice often leads to avoidable mistakes.
For those in their 50s and beyond, these choices are pivotal. Once taken, they cannot always be undone. The difference between a tax-aware, sustainable withdrawal plan and a hasty cash-out can run into tens of thousands of pounds over a lifetime.
Retirement is too important to leave to chance.
The FCA’s latest data is a wake-up call. If you’re thinking about how to access your pension, whether you’re tempted to cash out a small pot, weighing up drawdown, or considering annuities, take the time to get advice. It could
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
