How to Take Money From Your Pension Without Paying More Tax Than You Need To

If you have a defined contribution pension and you are approaching retirement, the way you take money out matters just as much as how much you have saved.

Get it right and you could significantly reduce the tax you pay. Get it wrong and you could hand thousands more to HMRC than you need to.

Here is what you need to know.

Why your State Pension affects your tax bill
Everyone in the UK has a personal allowance. This is the amount of income you can receive each year before you start paying income tax. In 2026/27 that allowance is £12,570.

The full new State Pension pays £12,548 a year. For those who receive the full State Pension, it may have already used up almost all of that allowance before a single penny is taken from a private pension. How much State Pension you receive depends on your individual National Insurance record, so this will not be the same for everyone.

What it means in practice is that for many retirees, pension withdrawals can be taxed at 20% from the very first pound. If total income goes above £50,270, the excess is taxed at 40%. Above £100,000 an effective 60% rate can kick in as the personal allowance starts to be withdrawn.

Think about taking your tax-free cash in portions

With a defined contribution pension in drawdown, you are entitled to take 25% of your pot tax-free. Many people take the whole lot on the day they retire. Taking it in smaller portions over time is worth considering instead.

When you take your pension in portions, 25% of each withdrawal is tax-free and 75% is taxable. This can help keep your taxable income lower in any given year. Whether this suits you will depend on your individual circumstances, including whether you have any large one-off spending needs, as this approach does use up your tax-free cash gradually over time.

Use your ISA alongside your pension
If you have a Stocks and Shares ISA or Cash ISA as well as a pension, withdrawals from an ISA are completely free of income tax. Drawing from both in the same year can allow you to take a larger combined income while keeping the taxable pension element lower. For anyone who has built up savings in both types of account, this is one of the most straightforward ways to manage the tax on retirement income.

Coordinate withdrawals with your partner
If your partner has a lower income than you, spreading pension withdrawals across both of you can make use of two personal allowances and two sets of basic rate tax bands. This can lower the overall household tax bill without either of you individually tipping into a higher rate bracket. It is a simple step that many couples do not think about.

Watch out for the MPAA
The Money Purchase Annual Allowance (MPAA) is a rule that catches a lot of people off guard. Once you take any taxable income from a defined contribution pension, beyond your tax-free cash, your annual pension contribution limit drops permanently from £60,000 to just £10,000. If you are still working and paying into a pension, this matters. Taking only your tax-free cash does not trigger the MPAA.

The 2027 inheritance tax change
From April 2027, unspent defined contribution pension pots are expected to be included in your estate for inheritance tax purposes at 40%, pending confirmation of the final rules. This changes the old advice of leaving your pension pot untouched for as long as possible. Whether it still makes sense for you will depend on the size of your total estate and whether you have other assets to draw on first.

What to do next
Use our free pension calculator to model different withdrawal scenarios: investinginsiders.co.uk/pension-calculator/

You can also check your State Pension forecast at gov.uk/check-state-pension, which will show you how much you are likely to receive and when.

If you are 50 or over, Pension Wise at moneyhelper.org.uk offers free, impartial government guidance on your retirement options.

For larger pots or more complex situations, speaking to a regulated financial adviser is worth considering.

This article is for general information only and does not constitute personal financial advice. It relates specifically to defined contribution pensions in drawdown. Tax treatment depends on individual circumstances. The amount of State Pension received depends on individual National Insurance accruals. Rules and rates are based on 2026/27 figures and may change. Capital at risk.