We’ll help you understand the basics and show you how being tax smart could make your life savings last longer

The good news

  • At age 55, you can dip into your pension whenever you like and normally get the first 25% tax-free. You can take this as one lump sum or in stages.

    This will increase to age 57 in 2028.
  • The rest of your income is taxable but everyone has a personal tax allowance (normally £11,850 for the tax year 2018/2019). You don't pay any tax on this.
  • Whatever age you are, you don't pay National Insurance on pension income and once you reach State Pension age you normally won't have to pay National Insurance at all.

The not so good news

  • You'll pay tax on all your pensions including your State Pension if your total income in a tax year from all sources is greater than your personal tax allowance.
  • Withdrawing all of your pension money in one go may be tempting but it means the balance above your tax free lump sum will all be taxed in a single year.

    You may be able to pay less tax and get more in your pocket by taking it over a longer period of time.
  • Taking out more than your tax-free cash limit can restrict the payments you or an employer can make to your pensions, normally to £4,000 a year.
  • Find out more about tax relief, limits and your pension.

Some handy tips to reduce your tax bill

There are a few perfectly legal ways to help you reduce the amount of tax you pay.

  • Transfer Personal Allowance

    Some married couples and civil partners may be able to save tax by transferring up to 10% of a non-taxpayers allowance to their spouse or civil partner. This only applies if the recipient is a basic rate taxpayer.

  • Tailored Drawdown

    Some pension products have more flexibility around how the funds are taken, allowing regular withdrawals to be structured to provide either phased payments of tax free cash, taxable income or a combination of the two.

    This flexibility may help you take funds more tax efficiently and you can make adjustments as your cisrumstances change.

    You may need to seek specific financial advice if you are considering this option.
  • Top up your pension

    If you're still working, making a pension contribution can reduce the income tax you pay. 

  • Make a contribution to charity

    Donate to charity under Gift Aid and reduce your total taxable income.

  • Salary Exchange

    If you're still working and under State Pension age, making a contribution using Salary Exchange can reduce the National Insurance that you pay too. Remember, Salary Exchange won't be right or available for everyone.

  • Transfer Assets to your Spouse or Civil Partner

    If your spouse or civil partner pays a lower rate of tax than you, then you could transfer income-producing assets such as savings or equities into their name. This would work if you're a higher rate taxpayer and they're a basic rate taxpayer or non-taxpayer.

    Remember though, each person has their own dividend and personal savings allowances and you could pay additional tax if you exceed these allowances. You may need to seek specific financial advice if you are considering this option.

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These tips should not be regarded as financial advice. The right approach for you will depend on your individual circumstances.

This information is based on our understanding of taxation legislation and regulations in April 2018. The legislation and regulations can change. Your personal circumstances also have an impact on tax treatment.

Access to impartial guidance

We recommend you seek appropriate guidance or advice before you make any decisions. An adviser may charge a fee for this. You can also get free impartial guidance over the phone or face to face with Pensionwise. Go to pensionwise.gov.uk or call 0800 138 3944. Make sure you understand all your retirement options by reading the Money Advice Service guide – Your pension - it’s time to choose

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