More than 292 people fully withdrew a pension pot of £250,000 or more between October 2023 and March 20241, resulting in a tax bill of at least £98,700 each2, according to new analysis of FCA figures by Standard Life, part of Phoenix Group. This is 70 more fully encashed pots over £250,000 than in the period between October 2022 and March 2023 (222). In the same period, 1,593 people fully encashed a pot of between £100,000 and £249,000, 56 more than in the period October 2022 to March 2023, which would lead to a minimum £27,400 tax bill for each person. Someone fully withdrawing a pot of £174,500, the middle point of that range, would pay a minimum of £64,700.
Those fully encashing larger pots between October 2023 and March 2024 would have experienced an increase in tax compared to 2022/23, because of the threshold for additional rate tax being lowered from £150,000 to £125,140 from April 2023 – with those enchasing pots of £250,000 paying an additional £1,200 in tax. These figures only take the pension into account – people with other sources of income at the time of withdrawal would pay even more tax. This is because when people fully encash their pension, HMRC tax anything above their 25% tax free pension cash as income, so it’s taxed like an ongoing salary.
Tax on fully encashed pension pots, after tax-free cash
*Figures rounded to nearest £100
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group said: “A huge number of people are paying a disproportionate amount of tax to access their pension. It’s impossible to know whether their individual circumstances warranted them taking such a big tax hit, but for the vast majority of people it’s something they’ll want to avoid. When deciding how to take your retirement savings, it’s important to know that most pension income is eligible for tax, like other income. Fully encashing a large pot will almost always mean a very large tax bill, sometimes taking away many years’ worth of savings. While some people want to withdraw their entire pension and put it in their bank account for ease of access, this can be financially detrimental. Not only does this mean their savings become eligible for tax but it also means they’re potentially giving up investment returns. The good news is there are ways to make withdrawing your retirement savings more tax efficient and it’s possible to spread your withdrawals over many years which can be more efficient.
“Taking just one option at retirement, such as just cash or an annuity could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the round. It’s worth considering a combination of flexible and guaranteed income which could help you achieve the best of all worlds – you could, for example, annuitise a portion of your income to cover essential outgoings, and leave the rest in drawdown to access as and when you need it. Be sure to speak to your pension provider about your options, and ideally seek advice or guidance when taking your pension.”
Mike’s pension withdrawal tax tips
How much tax will I pay on my pension pots?
“The first thing to note is that most people will get 25% of their pension pot tax-free, and the remaining 75% is taxable. The amount of tax you pay on that 75% will depend on things like your tax code, the amount you take at a time and whether you have any income from elsewhere or not. Don’t forget, the total amount you can normally take tax-free across all your pension pots is now £268,275, unless you have specific protections in place. And remember, most people can’t access their pension pots until they reach age 55 (rising to 57 in April 2028). Keep in mind everyone gets a tax-free Personal Allowance every tax year, in the same way you do when working. For the 2025/26 tax year, the Personal Allowance is £12,570, and it’s been frozen at that level for a few years now and is due to remain there until 2028. Anything you take above this amount will be taxed as earned income according to your tax band.”
Work with your Personal Allowance
“The simplest way to avoid paying too much tax is to make sure you don’t take any more from a pension pot than you need to. Taking it in small, regular chunks could keep your tax bill down. Remember, you only pay income tax on anything over your Personal Allowance. So, if a pension pot is your only source of income, you could take £12,570 from it each tax year and not pay any tax on it at all. On the other hand, if you were to take multiple large lump sums from your pot in the same tax year (outside of your 25% tax-free entitlement), you could potentially find yourself pushed into a higher tax bracket.”
Combine tax-free with taxable
“Remember you don’t necessarily need to take all of your tax-free lump sum in one go. You can usually take it in chunks over a number of months or years – as long the type of pension plan you have lets you do this. So you could choose to take a withdrawal from the taxable portion of your pot, and top it up with some of your tax-free amount. In theory, every month, you could take £1,000 from the taxable part of your pot (staying under your £12,570 personal allowance) and £1,000 from your tax-free part. That would give you an income of £2,000 each month without paying any tax at all. This is just an example – you can usually switch up the amounts to suit you. We call this ‘tailored drawdown’ – you can find out more about how it works in What is tailored drawdown? Not all providers will offer this option, so do check what your options are and shop around if you need to.”
Take some income from your ISA instead
“Unlike your pension pots, the savings in your ISA generally won’t be taxed at all when you take them. You can pay in up to £20,000 each tax year (across all your ISAs), and you won’t pay tax on the withdrawals, or on any gains you might make. So, if you’ve got some savings in an ISA, you could think about using them to top up the income from your pension to help keep the tax down. Or you could use your ISA to cover your retirement income entirely before touching your pension. For some people, the earlier years of retirement can be a bit more expensive, so the amount of income you need is higher. So it could make sense to use the tax-free withdrawals from your ISA to cover this period. Then, as you get older and further into retirement, you might find some of your costs start to come down. Maybe you’ve paid off the mortgage, the kinds of hobbies you have are less expensive, or your children don’t rely on you for financial help anymore. All of this could mean you can eventually afford to live off a more modest amount from your pension. And, as you know, the less you take, the less tax you pay.”
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