Discover tax-efficient ways to take your pension money

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Find out what you need to know about accessing your pension savings and the tax tips that can help you make the most of them.

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Pension plans give you choices – especially when the time comes to consider how best to use the money you’ve saved.

But when you’ve spent a long time striving to build up your pension pot, it’s important to feel confident you’re making the right choices and getting the most out of your pension savings.

Everyone’s needs and circumstances are different, and the rules around tax and taking money from your pension savings can change over time and will also depend on where you live in the UK. So, we want to outline your options, give you some tips on being tax savvy and bring you up to speed with rules and changes you might not be aware of.

When can I access my pension money?

Currently if you have a defined contribution pension, you can access your money how and when you choose from the age of 55. The government confirmed this will be changing to age 57 from 2028.

You’ll have a number of options available including taking a flexible income, buying an annuity, taking cash lump sums or leaving your pension plan invested, and you should carefully consider things before making any decisions. You can read more on our retirement page.

If you’re considering taking money from your pension savings as a flexible income, also known as drawdown, it’s important to know how that will be taxed. More on this later.

Can I take 25% of my pension tax free every year?

You may know that people can usually access some of their money without paying tax, but perhaps you aren’t sure how it works.

When you access your pension savings, you can normally take a quarter – 25% – of your total pot tax free. You can take it in slices over a number of tax years if the pension plan you have lets you, but you don’t get a new 25% tax-free entitlement each year.

If you have defined contribution pension, when you take your tax-free entitlement is up to you. You can take it all at once. But you don’t have to – remember, once it’s gone, it’s gone.

And, of course, just because you can, doesn’t mean you should take all – or any of it. The longer your money stays untouched inside your pension plan, the more potential it has to grow in a tax-efficient way and the higher your tax-free entitlement could be. Of course, that’s not guaranteed and because money in your pension plan remains invested, its value can go down as well as up and could be worth less than what’s been paid in.

How much tax will I pay on my pension money?

When and how you take it can make a big difference to how much tax you pay.

Taking money little and often can make all the difference so that you don’t pay more tax than you need to.

Most people will have a personal income tax allowance that means they don’t have to pay tax on the first £12,570 of their income (for the year 2022/23), such as salary or rental income. Although, if your yearly income is over £100,000, you may not get all this personal allowance. You can find out more on the Government’s Income Tax rates and Personal Allowances pages. Remember that your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay and laws and tax rules may change in the future.

When you take money from your pension savings over your tax-free entitlement, it’s taxable just like any other income – as is the State Pension, when it kicks in. That means you pay income tax on anything above your tax-free entitlement and any personal allowance you get every year.

How much income tax you pay will depend on which tax band your income falls into. By taking just enough to keep in the lowest tax band you can, you could keep more of your money overall.

Do I pay tax on my pension income if I am still working?

Yes, you’ll still pay income tax on your pension money if you’re working when you take it. However, it’s important to understand how taking your pension money could affect the amount you can pay in.

Once you start flexibly accessing any taxable income from your pension savings, the amount that can be paid into any of your pension plans while still getting tax benefits will be limited to £4,000 per tax year – known as the Money Purchase Annual Allowance.

For more about the tax implications of taking money out of your pension savings, including what to consider if you’re planning to keep working and paying into your pension plan as well, try MoneyHelper or read our article Can I take money from my pension plan at 55 and still work?

The potential benefit of little and often

Life after 55 is full of possibilities – whether that’s to continue working, work less, set up your own business or do some travelling. Whatever your plans, taking out just what you need and leaving the rest in your pension plan until you need it could be a sensible move for many people. This is because you’re keeping your money invested with the potential for growth.

Taking out more than you need and putting it in a current or low-interest savings account, for example, means you lose that potential for growth, and as costs rise with inflation this means you can afford to buy less with your savings.

Last but not least, passing it on

Pension plans can be a great way to pass your money on to whoever you want to inherit it. And the good news is that inheritance tax isn’t normally payable on your pension savings.

However, as Wills don’t usually cover pension plans, it’s important to tell your pension provider(s) who you want your money to go to on your death. You can do this by nominating your beneficiaries and keeping these details up to date. Your provider(s) will take your wishes into account but cannot be bound by them. Read MoneyHelper’s Death and Pensions guide for more.

Want to find out more?

Read our guide on Ways to take your pension money for more helpful tips, or find out more about tax and pension plans at Pension Wise, a service from MoneyHelper.

If you’re looking to access your Standard Life pension savings, get started by registering or logging in online.

But before making any decisions it could be a good idea to talk your tax position through with a financial adviser - there’s likely to be a charge for this. If you don’t have an adviser, you can find one at unbiased.co.uk

The information here is based on our understanding in July 2022 and shouldn’t be taken as financial advice. 

A pension is an investment, the value can go down as well as up and you could get back less than you paid in.

Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment