Brits hit with up to £98,000 tax bills for cashing in pensions | Personal Finance | Finance

Brits in their hundreds across the UK have been hit with eye-watering tax bills of nearly £100,000 after fully withdrawing large pension pots, a new analysis shows.

Between October 2023 and March 2024, more than 292 individuals fully withdrew pension pots worth £250,000 or more, incurring a minimum tax bill of £98,700 each. This represents an increase from the same period a year earlier, when 222 people did the same. In the same period, 1,593 people fully encashed pots valued between £100,000 and £249,000 – 56 more than the previous year. Each person in this group faced a tax charge of at least £27,400, with someone withdrawing a pot of £174,500 paying a minimum of £64,700.

The tax burden has increased year on year due to a change in the additional rate tax threshold, which dropped from £150,000 to £125,140 in April 2023. As a result, those fully encashing pots of £250,000 paid around £1,200 more in tax than in 2022/23.

These figures, sourced by Standard Life, only take pensions into account. People with other sources of income at the time of withdrawal would pay even more tax. Anything above the 25% tax-free pension allowance is treated as income by HMRC and taxed accordingly, similar to an annual salary.

Mike Ambery, retirement savings director at Standard Life, said that while everyone’s financial needs are different, most people would likely want to avoid taking such large tax hits.

He said: “A huge number of people are paying a disproportionate amount of tax to access their pension,” he said, warning that fully encashing a large pension “will almost always mean a very large tax bill, sometimes taking away many years’ worth of savings.”

Mr Ambery acknowledged that some people cash out for ease of access, but said this could be financially damaging. Not only are withdrawals above the tax-free allowance taxed heavily, but savers may also lose out on potential investment growth.

Instead, he urged retirees to consider a mix of income options, like combining flexible drawdown with an annuity, to better balance accessibility, tax efficiency, and long-term income needs.

He added: “Be sure to speak to your pension provider about your options, and ideally seek advice or guidance when taking your pension.”

How to minimise your pension tax bill

Mr Ambery shared several strategies to help retirees avoid becoming “big pension taxpayers”.

Understand how your pension is taxed

Mr Ambery said: “The first thing to note is that most people will get 25% of their pension pot tax-free, and the remaining 75% is taxable… Don’t forget, the total amount you can normally take tax-free across all your pension pots is now £268,275, unless you have specific protections in place.”

Also, the tax-free Personal Allowance remains at £12,570 for the 2025/26 tax year and is expected to stay frozen until 2028.

Work with your personal allowance

Mr Ambery said: “The simplest way to avoid paying too much tax is to make sure you don’t take any more from a pension pot than you need to. Taking it in small, regular chunks could keep your tax bill down.”

Combine tax-free and taxable withdrawals

Mr Ambery said: “You don’t necessarily need to take all of your tax-free lump sum in one go… In theory, every month, you could take £1,000 from the taxable part of your pot (staying under your £12,570 personal allowance) and £1,000 from your tax-free part. That would give you an income of £2,000 each month without paying any tax at all.”

This approach is known as tailored drawdown, though availability depends on your pension provider.

Use your ISA to manage tax

Mr Ambery said: “Unlike your pension pots, the savings in your Individual Savings Account (ISA) generally won’t be taxed at all when you take them… You could think about using them to top up the income from your pension to help keep the tax down.”

For many, using ISAs in the early years of retirement, when expenses may be higher, can help reduce the need to tap into taxable pension income.