Nearly a third of UK pension savers are cashing out early – here’s what it costs you
Key Points
- Around 30% of UK private pension pots reach a saver's bank account at the earliest moment the rules allow, according to the Pensions Commission's interim report.
- Savers take roughly half of all pots out in full, and nearly half of those full withdrawals fund a car, a holiday or home renovations.
- AJ Bell modelling shows a 55-year-old who takes a £125,000 tax-free lump sum and holds it in cash sits more than £63,000 behind a decade later.
- The £20,000 annual ISA subscription cap stretches a £125,000 lump sum across seven tax years, leaving the saver £18,535 worse off than leaving the money invested.
- Tax-free cash withdrawals hit £18.3 billion in 2024/25 against a five-year average of £7.9 billion, a jump AJ Bell attributes to Budget speculation.
Around 30% of UK savers empty their private pension pots at the earliest moment the rules allow, the Pensions Commission found.
The Commission’s interim report, which the Department for Work and Pensions published in May, puts 15 million working-age adults on course to undersave for retirement, and records that savers take half of all pots out in full, with nearly half of those withdrawals going on large expenses such as a car, a holiday or renovations.
Three-quarters of defined contribution savers over 40 hold no clear plan for accessing their benefits, and withdrawal rates frequently run at levels that exhaust a pot within 10 years. The Commission has called for stronger guardrails around the point at which savers first reach their money.
What cashing out early costs
Investment platform AJ Bell modelled a 55-year-old with a £500,000 pension who takes the maximum £125,000 tax-free lump sum as soon as the rules permit.
Moving that money into a stocks and shares ISA leaves the saver £18,535 worse off than leaving it inside the pension, because the £20,000 annual ISA subscription cap stretches the transfer across seven tax years and exposes the uninvested balance to tax along the way.
A saver who takes the same lump sum and parks it in a cash savings account instead sits more than £63,000 behind a decade later.
AJ Bell points to the Commission’s finding that reaching a pot at the first opportunity can cut retirement income by more than 60% in some cases.
The Commission also recorded that savers who take tax-free cash tend to move it into savings accounts or spend it on a single purchase rather than convert it into income.
Budget speculation drove a £10 billion spike
Tax-free cash withdrawals across FCA-regulated firms averaged £7.9 billion a year between 2018/19 and 2022/23 and never rose above £8.7 billion, despite a post-Covid bounce.
Withdrawals then climbed through the 2024 election campaign and reached £18.3 billion in 2024/25, an increase of roughly £10 billion that AJ Bell attributes to rumours of a cut to the tax-free cash allowance at the Autumn Budget 2024. The FCA has not yet published figures for 2025.
AJ Bell wants a Pension Tax Lock
AJ Bell has written to new Chancellor John Healey calling for a public commitment to a Pension Tax Lock ahead of his first Budget.
The proposal covers two incentives: the pension commencement lump sum, which savers know as tax-free cash, and tax relief on contributions.
Chief Executive Michael Summersgill said a Pension Tax Lock would give certainty to savers and stabilise the retirement savings market without new Treasury spending.
The platform has campaigned on the issue since 2025, and its parliamentary petition has gathered more than 20,000 signatures from members of the public and financial advisers.
