Tax and taking your pension savings - what you can do and what's changing

MoneyPlus Features Team

With the government confirming plans to change the age at which most people can first access money from their pensions, our tax tips can help you make the most of your pension savings.

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 carefully building up your pension savings, it’s important to be 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 September, the government confirmed plans to raise the age at which you can access money from your pension savings to 57 from 2028, with new legislation coming “in due course”.

Currently if you have a modern, flexible pension plan, you can access your money how and when you choose from the age of 55.

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

Taking a quarter of your pension savings tax free

A lot of people know that they can access some of their pension money without paying tax but perhaps 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 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 is 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 £12,500 of their income (for the year 2020/21), such as salary or rental income. Although, if your yearly income is over £100,000, you may not get this personal allowance.

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.

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, read Taking money from your pension savings soon? What you need to know.

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

Pensions 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 our guide to passing on your pension tax efficiently for more.

Want to find out more?

Read our tax guides for more helpful tax tips, or find out more about pensions at Pension Wise.

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 October 2020 and shouldn’t be taken as financial advice.

Tax and legislation may change and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.

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