Economic inactivity among older people has risen in recent years, and pension flexibilities may be one contributing factor. The 2015 reforms created a financial bridge that makes it easier to leave work before State Pension age. Stopping work early used to mean relying on benefits or finding another source of income. With working-age benefits providing below poverty income levels, pensions have become a more appealing and often necessary way to replace lost earnings.
Accessing pension savings can be a rational choice. People in their 50s and 60s may face health problems, caring responsibilities, or redundancy, with limited opportunities to re-enter the labour market and drawing on pensions may be the only alternative to poverty. In 2020–2021, 57% of 60- to 65-year-olds with a Defined Contribution pension had accessed at least one pot, most commonly at age 60. Two-thirds of those who accessed took a lump sum, with 38% using it for day-to-day costs. Nearly half of those aged 55–65 who access their pensions have no other private pension savings, meaning their future retirement income will depend heavily on what remains after these early withdrawals.
Pension access behaviour also responds to wider economic and policy pressures. In 2024–2025, tax-free cash withdrawals jumped to £18 billion, a 61% increase on the previous year. Almost 60% of this activity happened between September and March, coinciding with Budget rumours, and the 30 October announcement that unspent pension assets would be included in inheritance tax calculations from April 2027. This shows how quickly behaviour can shift when financial uncertainty rises, with many people using pensions to meet urgent needs rather than to plan for the long term.
Without the guaranteed income that DB pensions provided, early access can mean permanently lower retirement incomes. Yet it is important to recognise that the decision to access pensions early is often driven by necessity. Pension freedoms are filling gaps that other policies, such as working-age benefits and employment support, should arguably address.
The role of pension freedoms in enabling earlier exits from the workforce has received little attention. It remains unclear whether access to pensions directly encourages people to leave work, or simply supports decisions they would have made anyway. Understanding this link matters. If people are being forced to rely on pensions because other parts of the system are failing to support them, there is a risk that flexibility today will come at the cost of financial security tomorrow — both for individuals and for the state, which may face higher demand for later-life benefits as private savings run down.
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