How to be tax savvy with your pension savings

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MoneyPlus Features Team

July 08, 2021

5 mins read

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.

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 money.

Everyone’s needs and circumstances are different, and the rules around tax and taking money from your pension savings can change over time. 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 you access your pension money?

In autumn 2020 the government confirmed plans to raise the age at which you can access money from your pension savings to 57 from 2028, saying new legislation would be coming “in due course”.But currently if you have a modern, flexible pension plan, you can access your money how and when you choose from the age of 55.

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.

Taking a quarter of your pension savings tax free

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% – tax free. If you have a modern, flexible pension plan, when you take this is up to you. You can take it all at once. But you don’t have to.

You can take it in slices over a number of tax years if the pension plan you have lets you. This is known as phasing, and could be a smart move as it tends to be more tax efficient overall.

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 amount 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 you take your money can make a real difference

Apart from wanting to make your money last, 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 2021/22), 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 what you’re taking tax free, 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 cash and any personal allowance you get every year.

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 relief will be limited to £4,000 per tax year – known as the Money Purchase Annual Allowance.

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.

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 as well, try MoneyHelper or read our article Taking money from your pension plan soon? Here’s what to think about.

The potential benefit of little and often...

Whatever your plans for life after 55, whether that’s to continue working, work less, set up your own business, or travel, taking out just what you need and leaving the rest in your pension plan until you need it could be a clever 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 pot.

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. 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.

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

The information here is based on our understanding in July 2021 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.



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