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Since the introduction of UK Pension Freedoms in 2015, individuals aged 55 and over have been able to access their defined contribution (DC) pensions flexibly. In other words, there are no limits on how much or how little you can draw down from your funds each year.
Having more control over your hard-earned retirement wealth might sound appealing; however, it also means you’ll face some complex decisions when you decide to access your pensions. Should you take a lump sum, cash in the whole pot, or use income drawdown?
Unfortunately, research published by Pensions Age shows that fewer than half of UK savers are aware of their options for accessing pensions. Perhaps unsurprisingly, then, IFA Magazine reports that two-fifths of UK adults are at a high or medium risk of making poor financial choices when they start spending their pension wealth.
If you want to make sure your retirement savings support your chosen lifestyle for as long as they need to, keep reading to discover four common pension withdrawal mistakes to avoid.
1. Taking too much too soon
According to Standard Life, the average pension wealth for UK adults aged 55 to 64 is £137,800. If you’re a higher earner, your pot may be significantly more valuable by the time you reach 55, which is normally the age you can access private and workplace pensions (rising to 57 in 2028). As such, it may be tempting to dip into your pensions as soon as you can, especially if you’re juggling multiple demands on your finances, such as your children’s university fees or wedding costs.
However, withdrawing too much too soon might put you at risk of running out of money in later life.
In contrast, leaving your pension savings invested for longer allows them to potentially grow in a tax-free environment, which could increase your retirement income.
As such, if you have other sources of income, you may want to consider preserving your pension or limiting withdrawals to the minimum amount necessary to cover essentials.
2. Drawing from your pension while still earning
If you’re still earning when you become eligible to start drawing your pensions, it’s important to consider the Money Purchase Annual Allowance (MPAA) before you start making withdrawals.
The MPAA dramatically reduces the amount you can contribute to your DC pensions each tax year while still receiving tax relief and without incurring additional tax charges. In 2026/27, the MPAA caps tax-efficient contributions to a DC pension at £10,000.
In contrast, most people who are not subject to the MPAA can contribute up to £60,000 or 100% of their earnings (whichever is lower) to their pensions in a single tax year.
The MPAA is triggered when you start flexibly accessing your DC pension. So, if you’re still earning and want to continue topping up your pension, it’s worth thinking carefully before accessing it.
3. Overlooking tax implications
You can usually take the first 25% of your total pension pot as a tax-free lump sum, provided your withdrawals don’t exceed £268,275. If you have protected allowances, the amount of the tax-free lump sum you can take may be higher.
Any withdrawals that exceed your tax-free allowance will be taxed as income at your marginal rate. So, if you take out large or frequent lump sums, you could move into a higher tax band. This risk may be greater if you have other income sources, such as the State Pension and rental property.
In contrast, a more tax-efficient approach might include spreading withdrawals over multiple tax years by taking only what you need when you need it and coordinating with other income sources.
Managing your withdrawal timings and amounts strategically could help you keep more of your hard-earned savings and bolster your retirement income.
4. Withdrawing a lump sum to sit in cash savings
Research findings published by Pensions Age reveal that 46% of retirees said they would take a lump sum out of their pensions “simply because they could”. Moreover, 22% said they took out a lump sum or would consider doing so because they wanted to put it in a current account or Cash ISA to keep for a rainy day.
Unfortunately, this approach could lead to unintended financial consequences.
While cash savings can be useful for short-term expenditures and emergencies, they might not help you achieve your long-term goals. That’s because cash is less likely to keep pace with inflation compared to other forms of investment. As such, its real-term value may fall over time.
In other words, money held in a cash account today might not have as much purchasing power in 10 years. Indeed, according to the Bank of England’s inflation calculator, you’d have needed £1,760.96 in March 2026 to buy goods and services that cost just £1,000 20 years ago in 2006.
On the other hand, leaving money in your pension until you need it allows your savings to grow free from tax and potentially benefit from compound returns over time.
We can help you sidestep pension withdrawal pitfalls and build a sustainable retirement income
Shifting from saving to spending your pension wealth might feel daunting and complicated.
Our financial planners can help you avoid costly mistakes and create a tax-efficient withdrawal strategy tailored to your unique circumstances and goals.
We can use sophisticated cashflow modelling to forecast how long your pension pot will last and help you make the most of your wealth by carefully planning how much to withdraw and when.
To find out more about how we can support you in building a sustainable retirement income, please get in touch.
Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate cashflow planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
Approved by Best Practice IFA Group Ltd on 21/5/2026