Inheritance tax warning: Savers scramble to take out £2.2bn from pension pots amid tax grab fears

New HMRC figures reveal 120,000 people aged 55 to 56 withdrew taxable sums from their pensions in 2023 - 24, an 18 per cent rise over five years.

There was a significant rise from 2019-20, when 100,000 individuals in the same age bracket withdrew just under £2 billion. The data covers taxable withdrawals made by individuals and excludes tax-free lump sums.

Once workers reach 55, they can access 25 per cent of their pension tax-free, up to a maximum of £268,275. Any withdrawals beyond this allowance are taxed as earnings.

Rising living costs and political uncertainty have driven this surge in early pension withdrawals.

Jason Hollands, of investment platform Bestinvest, said: "Demographic patterns will be a factor. But other possible influences are a rise in business exits and second property disposals ahead of the election enabling more people to take early retirement."

Capital gains tax revenues reached a record £16.9bn in 2022-23 as fears mounted that a Labour election victory would result in higher tax rates.

The October Budget has intensified concerns, with Chancellor Rachel Reeves announcing the removal of inheritance tax exemptions on pension pots from 2027.

Currently, savers can pass on their retirement funds tax-free, but this change has prompted many to reconsider their withdrawal strategies.

Financial experts have expressed alarm at the growing number of people accessing their pensions at the earliest opportunity.

Daniel Hough, of wealth manager RBC Brewin Dolphin, said: "Retirement is lasting longer for people by accessing their pensions at 55, there will be more pressure on providing a sustainable income throughout retirement, however long it may last."

Andrew Tricker, of Lubbock Fine Wealth Management, who obtained the data, warned: "The large number of savers withdrawing from their pensions before actually retiring is very concerning. Many of them are withdrawing too much and too early."

With increasing life expectancies, experts caution that early access could leave retirees struggling to maintain their standard of living throughout their retirement years.

It comes amid growing concerns that savers could be tempted to spend excessively out of their pensions in order to avoid an inheritance tax bill.

Currently, savers can pass on their pension pots tax-free. However, Reeves axed the exemption in the October Budget, with changes due to come into effect in 2027.

The inheritance tax changes have created significant concern among pension holders.

Kate Smith, of pensions firm Aegon, said: "The expectation is that those individuals with large estates will access their pensions earlier to avoid inheritance tax, and later life tax planning will become increasingly important."

Hough noted the proposals had caused "concern and some confusion" among those approaching retirement.

A survey by RBC Brewin Dolphin of 1,000 individuals aged 45 or over with pension pots worth at least £300,000 revealed that 56 per cent were planning to "spend more" of their pension following the October Budget.

The changes mean that from 2027, pension pots will no longer be exempt from inheritance tax, potentially encouraging savers to withdraw funds earlier than originally planned.