State pensioners born before 1960 are increasingly withdrawing funds from their private pensions in anticipation of significant inheritance tax (IHT) changes coming into effect in April 2027. This rush is driven by new regulations from the Labour Party government and HMRC, which will see most unused pension funds and death benefits added to the value of estates for IHT purposes.
Birmingham-based financial firm Wesleyan reports that nine out of ten financial advisers have witnessed a surge in accelerated pension drawdowns among their clients. Approximately three-quarters of advisers say clients are increasing withdrawals by 5 to 15 percent, while 18 percent have seen increases exceeding 16 percent.
Currently, state pensioners become eligible for the full state pension from age 66 if born before 1960, but many rely on private pension pots to supplement their retirement income. However, experts caution that hastening withdrawals can lead to “sequencing risk,” a scenario where market declines early in retirement combined with steady withdrawals force portfolios to grow faster later to recover, which is often a difficult, if not impossible, task.
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Over 90 percent of advisers have flagged the risks to retirees’ long-term income streams amid such accelerated withdrawals, especially during periods of volatile market conditions.
Karen Blatchford, Managing Director of Distribution at Wesleyan, explains: “While it’s understandable that clients want to act before the IHT changes take effect, advisers recognize that increasing withdrawal rates can have serious consequences in today’s uncertain markets. Robust financial planning and professional advice are essential to ensure clients safeguard their long-term financial stability.”
Richard Cook, senior financial planner at Rathbones, adds: “Withdrawing more from your pension pot may seem appealing, but it carries risks. Larger withdrawals can push you into higher income tax brackets, resulting in a bigger portion of your savings going to the tax authorities rather than your personal finances. Additionally, withdrawing too much too early can rapidly deplete your pension, potentially leaving you financially vulnerable later in life when funds are crucial.”
Careful consideration and strategic advice remain key for pensioners navigating these upcoming changes to protect their retirement income and inheritance goals.