Retirement Incomes at Risk as Withdrawals Surge

New data from the Financial Conduct Authority has raised concerns about the sustainability of retirement incomes. The figures show that half of regular pension withdrawals among 55 to 64-year-olds were made at an annual rate of 8% or more in 2025/26. This trend has prompted questions about how long retirement savings will last, especially as the total amount withdrawn from pension pots rose sharply to £91.2 billion, up 21.7% from £75 billion the previous year and around 70% from £53.6 billion in 2023/24.

The data reveals that 320,762 pension plans across all age groups were subject to withdrawals at this level, a 24% increase from the previous year. This rise in withdrawals coincides with growing uncertainty about the future tax treatment of pensions, which may be driving higher outflows.

Withdrawal Rates and Pension Pots

Higher withdrawal rates were most common among smaller pension pots. However, annual withdrawals of at least 8% were also taken from more than 15% of pots worth £250,000 or more and 36% of those worth between £100,000 and £249,999. Notably, the proportion of pots worth £250,000 or more being accessed rose to 8.6%, up from 7.2% the previous year and 4.8% in 2023/24.

David Brooks, head of policy at Broadstone, stated that these figures would “inevitably raise questions about long-term sustainability.” He noted that for some retirees, particularly those relying on defined contribution savings, such withdrawal rates may increase the risk of exhausting their pension pot earlier than expected. However, Brooks cautioned that an 8% withdrawal rate might be appropriate for some savers, depending on their personal circumstances, household finances, and other sources of wealth.

Tax Uncertainty and Policy Concerns

Former pensions minister Steve Webb, now a partner at LCP, suggested that uncertainty around pension tax policy may have contributed to this rise. Webb pointed to speculation over restrictions on tax-free cash and plans to bring unused pension funds within estates for inheritance tax purposes from April 2027.

Annuity Purchases and Retirement Income

Annuity purchases rose by 13.2% to 100,144 in 2025/26. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, attributed this increase to higher gilt yields, which have pushed annuity rates higher. Morrissey highlighted that a 65-year-old with a £100,000 pension could now receive up to £8,061 a year from a single-life annuity with a five-year guarantee, compared to £4,940 five years ago.

She emphasized that while income drawdown and cash withdrawals remain popular, annuities continue to play a significant role in the retirement income market. Meanwhile, 64.5% of people entering drawdown took a pension commencement lump sum, up from 61.9%, reflecting the diverse strategies retirees are adopting to manage their retirement income.