Tax paid on pension income and withdrawals soars as 'boomers' retire and pots grow

Two annual sets of statistics relating to workplace and private pensions were released by the Department for Work and Pension and HM Revenue & Customs today. David Little, Partner in Financial Planning at wealth management firm Evelyn Partners picks out two key trends:

• Tax payments on pension access and withdrawals soared by 47% between 2021/21 and 2024/25 [1]

• The number of savers accessing defined contribution (DC) pots flexibly will soon overtake those receiving a defined benefit (DB) or annuity income [2]

David comments:

‘There is a notable 47 per cent increase in “pensions tax charges” from £20.5 billion in 2021/22 to £30.1 billion in 2024/25 and this figure shows that the income tax take from pension benefits — including DB pension income, annuity income, and lump sum and drawdown withdrawals — is growing rapidly as the population ages and the “boomer” generation retires.[see note 1]

‘The increase reflects a growing retired population, larger pension payments and withdrawals after several years of inflation, and frozen tax allowances dragging more pensioners into tax or into higher bands. Poorly timed full encashments will also contribute, and there is some evidence that an increasing number of small pots are being cashed in in full, despite the tax consequences.

‘So while the cost of pension tax relief has increased, the Treasury is also recovering substantially more tax from people drawing on pensions. For some people, pension relief is – at least in part - a tax deferral rather than a permanent giveaway.

‘Meanwhile [see note 2], flexible DC access is moving from being the minority route to being broadly as common as receiving a DB pension or annuity when people first access private pensions.

‘That matters because the risks are very different. With a DB pension or annuity, the individual is largely being provided with a pre-determined income. With drawdown or lump-sum access, they have to make decisions about tax, investment risk, sustainable withdrawals and how long the money must last.

‘Not everyone accessing a DC pension will need comprehensive ongoing advice, particularly where pots are small. But the growing number doing so increases the need for accessible guidance and targeted advice at the point of access. A seemingly simple decision can trigger an unnecessary tax charge or the money purchase annual allowance, and undermine longer-term retirement security.’

[1] From Private pension statistics commentary: July 2026 - GOV.UK

[2] From Workplace pension participation and savings trends of employees: 2009 to 2025 - GOV.UK