Why advisers say many over‑55s should delay cashing in their pension lump sum – and what to consider first

Thomas Wilkins • December 10, 2025 16:26

On a grey Thursday in Manchester, Linda opened her banking app and saw the advert again: “Over 55? Take £30,000 tax‑free from your pension today.” The picture showed a couple on a beach, not someone checking the supermarket receipts twice before the till. She was 57, still working, and her pension pot suddenly felt like a long‑lost savings account.

Her colleague had already taken his lump sum “just in case”, parked it in a cash ISA, and insisted she was daft not to do the same. Her son mentioned a deposit on his first flat. Her mortgage rate had crept up. The money was there. Why not use it?

Because that “tax‑free cash” is not magic money. It’s part of a plan that has to last as long as you do. And advisers say the timing of when you touch it can quietly make or break that plan.

The offer that lands in your inbox at 55

Since pension freedoms arrived, most defined contribution pensions let you take up to 25% of your pot as a tax‑free lump sum once you reach the minimum pension age (currently 55, rising to 57 in the coming years). The rest stays in the pot to provide taxable income later.

On paper, it looks clean and simple: take the quarter you “don’t pay tax on”, leave the rest invested, carry on with life. In practice, the minute you press the button you’re changing how your retirement money works, how it’s taxed, and how long it’s likely to last.

The marketing leans on emotion. “You’ve worked hard, you deserve this.” You probably do. But a decision built on a slogan rather than on numbers can store up quiet problems for your 60s and 70s.

Why many advisers say: “Wait if you can”

Advisers aren’t against lump sums. They are against reflexes. The common advice to delay isn’t about denying you your own money; it’s about how pensions behave in the background.

Several things happen when you grab the cash early:

You shrink the engine that has to fund your later life.
A £100,000 pot that keeps growing tax‑sheltered is not the same as a £75,000 pot and £25,000 in a low‑interest account. Over a decade or two, the gap in growth can be stark.
You may trigger stricter limits on future pension saving.
Once you start taking taxable income from most defined contribution pensions, a rule called the Money Purchase Annual Allowance (MPAA) usually kicks in. That can sharply cut how much you can pay into pensions with full tax relief each year. Taking only the 25% lump sum and leaving the rest untouched in drawdown generally avoids this, but a mis‑step can box you in.
You move money from a tax‑efficient shelter into the normal tax world.
Pensions grow largely free of income tax and capital gains tax. Many people take their lump sum and just leave it in the bank. The money feels “safer” but may now be losing to inflation and earning taxable interest.
You can accidentally create bigger future tax bills.
Some people take a large lump sum and slowly spend it while still paying into pensions or ISAs. Later, when they truly retire, their remaining pension is smaller, so they rely more on taxable savings income just as the State Pension starts. The mix can push them into higher tax rates than if they’d left more in the pension.
You may disturb means‑tested benefits.
If you’re on, or might need, means‑tested support, large cash holdings can be treated less kindly than money left in a pension. The rules are subtle and can change, but an early lump sum can reduce what help you’re entitled to.

Here’s how some of those reasons line up in practice:

Reason to delay	What it means	Who feels it most
Growth on the full pot	More money compounding tax‑sheltered for longer	People 55–60 still working
MPAA restrictions	Much lower annual pension allowance if triggered	Anyone still building pension savings
Benefit interactions	Cash can count against you; pensions often don’t (until drawn)	Those on current or likely means‑tested benefits

The thread through all of this is simple: your “tax‑free cash” is deeply tied to how the rest of your retirement will work. Taking it because it’s available is very different from taking it because it’s needed.

When cashing in does make sense

Delaying isn’t always the right answer. There are clear cases where advisers are more likely to say “yes, take it”.

Clearing expensive, unsecured debt.
If you’re carrying persistent credit card balances or personal loans at high interest, using part of your lump sum to wipe them can be powerful. You’re effectively getting a “return” equal to the interest you stop paying.
Topping up an emergency fund.
Going into your late 50s and early 60s with no cash buffer can drive you back to debt when the boiler fails. Ring‑fencing a modest slice of lump sum as a true emergency pot, then leaving the rest invested, can be sensible.
Bridging a short, planned gap.
If you’re stepping back from work a year or two before other income (such as the State Pension or a defined benefit pension) kicks in, a measured, pre‑planned use of tax‑free cash as a bridge can avoid panic withdrawals later.
Serious health concerns.
If your life expectancy is genuinely shortened, the trade‑offs change. Accessing money earlier, perhaps to adapt your home or simply to enjoy it, can matter more than preserving a pot for a distant age you’re unlikely to reach.
Avoiding forced choices in a crisis.
Sometimes, a partial lump sum gives you breathing space to make better long‑term decisions: paying for retraining after redundancy, covering a partner’s illness, or buying time to sell a business at a decent price.

The key pattern in all these situations is that the money has a specific job. “I’ll just take it and see” rarely ends as well.

Questions to ask yourself before you touch your pot

Before you log in and slide the bar to “25%”, sit with a notebook or a spreadsheet and work through a few blunt questions.

