by Jonathan Eida, researcher
The government’s fiscal position is deteriorating rapidly. Caught in a bind of its own making, ministers are trapped by competing pressures: vast public spending commitments, unsustainable borrowing, and manifesto pledges not to raise the three big revenue levers of income tax, national insurance, or VAT. The result is a growing search for alternative sources of revenue and pensions are increasingly in the crosshairs.
One option that has been floated is the taxation of lump-sum pension withdrawals. Under current rules, savers aged 55 and over can typically take up to 25 per cent of their defined contribution pension pot tax-free, subject to a cap of £268,275. Restricting or abolishing this allowance would represent a significant shift in how pensions are treated and it would strike directly at the principle that individuals should be rewarded, not penalised, for saving for their own retirement.
The risk of such a move has not gone unnoticed by savers. New figures reveal a sharp acceleration in pension withdrawals. In 2024-25, a record £70.9 billion was withdrawn from private pensions, nearly £20 billion more than in 2023-24, representing a 36 per cent increase. At the same time, defined benefit to defined contribution transfers continued their downward trajectory, falling to 6,418 from 7,181.
Even more striking is the pattern in drawdown activity. Between April and September 2024, 168,000 pension pots entered drawdown. In the following six months, that number rose by a further 9 per cent. Within this aggregate trend lies an especially telling detail: pots worth £250,000 and above entering drawdown surged by 33.5 per cent. In other words, it is the largest pension savers, those with the most to lose from future tax changes, who are moving fastest to access their funds. That points not to coincidence, but to a rational response to the heightened risk of fiscal raids.
Age patterns reinforce the conclusion. Among those aged over 75, the number of pots entering drawdown more than doubled, up by 116 per cent compared with the previous year. This far outstrips the increases in any other age group and reflects a growing concern that assets held in pension form will soon be exposed to taxation after death. Indeed, from April 2027, pension pots are scheduled to be included within inheritance estates for tax purposes, a change projected to increase the number of families paying inheritance tax by nearly a quarter, with grieving families facing an additional average bill of around £65,000.
Taken together, these developments send a clear message. Savers are not irrationally panic-stricken; they are responding logically to signals from the government. The more people put aside for their retirement, the more exposed they become to fiscal raids. Yet this approach runs directly counter to the stated policy objective of encouraging long-term saving to reduce reliance on the welfare state. If pensions are undermined as a trusted savings vehicle, individuals will save less, household resilience will weaken, and future governments will face higher welfare bills which is precisely the long-term fiscal pressure that saving is supposed to alleviate.
Meanwhile, the fiscal backdrop continues to darken. Borrowing in the first five months of 2025-26 reached £83.8 billion, £16.2 billion more than in the same period the previous year. In August alone, the government borrowed £18.0 billion. These figures confirm the scale of the challenge but they also underscore why short-term tax raids on pension savers are the wrong answer.
Britain’s fiscal crisis will not be solved by deterring households from saving responsibly. Sustainable reform requires confronting the real driver of debt: uncontrolled government spending. Unless ministers grasp that nettle, no amount of tinkering with pensions will restore the public finances to health.