Pension savers warned of 'long-term damage' as £70billion drained from retirement pots ahead of Rachel Reeves's tax raid

This marks an unprecedented 36 per cent surge from the prior year, Financial Conduct Authority figures reveal.

The dramatic increase in withdrawals appears linked to mounting anxiety over potential government tax reforms. Industry experts suggest savers acted preemptively amid uncertainty surrounding Chancellor Rachel Reeves' October Budget and announced proposals to incorporate unused pension funds into inheritance tax calculations starting April 2027.

The £70billion milestone represents the first time withdrawals have reached this level, with speculation about changes to tax-free cash entitlements driving many to access their retirement savings earlier than planned.

The data indicates widespread concern among pension holders about preserving current tax advantages before potential policy shifts.

Concerns about the future of tax-free cash allowances intensified in the lead-up to Rachel Reeves' first Budget as Chancellor last October, prompting many to withdraw funds defensively.

The announcement that unused pensions would become subject to inheritance tax from April 2027 further accelerated withdrawal decisions as savers reassessed their estate planning strategies.

Rachel Vahey, head of public policy at AJ Bell, warned that "speculation surrounding the fate of pensions tax-free cash ahead of Chancellor Rachel Reeves' inaugural Budget last October led to an increase in people accessing their cash out of fear they may lose some of it to a change in policy, potentially causing untold damage to their long-term retirement plans."

The inheritance tax announcement particularly influenced savers to consider withdrawing pension money for immediate spending or gifting to family members.

Drawdown emerged as the preferred option for accessing retirement funds, with policy sales climbing 26 per cent to nearly 350,000 in 2024/25.

Analysis by AJ Bell revealed that 60 per cent of those selecting drawdown withdrew their tax-free cash without taking any income payments, indicating many sought to secure their allowances under existing regulations rather than meet immediate financial needs.

Annuity purchases increased by 7.8 per cent to 88,430, benefiting from elevated interest rates, though this growth rate decelerated compared to 2023/24. The percentage of savers completely cashing out their pensions decreased marginally from 53 per cent to 48 per cent.

These patterns suggest retirees prioritised flexibility and tax efficiency over immediate income requirements, with many appearing to bank their tax-free entitlements while current rules remain in place.

The withdrawal surge illustrates how speculation about tax changes can trigger hasty financial decisions, according to industry leaders. Ms Vahey emphasised that "this neatly demonstrates the damage that idle Budget speculation can cause, driving people to make knee-jerk reactions about their personal finances."

She argued that retirement savers require greater certainty for effective long-term planning. "Creating the right environment for long-term planning means removing the worry that goalposts could shift at any given moment," Ms Vahey stated.

AJ Bell has urged the government to introduce a Pensions Tax Lock, with Ms Vahey explaining: "That is why we are calling on the chancellor to commit to a Pensions Tax Lock, pledging not to make any changes to pensions tax incentives for the remainder of this Parliament."

Financial advisers stress the importance of developing sustainable withdrawal strategies for those entering drawdown. MsVahey noted: "It is crucial anyone entering drawdown has a clear plan for making their pension last, which means you need to regularly review your retirement strategy and withdrawals to make sure they remain sustainable."

For risk-averse retirees, annuities offer guaranteed income despite requiring permanent commitment. Ms Vahey advised: "Once you lock into an annuity, there is no going back, making it critical that you shop around the market not just for the best rate, but for the product that is most appropriate to your circumstances."

Combining both approaches provides optimal flexibility. Retirees might purchase annuities to cover essential expenses while maintaining drawdown funds for discretionary spending and growth potential, or begin with drawdown before converting to annuities later when rates improve.