Analysis of FCA data by Standard Life shows that clients fully encashing pension pots worth £100,000 or more paid a combined minimum of £87.2m in income tax between October 2024 and March 2025, a rise of more than 20% on the same period the prior year.

In total, 392 people fully encashed pension pots worth at least £250,000, each triggering a minimum estimated income tax bill of £98,700. A further 1,772 people fully cashed in pots worth between £100,000 and £249,000, each paying at least £27,400 in tax.

These figures are based on minimum estimates and focus on people who fully withdrew pension pots of £100,000 or more. They don’t include tax paid on full withdrawals from smaller pots or regular withdrawals. The final tax bill for those who choose to cash in their pension in one go will also depend on someone’s wider income, which means many people could end up paying more than these figures suggest.

The mechanics are straightforward but evidently underappreciated by clients: once the 25% tax-free lump sum is taken, the remainder of a full encashment is treated as income in the year of withdrawal. This makes it easy for a single transaction to push a client through higher and additional rate thresholds, with income above £125,140 taxed at 45%.

Mike Ambery, retirement savings director at Standard Life, noted that the coming IHT changes are likely to bring tax planning to the forefront of retirement conversations, and that the key advice opportunity is helping clients weigh accelerated withdrawal against the income tax cost of doing so, rather than defaulting to full encashment for simplicity.

“Life doesn’t always follow a set path, and when people reach the point of accessing their pension, there are often a lot of competing priorities,” he said. “For some, taking a larger amount upfront will feel like the simplest option, but it can come with a sting in its tail in the form of a higher tax bill than many expect.

“What catches people out is how quickly a single withdrawal can push them into higher tax bands. In some cases, a decision that feels straightforward in the moment can mean a significant portion of the money they’ve worked hard to build up ends up going to tax. Taking a bit of time to understand how withdrawals are taxed, and spreading them more carefully, can make a real difference over time. Even relatively small changes to when and how you take money can help more of your savings go towards supporting your life later on.

“The findings come ahead of changes to how pensions are treated for inheritance tax. While pensions can often be passed on tax-efficiently today, from next year changes may mean some savers consider withdrawing funds earlier – even if that means paying income tax – rather than leaving them exposed to inheritance tax later.”

Mike Ambery added: “Tax is becoming an increasingly important part of how people think about their pensions, particularly as inheritance tax changes loom. For some, this prospect may lead to decisions about accessing their savings earlier than they otherwise would have. However, it’s important to weigh it up carefully - taking money out sooner can mean bringing forward income tax liabilities, and in some cases paying more than expected. Fully withdrawing means you may also lose out on potential investment returns, depending on what you do with it next.

“Taking a step back to understand the trade-offs can help people make decisions that are right for their circumstances and avoid unintended tax consequences. Ultimately, it’s about feeling confident in the choices you make, accessing financial advice or guidance if possible, and understanding how to use your pension in a way that fits your individual circumstances.”