Those aged 55+ now have increased freedom and flexibility around accessing their pension savings.

Our clients often ask us whether they should withdraw money early from their pension. Whether you’re looking to withdraw a lump sum or you want a regular income, our Wealth Management Team are on hand to discuss your options and work with you to compare the various pension products available. They offer independent advice and research the best solution to achieve your current and future needs and aspirations.

But what about the tax implications of withdrawing your pension early? Your pension pot remains tax free if you leave it alone, but once you start to take money from your savings, the money becomes taxable. Here we take a look at the various tax implications of dipping into your pension pot early.

Guaranteed Income (or Annuity)

One option is to use your pot to buy an annuity or ‘guaranteed income’. If you withdraw money from your pension, the first 25% of your pot before you buy the annuity will be tax-free. However, any income from the annuity will be taxed like any other income, at your normal rate.


Steve earns £35,000 a year and has a pension pot of £160,000. He chooses to take a quarter of this as a lump sum, using the rest to buy an annuity to give a regular income. The lump sum of £40,000 can be taken tax free.

Any income from Steve’s annuity will count towards his overall income for the year, so he’ll need to consider whether his pension income will take him into a higher tax bracket. As long as Steve’s annuity doesn’t give more than £11,350 a year, he won’t be bumped up to the 40% tax band.

Adjustable Income (or Flexi-Access Drawdown)

If you decide on an adjustable income, as with an annuity, you can take the first 25% tax free. You can then take and invest the remainder into a policy which gives you an income. As you might expect, you can adjust your income amount with this option.

Take Your Pension Cash in Chunks

For some it might make sense to take small chunks of their pension, as opposed to a lump sum. With this option, 25% of each withdrawal will be tax free and the remaining 75% will be taxed. If taking a regular income could put you into a higher rate tax band, then it might be more tax-efficient to take chunks of your money over several years.

Remember to make sure you’ve been taxed correctly, as you could find that you’ve been taxed on your pension income via an emergency tax code. You should be able to reclaim any overpayment from HMRC.

Take Your Whole Pot

You can of course choose to withdraw your entire pension fund. With this option, again the first 25% of the whole amount will be tax free and the remainder will be classed as taxable income.

Mix it Up

If you prefer to mix it up, you can adopt a mixture of these pension options, choosing to buy an annuity and an adjustable income product, for example. You’ll then be taxed depending on which options you choose.

You Can Still Leave It Alone…

If you don’t need your pension, then you can leave it untouched, allowing it to grow tax-free until you need to access funds. You’ll continue to receive tax relief on savings up to £40,000 each year (18/19). However, if you want to delay your pension until after age 75, you’ll need to check with your pension provider whether there are any restrictions.

Don’t Rush!

If you do decide to take your money early, make sure you don’t rush into anything. You’ll need to consider your circumstances carefully and work out the best solution for you. Pension income can affect entitlement to benefits and tax allowances. And remember, before making any big withdrawals from your pension pot, you’ll want to make sure you have enough left for your future plans.

To speak to one of our advisors about the most tax efficient strategy for your pension, contact your local Champion Office.