How tax works on money you take out

You can take a quarter of your money tax free

You can take this amount as a tax-free lump sum. The rest, no matter how you take it, is treated as income. That means you might have to pay tax on it. If your total yearly income is higher than your personal allowance – an amount set by the government – you’ll pay income tax on any income that’s over the allowance. The personal allowance for 2024-2025 is £12,570.

If you don’t want a lump sum and you keep all your savings invested, a quarter of any income you take from them would be tax free. The rest would be treated like earned income. You’d pay tax on any income that’s over your personal allowance.

You could choose to take all of your pension savings out at once. If you did, a quarter of the money would be tax free. The rest would be treated as income. You’d pay tax on any income that’s over your personal allowance. Taking all your money out at once could mean you move into a higher tax bracket, so you might end up with a big tax bill.

You might need to claim back some tax from HMRC

The first time you take some money out of your pension savings (other than your tax-free lump sum), HMRC assumes that you’ll be taking this amount out regularly. This can mean that they over-estimate your annual income and, as a result, charge you too much tax. If you’re not taking the same amount out every month, contact HMRC. They will change your tax code – so you pay less tax – and arrange to pay back any overpaid tax.

Taking your money could affect how much you can save into other pension plans

If you choose to take all your money out as cash, or to keep it invested and take a bit out at a time, it reduces the amount you can save into other pension plans. For this tax year, it would mean you’re allowed to save a maximum of £4,000 into other pension plans.