During the 2024 Autumn Budget, Chancellor Rachel Reeves announced that from 2027, unused pension pots will be taken into account when working out the total value of an individual’s estate.

Unsurprisingly, this sparked a reaction, with savers from across the UK withdrawing their tax-free cash sums in a bid to protect their estate from Inheritance Tax (IHT).

Over £18 billion has been withdrawn in the last 12 months, a 60 per cent rise on the previous 12-month figure of £11.25 billion.

What has sparked the sharp increase in savings withdrawals?

In the six months up to and including March 2025, £10.43 billion was withdrawn, a 36.5 per cent increase on the six months before the 2024 Autumn Budget.

The same six-month period up to and including March 2025 saw a 33 per cent increase in the number of individuals withdrawing their tax-free lump sum.

The Chancellor’s IHT reforms have played their part, with pensioners and savers keen to protect their estate.

With the IHT nil-rate band remaining frozen at £325,000 until 2030, and unused pensions to be classed as part of an individual’s estate from 2027, people are acting early to limit the damage and attempt to keep the value of their estate below the IHT threshold.

The number of individuals withdrawing their pension pot is likely to continue rising ahead of the 2025 Autumn Budget, which will take place on 26 November.

While unclear what will be announced, IHT has proven a useful avenue for the Chancellor as she tries to stick to her own tight fiscal rules while trying to improve the UK’s current economic climate.

What can I do to reduce the risk of an Inheritance Tax bill?

The increase in savings being withdrawn highlights one step individuals can take.

The vast majority of savers in the UK can take 25 per cent of their pension pot tax-free when they turn 55, although the age will rise to 57 from 2028.

The tax-free limit is £268,275, giving individuals the opportunity to withdraw cash sums in a bid to protect their estate and manage rising costs.

Your chances of an IHT bill decrease if the value of your estate reduces, and mitigate the risk altogether if your estate drops below the threshold.

Withdrawing also means you may choose to distribute their inheritance to your beneficiaries earlier than planned.

You need to be aware that gifts given seven years before your death could result in your beneficiary paying some of that back to HM Revenue and Customs (HMRC) should you pass away during the seven years.

However, you need to seriously think about whether withdrawing cash from your pension pot is the best approach.

You reduce the risk of an IHT bill, but your pot becomes significantly smaller, and you miss out on potential growth opportunities.

You may also face a tax charge if you decide to place the withdrawn cash into a savings account. An Individual Savings Account (ISA) can help with this, but there is a limit on how much can be put in.

Under current regulations, you can only place a maximum of £20,000 in an ISA, so if your withdrawn cash sum is larger, you will need to explore alternative options.

It’s not an easy decision, but it’s one you have to be sure is right.

Speak to a finance expert before withdrawing any cash

If you are looking to reduce the chances of paying an IHT bill, it’s important you assess all options before withdrawing cash from your pension pot.

It is always best to speak with finance experts who can advise and tell you what the best approach is. They will offer tailored support and help you analyse your finances before recommending the best course of action.

For all tax planning concerns, get in touch with our team.