Do I genuinely need this cash now, or do I just like the idea of having it?
List what you’d use it for. If most of the list starts with “maybe” or “nice to”, you may be raiding tomorrow to soothe today’s anxiety.
What other savings do I have outside my pension?
If you have healthy cash and ISA balances, you may be better off using or reshaping those first, keeping your pension intact for later.
How close am I to stopping work fully?
Someone 56 with ten more years of earnings has more to gain from continued pension growth than someone 64 already semi‑retired.
What will this do to my tax position this year and next?
The lump sum itself is tax‑free, but any taxable income you take alongside it, or interest on cash you move into the bank, isn’t. Model rough figures for now and for when your State Pension starts.
Could this affect benefits I rely on or may rely on?
If you receive means‑tested benefits, or suspect you might in future, ask a specialist or use reputable benefits calculators before shifting money into cash.
Have I considered my partner’s situation?
Your pension decisions interact with your partner’s income, tax bands, and inheritance. Sometimes, building up pension in the name of the lower earner is more efficient than raiding one pot early.

If you struggle to answer these on your own without drifting into “it’ll probably be fine”, that’s a warning sign to slow down.

Smarter ways to access pension cash

Accessing your pension doesn’t have to be all‑or‑nothing: 25% now, the rest “later”. The rules allow more nuanced approaches that advisers often prefer.

Phased or “slice‑by‑slice” withdrawals.
Instead of one big lump sum, you can move portions of your pot into drawdown over time. Each portion pays out 25% tax‑free and 75% taxable. Done well, you can keep taxable income within your personal allowance or basic‑rate band year by year.
Taking only the tax‑free element at first.
Some people move money into flexi‑access drawdown, take just the tax‑free cash, and leave the taxable part invested. As long as no taxable income is drawn, the stricter annual allowance rules typically don’t bite. This keeps flexibility open if you carry on working and contributing.
Using ISAs and cash first for smaller, known spends.
If you’re eyeing a new car, home repairs, or helping children with rent, and you already hold ISA savings, many advisers would spend those before touching the pension. ISAs don’t have the same inheritance and tax quirks as pensions.
Being wary of “emergency tax” on first withdrawals.
The first taxable payment from a new pension arrangement is often taxed using an emergency code until HMRC catches up. That can mean too much tax taken up front, which you later reclaim. Planning the timing and size of that first payment can reduce admin shocks.

Underneath these tactics is a quiet theme: steer the flow of money so it fits inside your tax bands, your real spending, and your long‑term plan instead of splashing over all three at once.

Simple rules of thumb to start from

Rules of thumb are no substitute for advice, but they can keep you out of obvious trouble.

If you’re under 60, still working, and not under acute financial pressure, delay taking a full lump sum by default. Review the idea every year instead.
If a firm is pressuring you to “unlock cash now” or implying there’s a deadline beyond normal pension rules, step away. Reputable providers do not need urgency tricks.
If clearing high‑interest debt or building a basic emergency fund would improve your sleep dramatically, consider a controlled, partial lump sum, not an all‑or‑nothing raid.
If you’re close to the point where the State Pension and any defined benefit pensions start, map out your income year by year. Use rough numbers but be concrete. That map should guide how and when you tap tax‑free cash.
If the jargon or the paperwork makes your head spin, use the free guidance on offer before you sign anything.

Where to get help that isn’t trying to sell you something

You don’t have to figure this all out alone, and you don’t have to start with someone whose fee depends on you moving money.

Pension Wise (via MoneyHelper).
If you’re 50 or over with a defined contribution pension, you’re entitled to a free, impartial appointment where someone walks you through your options and the implications. It’s not full advice, but it’s a solid grounding.
Regulated financial advisers.
For complex situations - multiple pots, business assets, illness, blended families - a chartered or independent financial adviser can build a plan that fits you. Check they’re regulated in the UK and how they charge: fee‑based, not commission on products you don’t need.
Workplace pension helplines and provider tools.
Many schemes offer calculators, webinars, and helplines. They won’t tell you what to do, but they can explain how your specific plan’s options work in practice.

Let’s be clear: this is your money, and there’s no moral virtue in never spending it. The point is timing and purpose. A pension lump sum used at the right moment can feel like a life raft. Used on impulse, it can quietly punch a hole in the boat you were counting on for your 70s.

FAQ:

Is the 25% pension lump sum always completely tax‑free?
In most standard UK defined contribution pensions, up to 25% of your pot can be taken tax‑free, either in one go or in stages. The exact limits and rules can change, and special arrangements may apply to older or public‑sector schemes, so always check your scheme’s terms and current HMRC guidance.

Will taking my lump sum affect my State Pension?
The State Pension itself isn’t reduced if you take a lump sum, but the extra cash and any income it produces can affect means‑tested benefits that sit alongside it. It’s the wider benefits picture, not the State Pension payment, that may shift.

What if my pension is a final salary (defined benefit) scheme?
Defined benefit schemes have their own rules about lump sums, often involving exchanging part of your annual pension for cash. Giving up guaranteed income for a one‑off sum is a big trade‑off and usually needs tailored advice.

Can I change my mind after taking the lump sum?
Once the money is paid out, you can’t put that specific tax‑free entitlement back into the pension. You may still be able to contribute new money, within allowances, but the original decision is effectively permanent.

Is this article personal financial advice?
No. It’s general information to help you frame the right questions. Your age, health, savings, debts, benefits, and family situation can all shift the “right” choice. If you’re unsure, speaking to Pension Wise and, if needed, a regulated adviser is the safest next step.