There are four key things to consider, an expert has said
Antonia Medlicott(Image: Investing Insiders)
Reaching retirement should be a time for unwinding, savouring your leisure time and reaping the rewards of a lifetime of hard work and saving.
Yet, withdrawing money from your pension can sometimes disrupt this peace of mind, particularly when it comes to how it’s taxed. To help you hold on to as much of your pension as possible by minimising your tax burden, Antonia Medlicott, founder and managing director of financial education specialists Investing Insiders, has outlined four key considerations she believes everyone should bear in mind before drawing down their funds.
Personal allowance alert
“The standard UK income tax Personal Allowance currently sits at £12,570, so everything you earn up to this amount each year is free of tax,” Antonia explained. “However, your State Pension is also included in this amount at £12,548 in 2026/27, so you’re left with just £22 of tax-free income before making a single withdrawal from any other pension.
“This is something that many people forget and can seriously affect your pension plans if not accounted for. Almost everything you withdraw from your pension will be taxed at a 20% rate, rising to 40% if your income goes beyond the £50,270 threshold, so any drawing down should be thought out accordingly rather than dipping in as and when.”
Plan with your partner
Antonia explained: “One of the simplest and most effective ways to reduce your tax bill is overlooked surprisingly often. If you have a partner, that means two Personal Allowances and two tax bands.
“If you or your partner has a lower income, you can spread out the withdrawals between the two of you. By coordinating in this way, you can keep track of how close you both are to tax thresholds and avoid paying the higher rates, potentially saving you hundreds of pounds.”
Take out the appropriate sum
Antonia advised: “When taking any amount of money out of your pension, it’s important to keep two main things in mind: taking out only as much as you need, and making sure it will last. For example, with a £600,000 pot growing at 4% a year net of charges, withdrawing £25,000 a year will still leave you with £488,000 in the pot after 30 years.
“At £30,000 a year, you’ll be left with £196,000. But rise to £35,000 and your pot runs out after 28 years, reducing to around 22 years if you withdraw £40,000 annually.
“For the majority of people, annual withdrawals of between £25,000 and £32,500 are the sweet spot, allowing you to hit the “comfortable” standard of living whilst remaining under the dreaded £50,270 tax bracket. Withdrawals of this amount should also make your pension last a full 30 years, so you won’t have to worry about your pot running dry too early.
“It’s also worth keeping in mind that changes to pensions are on the horizon, more specifically for how they interact with your inheritance. From April 2027, pensions are expected to fall under estates when it comes to inheritance tax, meaning leaving extra cash in the pot may not be the sound strategy it once was for getting the most from your money. Because of this, ensure that your drawdown plan is one that you’re regularly reevaluating, rather than one that you leave unaltered after your initial strategy.”
Utilise your ISA alongside your pension
Antonia went on to say: “Building up a Stocks and Shares ISA alongside your pension is one of the smartest investment decisions you can make and if you’ve done so it gives you far more leeway when it comes to how you manage your retirement cash.
“Withdrawals from these ISAs are tax-free, meaning you can use these funds alongside your pension to have a meaningful combined income whilst keeping the taxable amount to a minimum. This is one of the most impactful and straightforward strategies available, yet it’s far too underused.”
