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        Updated: April 16, 2024

        Tax And Pension Drawdown

        Understand how to take your pension income tax-efficiently

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        Though we all pay taxes, very few of us have a full understanding of how they are calculated. In our working lives, many of us leave our income tax calculations in the hands of our employers and don’t think too much about it.

        Once you retire, if you choose pension drawdown as a way to fund your retirement, your income is under your control. One of the factors in how much you should take is how much tax you’ll need to pay. So, it becomes essential that you understand how pension drawdown is taxed (or that you work with an advisor who can instruct you).

        Is pension drawdown taxable?

        Partly. When you move money from your pension pot into drawdown, you’ll be entitled to take 25% of it tax-free. The technical name for this portion is your pension commencement lump sum (PCLS), and most people take it at the start of their retirement. The remaining 75% of your pension drawdown is taxed as income at your marginal rate.

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        How much will you pay?

        The simple answer is that pension income from drawdown is taxed the same way as most other income, i.e. according to HMRC’s income tax bands:

        • 0% (personal allowance) up to £12,570
        • 20% (basic rate) from £12,571 to £50,270
        • 40% (high rate) from £50,271 to £150,000
        • 45% (additional rate) over £150,000

        For example, if you received a pension income of £20,000 a year (and no other income), you’d pay:

        • 0% of the first £12,570, i.e. £0
        • 20% of the remaining £7, 430, i.e. £1,486
        • Therefore, the total tax due for the tax year would be £1,486

        Please note that these rates are correct for England, Wales, and Northern Ireland in the current tax year (2022-2023). Rates in Scotland are slightly different, and rates may change in future tax years.

        The maths become a little more complicated if you have any other sources of income (as most pensioners do), as income tax is based on your total taxable income, not just your pension drawdown. This includes things like:

        • Your State Pension
        • Some other state benefits, such as carer’s allowance
        • Any other pension income, such as a defined benefit pension and annuities
        • Rental income on a property you own
        • Income from full-time or part-time work

        Examples of how this works

        Below, we’ve provided four examples for how much tax would be due for four people with different pension values and incomes.

        Example 1

        Example 2

        Example 3

        Example 4

        Your pension

        Total pension value:





        25% tax-free lump sum:





        Taxable drawdown pension value:





        Your income

        Intended annual drawdown income:





        State Pension (approx..):





        Annual income from other sources:





        Total income:





        Your tax due

        0% up to £12,570





        20% up to £50,270





        One of these might help you understand approximately how much tax you’ll pay, or your own situation may look different.  You could try to do your own calculations using estimates of your pension and income, or you might decide it’s easier and quicker to speak to a professional.

        What is the most tax efficient way to drawdown your pension?

        There’s no one way to drawdown your pension that’s universally the most tax efficient. The answer will be different for everyone, depending on how much you have in your pension pot, how much money you need to live on, and what other sources of income you have.

        If you have no other sources of income and your expenditure is low, the most tax-efficient way to drawdown your pension is to keep your annual withdrawals under the personal allowance (currently £12,570), so you’ll pay no income tax.

        However, many people need more than that to live on. Plus, many pensioners have more than one source of income. In these cases, you might benefit from expert help to make your pension income drawdown as tax efficient as possible.

        How to get help reducing your tax bill

        Almost everyone can benefit from getting independent pensions advice. An advisor’s role includes telling you how to withdraw from your pension in the most tax-efficient way, based on their understanding of your circumstances.

        They’ll tell you how much, and how regularly, to drawdown from your pension to ensure that you’re not paying more tax than you need to. They’ll also tell you about other ways to withdraw from your pension, such as phased drawdown or uncrystallised funds pension lump sums (UFPLS), that might be more tax efficient for you.

        If you’d like to speak to an independent advisor, get in touch.

        Can you take 25% from your pension tax-free every year?

        If you decide to take your retirement income through drawdown, you’re entitled to take 25% of your total pension pot tax-free. Most people take their tax-free cash as a lump sum, at the start of their retirement. This means that it’s a one-off payment, not an annual payment.

        If you decide to take your retirement income a different way, such as phased drawdown or UFPLS, it’s possible to make an annual withdrawal and receive between 25% and 100% of that withdrawal tax-free. Your withdrawals don’t necessarily have to be annual, e.g. you might decide to withdraw every three months, every five years, or on an ad hoc basis.

        These are just some of your options upon retirement. The easiest way to find out if you would benefit from one approach over another is to seek individually tailored, expert advice.

        What are the tax rules for flexi-access drawdown?

        Here’s a summary of the drawdown rules:

        • You’re allowed to take 25% of your pension pot as a tax-free lump sum
        • Withdrawals from the remaining 75% are taxable as income
        • If your total taxable income for the year is below £12,570, you’ll pay no income tax
        • If you total taxable income is above £12,570, it will be taxed at your marginal rate (i.e. basic, higher, or additional)
        • If you die before the age of 75, your pension drawdown will be passed onto your beneficiaries tax-free as long as lifetime allowance is not breached and the funds are paid out to the beneficiary within 2 years of death.
        • If you die after the age of 75, your beneficiaries will pay income tax at their marginal rate on any lump sum or income payment they receive from your pension drawdown.

        Speak to a pensions advisor

        Unfortunately, there are far more tax rules around pensions than we can possibly cover here, with many applying only to small groups of individuals. To understand all the tax implications of your intended pension withdrawal plan, you should speak to an independent advisor.

        We can match you with an advisor who specialises in tax efficiency and pension drawdown, if you’d like. Just give us a call on 0808 189 0463 or make an enquiry.

        Speak to an expert today


        No, National Insurance contributions are not due on pension income.

        Ask a quick question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.

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        Tony Stevens

        Tony Stevens

        Finance Expert

        About the author

        Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

        Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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