When pension freedoms were introduced in 2015, they were meant to empower savers – giving people more choice over how to access their money. And they have. But they’ve also revealed something else: we are not always rational when faced with choice, especially when that choice involves our own money.
The Financial Conduct Authority’s (FCA) 2024/25 Retirement Income Market Data shows that almost half of all pension pots accessed were taken entirely as cash, and fewer than one in three of those withdrawals were made after regulated financial advice. This means thousands of people may be making permanent decisions based on short-term emotions, and behavioural science can help explain why.
When reading this article, please bear in mind that tax treatment depends on your circumstances and is subject to change.
FCA data shows that almost 50% pots accessed in 2024/25 were withdrawn in full, with the average size of these pots being just under £15,000. While these aren’t typically life-changing sums, the cumulative effect is significant: more than 400,000 people each year now deplete their pension savings entirely within months of reaching minimum access age.
At first glance, it looks sensible: pay off debts, support family, or keep cash in an accessible savings account. But many end up worse off, not because of bad intent, but because of how human psychology interacts with financial decisions.
Behavioural economists call it present bias: the tendency to value money or rewards today more than greater rewards tomorrow.
It’s the same instinct that makes us choose to spend a £100 windfall on something fun now, rather than invest it for future growth. In pension terms, it’s what drives many people to think, “It’s my money – I’ll take it now,” without fully accounting for how long that money may need to last.
Even though the rational part of the brain knows that drawing money early means losing potential growth, the emotional satisfaction of control and immediacy often wins. This is particularly powerful at retirement, when income stops and the security of a regular wage disappears. Taking a lump sum can feel like re-establishing control.
Another behavioural bias, loss aversion, makes us feel the pain of loss roughly twice as strongly as the pleasure of an equivalent gain1.
When markets fall, or when we see negative headlines about the economy, many instinctively want to withdraw their pensions to protect them from loss. In reality, this can lock in poor returns and forgo recovery potential.
FCA data shows changing volumes of drawdown withdrawals year-to-year; Some commentators link these patterns to market conditions. Yet most retirees will probably spend 20–30 years in retirement, enough time for multiple market cycles. Selling investments in response to fear can therefore turn a temporary dip into a permanent loss.
We all use mental accounting: categorising money by its source or purpose. For example, people treat an inheritance differently from salary, or view pension money as separate from savings.
This can lead to unhelpful thinking, such as:
Older FCA qualitative research found many full cash-out decisions were driven by a desire to hold cash for perceived safety and mistrust of pensions2. While understandable, this often means swapping tax-efficient, inflation-linked growth for low-interest cash that can lose real value over time.
Previous FCA research2 records reports of consumers being surprised by higher-than-expected tax bills and later concerns about sustainability after full withdrawal.
And once a pot is withdrawn, the damage is usually permanent. Taking taxable income triggers the Money Purchase Annual Allowance (MPAA), permanently reducing future pension contribution limits from £60,000 (or your gross annual salary, whichever is lower) to £10,000 per year. For those still working, this can severely restrict the ability to rebuild pension wealth later.
Financial decisions in later life are rarely just about money. They’re about security, identity, and control; emotions that behavioural finance recognises as far more influential than spreadsheets or forecasts.
Each of these instincts is human, but unexamined, they can lead to decisions that conflict with long-term goals.
Behavioural biases aren’t unique to pensions, they shape all financial decisions. But in retirement, when each choice carries permanent consequences, awareness matters most.
It’s fair to say that the people who benefit most from the new flexibility are those who take the time to understand how their instincts influence their money.
The key isn’t to ignore emotion, it’s to design strategies that work with human behaviour, not against it.
Taking pension money early can feel empowering, but without a plan, it can also be expensive. The FCA’s data shows that most people who fully cash out their pensions do so without advice, likely driven by emotion rather than need.
Behavioural science explains why this happens. Financial planning explains how to prevent it. Recognising our own biases: present bias, loss aversion, and mental accounting is the first step toward more confident, sustainable decisions.
Retirement isn’t just about accessing your money; it’s about ensuring it lasts.
Paul Dunne
CEO
Chartered Financial Planner and Fellow of the Personal Finance Society
Discover more on this website about our services and how we do things. If you are ready to start your journey towards a more secure retirement:
1 Kahneman, D., & Tversky, A. (1977). Prospect Theory. An Analysis of Decision Making Under Risk.
2 FCA Retirement Outcomes Review – Interim Report: MS16/1.2 (July 2017)
This article is for information only and does not constitute personal advice. If you are considering taking money from your pension, seek regulated financial advice before doing so.
