Retirement Tax Planning

Key facts

You can usually take 25% of your pension tax-free as a lump sum, up to a maximum of £268,275.
The State Pension is taxable income — the full new State Pension is £12,548 per year (2026/27).
Pension drawdown lets you take flexible amounts from your pension pot, taxed as earned income.
There is no lifetime allowance from April 2024, but the tax-free lump sum cap remains.
Careful ordering of income sources can keep you in lower tax bands and preserve your Personal Allowance.

The 25% Tax-Free Lump Sum

When you access your defined contribution pension (from age 55, rising to 57 from April 2028), you can usually take 25% tax-free. You have several options:^[2]

Take the full 25% upfront as a single lump sum, then draw from the remaining 75% (fully taxable)
Take it in chunks — each withdrawal is 25% tax-free and 75% taxable (uncrystallised funds pension lump sum, or UFPLS)
Enter drawdown — take the 25% tax-free, leave the rest invested, and draw as needed

Lump sum cap: Although the lifetime allowance was abolished from April 2024, the tax-free lump sum is generally capped at £268,275 across all your pensions. If you have a protected amount from before 6 April 2024, the cap may be higher.^[2]

The State Pension and Tax

The full new State Pension for 2026/27 is £12,548 per year (£241.30 per week). It is taxable income but paid without tax deducted.^[3]

Scenario	Tax Position
State Pension only (£12,548)	Below the Personal Allowance (£12,570) — no tax due
State Pension + small private pension	May push total income above £12,570 — tax due on the excess at 20%
State Pension + significant other income	The State Pension uses up most of the Personal Allowance, leaving other income taxed from almost the first pound

Planning point: If you defer your State Pension, it increases by 1% for every 9 weeks of deferral (approximately 5.8% per year). Deferring can be useful if you have other taxable income in early retirement and want to reduce your tax bill in those years.

Pension Drawdown Strategies

Flexi-access drawdown gives you the most control over your retirement income. Key strategies include:^[1]

Stay Within the Basic Rate Band

For 2026/27, the basic rate band runs from £12,571 to £50,270. If your State Pension is £12,548, you have roughly £37,700 of basic-rate capacity left. Drawing your private pension up to that level means all your income is taxed at 0% or 20%.

Use Your Personal Allowance Fully

If you have no other income, withdrawing up to £12,570 from your pension is entirely tax-free (on top of the 25% tax-free element). In years when you have lower income, draw more from your pension to fill the allowance.

Avoid the 60% Tax Trap

If your total income exceeds £100,000, you lose £1 of Personal Allowance for every £2 of income above that threshold. This creates an effective 60% marginal rate between £100,000 and £125,140. Manage withdrawals carefully to stay below £100,000 if possible.

Annuity vs Drawdown

Feature	Annuity	Drawdown
Income	Guaranteed for life	Flexible — you choose how much
Tax control	Fixed income, limited control	Full control over taxable withdrawals
Investment risk	None (insurance company bears it)	Your pension remains invested
On death	Usually stops (unless joint-life)	Remaining fund passes to beneficiaries
Inflation	Fixed unless index-linked (more expensive)	Investment growth may outpace inflation

The Money Purchase Annual Allowance (MPAA)

Once you flexibly access taxable pension income (e.g. via drawdown or UFPLS), the amount you can contribute to a money purchase pension drops to £10,000 per year. This is the MPAA. Taking only the 25% tax-free lump sum does not trigger it.^[1]

Important: If you plan to continue working and making pension contributions, be aware that accessing your pension flexibly will trigger the MPAA and restrict future contributions.

Pensions and Inheritance

Pensions are generally outside your estate for Inheritance Tax. If you die before 75, your beneficiaries can usually draw the pension tax-free. If you die after 75, withdrawals are taxed at the beneficiary’s marginal rate. This makes leaving pension wealth intact an effective estate planning tool.^[1]

Frequently Asked Questions

How much of my pension can I take tax-free?

You can normally take 25% of your defined contribution pension pot tax-free. The maximum tax-free lump sum is capped at £268,275 (25% of the old lifetime allowance of £1,073,100). If you have multiple pensions, the cap applies across all of them combined.

Is the State Pension taxable?

Yes. The State Pension counts as taxable income, although it is paid gross (without tax deducted). If you have other income, HMRC usually collects the tax by adjusting your PAYE code on any occupational pension or employment income. If you only receive the State Pension and it is below the Personal Allowance, no tax is due.

What is pension drawdown?

Drawdown (also called flexi-access drawdown) lets you keep your pension invested and withdraw amounts as and when you need them. Each withdrawal is 75% taxable and 25% tax-free. This gives you flexibility to manage your tax band year by year.

Should I take my entire pension as a lump sum?

Usually not. Taking your entire pension in one year could push you into the higher or additional rate tax band, resulting in a much larger tax bill. Spreading withdrawals over several years, or using drawdown, typically results in less tax overall.

Sources

Tax when you get a pension — GOV.UK
Pension withdrawal: tax-free amounts — GOV.UK
The new State Pension — GOV.UK