Retirement should be a time to relax and enjoy the fruits of your labour, but withdrawing money from your pension can sometimes complicate matters, especially with tax implications. To help you keep more of your pension pot, Antonia Medlicott, founder and managing director of financial education specialists Investing Insiders, shares four key considerations before drawing down funds.
Personal Allowance Alert
The standard UK income tax Personal Allowance is currently set at £12,570, meaning everything you earn up to this amount each year is tax-free. However, your State Pension is included in this figure, and for 2026/27 it stands at £12,548. This leaves you with just £22 of tax-free income before making any withdrawals from other pensions. Many people overlook this, and it can significantly affect pension plans. Almost everything withdrawn from a pension will be taxed at 20%, rising to 40% if income exceeds £50,270. Therefore, withdrawals should be carefully planned rather than taken ad hoc.
Plan with Your Partner
One of the simplest ways to reduce your tax bill is often overlooked: if you have a partner, you have two Personal Allowances and two tax bands. By coordinating withdrawals between you, especially if one partner has a lower income, you can spread out the withdrawals and avoid higher tax rates. This could save you hundreds of pounds.
Withdraw the Right Amount
When taking money from your pension, keep two things in mind: take only what you need, and ensure it lasts. For example, with a £600,000 pot growing at 4% net of charges, withdrawing £25,000 a year leaves £488,000 after 30 years. Withdrawing £30,000 leaves £196,000, but £35,000 a year depletes the pot in 28 years, and £40,000 in 22 years. Annual withdrawals between £25,000 and £32,500 are often the sweet spot, providing a comfortable standard of living while staying under the £50,270 tax bracket and lasting 30 years. Also, from April 2027, pensions are expected to be included in estates for inheritance tax purposes, so regularly reevaluate your drawdown plan.
Use Your ISA in Tandem with Your Pension
Building a Stocks and Shares ISA alongside your pension is a smart investment decision. Withdrawals from ISAs are tax-free, so you can use these funds alongside your pension to have a meaningful combined income while keeping taxable amounts to a minimum. This straightforward strategy is underused but highly effective.
