Hundreds of thousands of pension savers are cashing in their retirement pots in one go, but many could be paying far more tax than they realise.
A single withdrawal can push retirees into a higher tax bracket, leaving HMRC with a sizeable share of money that may have taken decades to build up.
Figures from the Financial Conduct Authority show that the number of people withdrawing their entire pension pot has risen by 29 per cent since 2018.
In the 2024/25 financial year alone, 462,160 savers chose to take all of their pension savings in a single withdrawal.
While taking a lump sum may seem appealing, particularly for those looking to clear debts, help family members or move their money elsewhere, it can prove costly.
This is because HMRC may treat large pension withdrawals as taxable income.
As a result, some retirees can find themselves pushed into a higher tax band, meaning a larger proportion of their pension goes to the taxman.
Dale Critchley, policy manager at Aviva, warned that cashing in a pension all at once can have serious financial consequences.
Some retirees can find themselves pushed into a higher tax band
| GETTYHe said: "While it might be tempting to cash it all in and spend it, or even save it elsewhere, taking a lot of money in one go could mean that you lose a big chunk of your pension to the tax man."
Mr Critchley said pension savings can only be spent once and should be viewed as a long-term source of income throughout retirement.
He added that the purpose of building up a pension pot is to provide financial security later in life when work is no longer an option.
"Taking a big lump sum means we won't have as much to spend in old age," Mr Critchley added.
Financial experts suggest that a more measured approach can help retirees retain greater control over their money and minimise their tax burden.
Retirees should also be aware that 25 per cent of their pension pot can be accessed without incurring any tax liability
| GETTYMike Ambery, retirement savings director at Standard Life, outlined strategies for managing pension withdrawals more effectively.
"Spreading withdrawals over a number of years, or taking smaller amounts while leaving the rest invested, can help manage the tax you pay and make your savings last longer," he explained.
By phasing withdrawals across multiple tax years rather than taking everything immediately, pensioners can potentially remain in lower tax brackets whilst allowing their remaining funds to continue growing through investment returns.
Retirees should also be aware that 25 per cent of their pension pot can be accessed without incurring any tax liability.
Beyond this tax-free portion, however, all withdrawals become taxable and risk elevating earners into higher bands
| GettyBeyond this tax-free portion, however, all withdrawals become taxable and risk elevating earners into higher bands.
One potential pitfall involves HMRC assigning an emergency tax code after the initial tax-free withdrawal, which can result in excessive deductions and lengthy waits for refunds.
A simple workaround exists: withdrawing just £1 from the pension first prompts HMRC to issue the correct tax code.
Additionally, ISAs offer a valuable alternative income source, as withdrawals remain entirely tax-free and do not contribute to taxable earnings, making them an ideal complement to state pension payments.