Rachel Reeves's pensions inheritance tax raids force savers to withdraw £2.3billion from retirement funds

The change could leave around one-in-five families facing significant tax liabilities on wealth passed down from parents or grandparents.

Figures show that 116,100 individuals aged 55 accessed some or all of their tax-free entitlement during the 2024-25 tax year.

This marks a 38 per cent increase compared with 2020, when 84,200 people of the same age made similar withdrawals, with the total amount withdrawn rose from £2.1billion the previous year to £2.26billion.

Under existing rules, savers can withdraw 25 per cent of their pension pot tax-free from the age of 55, but the minimum access age is due to rise to 57 in 2028.

The tax-free lump sum is currently capped at £268,275.

However, speculation has been rife that Rachel Reeves could reduce this threshold to £100,000.

At present, pension wealth can be passed to family members without incurring inheritance tax.

Beneficiaries also avoid income tax on inherited pension funds if the original holder dies before the age of 75.

From April 6, 2027, however, pensions left to anyone other than a spouse or civil partner could be subject to a 40 per cent inheritance tax charge.

Estates valued below £325,000 are typically exempt from inheritance tax.

This threshold increases to £500,000 where a main residence is passed to direct descendants and the total estate is valued at less than £2million.

Financial advisers have raised concerns about the growing number of early withdrawals.

Andrew Tricker, of Lubbock Fine Wealth Management, said: "With pensions being dragged into the inheritance tax net, many are rushing to take money out of their pensions as soon as they can to help mitigate what they see as excessive tax bills for their dependants."

He added: "What is surprising is that this trend has spread to people who have decades left to live, based on average life expectancy."

Nicholas Clark, also of the firm, warned that some savers may be acting without fully considering the consequences.

“Pensions were widely seen as highly tax‑efficient, so many people built and preserved very large pots that they could pass on to their loved ones free of inheritance tax,” he said.

“Some have now started to change course, often without fully thinking it through.”

Mr Tricker said accessing pension savings too early could pose risks to long‑term financial security.

“It is worrying that more people are tapping into their pension pots so long before the usual retirement age,” he said.

“Some are taking too much, too soon. Without careful planning, they could find themselves short of money in retirement.”

He added that rising life expectancy and uncertainty over future healthcare and care costs make maintaining sufficient savings essential. “Income is much harder to increase once you stop working,” he said.

HM Revenue and Customs (HMRC) said the Government remains committed to encouraging pension saving.

A spokesperson said: “The Government wishes to encourage pension saving, to help ensure that people have an income, or funds on which they can draw, throughout retirement.”