Over three-quarters of people (76%) aged 55 to 64 say they have already taken the tax-free lump sum from their pension, with many spending the money on discretionary purchases rather than retirement costs, AJ Bell has found.

Among those who had taken a lump sum, only 30% used their first pension payment to cover living costs. A further 26% spent it on home improvements, 21% on holidays, 19% on paying off debt and 16% on a new car.

AJ Bell found that 26% of people took their first pension payment while they were still working. Among those who did no work in retirement, 23% had drawn money from their pension before stopping work altogether.

Sarah Coles, head of personal finance at AJ Bell, said: "The tax-free lump sum is everyone’s favourite part of the pension. People with little or no interest in pensions overall hit the age of 55 and realise they can get their hands on tens of thousands of pounds overnight.

“However, there’s a risk some of them are doing so without considering the impact on their overall retirement income.”

"It’s technically known as the Pension Commencement Lump Sum, but it’s known to most people as tax-free cash. The vast majority of people take this money, but this research rings alarm bells over how they’re doing it, and what they’re spending the money on."

Budget speculation about changes to pension tax-free cash could further encourage people to withdraw money prematurely. AJ Bell analysis of Financial Conduct Authority (FCA) data found that people took an estimated £14bn more from pensions in 2025/26 than they would have done without speculation over a potential change, following an estimated £10bn increase the previous year.

According to investment firm, the trend was particularly concerning because the Pensions Commission estimated that 14.6 million people were not saving enough for retirement, rising by a further two million if people took their tax-free cash and spent it.

AJ Bell said it was calling on Chancellor John Healey to introduce a 'pension tax lock' to prevent further speculation from encouraging withdrawals that could undermine retirement incomes.

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