Tax when you get a pension
What's tax-free
You will not usually pay any tax if your total annual income adds up to less than your Personal Allowance - this is usually £12,570.
Lump sums from your pension
You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take is £268,275.
If you hold a protected allowance, this may increase the amount of tax-free lump sums you can take from your pensions.
The tax-free lump sum does not affect your Personal Allowance.
Tax is taken off the remaining amount before you get it.
Example
Your whole pension is worth £60,000. You take £15,000 tax-free. Your pension provider will then take off the tax from the remaining £45,000.
When you can take your pension depends on your pension scheme’s rules. It’s usually 55 at the earliest.
You might have to pay Income Tax at a higher rate if you take a large amount from your pension. You could also owe extra tax at the end of the tax year.
How you can take your pension
A pension worth up to £10,000
You can usually take any pension worth up to £10,000 in one go. This is called a ‘small pot’ lump sum. If you take this option, 25% is tax-free.
You can usually get:
- up to 3 small pot lump sums from different personal pensions
- unlimited small pot lump sums from different workplace pensions
A pension worth up to £30,000 that includes a defined benefit pension
If you have £30,000 or less in all of your private pensions, you can usually take everything you have in your defined benefit pension or defined contribution pension as a ‘trivial commutation’ lump sum. If you take this option, 25% is tax-free.
If this lump sum is paid from more than one pension, you must:
- have your savings in each scheme valued by the provider on the same day, no more than 3 months before you get the first payment
- get all payments within 12 months of the first payment
If you take payments from a pension before taking the rest as a lump sum, you pay tax on the whole lump sum.
Cash from a defined contribution pension
Check with your provider about how you can take money from a defined contribution pension. You can take:
- all the money built up in your pension as cash
- smaller cash sums from your pension
You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take is £268,275.
If you hold a protected allowance, this may increase the amount of tax-free lump sums you can take from your pensions.
You may have to pay a tax charge on money you put into your pension after you withdraw cash.
If your life expectancy is less than a year
You may be able to take all the money in your pension as a tax-free lump sum, if all of the following apply:
- you’re expected to live less than a year because of serious illness
- you’re under 75
- it’s below your lump sum and death benefit allowance
You’ll pay Income Tax on some or all of the lump sum if:
- you’re over 75
- it goes above your lump sum and death benefit allowance
Check with your pension provider. Some pension funds will keep at least 50% of your pension for your spouse or civil partner.