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Published on 15 February 2023

Accessing your pension – tax issues to consider

Research suggests that the number of people accessing their private pensions has gone up, and that the amounts taken out of pensions are increasing. This may be for various reasons – for example, due to taking early retirement or to supplement living costs because of high rates of inflation. Here we look at the tax issues that you need to think about when accessing your pension.

NEWS: Accessing your pension – tax issues to consider. Image of a money Jar full of coins, label on the jar says "pension"

⚠️ Making pension withdrawals is an area where it is important to take tailored advice before taking action. This article gives an overview of tax matters to consider but is not a substitute for getting advice. We give links further below to help you find sources of further information and advice.

In this article, we use the term ‘private pension’ to mean any sort of defined contribution pension scheme (also sometimes called a money purchase scheme) that you have personally set up and contributed to over the years or it might be an occupational pension scheme set up by your employer. With these types of pensions, you build up a ‘pot’ of money that you can then choose what to do with when you want to draw on it, subject to various tax rules. Note that this article is aimed at those on lower incomes with modest pension savings, so it does not deal with complexities such as the pensions lifetime allowance.

This article does not look at the position for defined benefit pension schemes (also sometimes known as final salary or salary-based schemes), as these sorts of pensions work differently.

Please note that your private pension should not be confused with your entitlement to state pension. This is a separate pension entitlement, payable by the government, which is available to those who have made sufficient National Insurance contributions or received National Insurance Credits over the course of their working life. You can read more about state pension entitlement on our page Approaching retirement. We also have a further page on the UK state pension which might be helpful if you have come to the UK from overseas or spent time working overseas.

What is pension flexibility?

Pension flexibility can allow you to cash in your entire private pension as a lump sum, or take chunks of money out on request. We explain more about this our pension flexibility page.

You might also decide to buy an annuity – which provides you with a certain income, often for the rest of your life – with your pension savings. 

When can I access my private pension?

You can usually access your private pension pot once you have reached the normal minimum pension age (NMPA), which is currently age 55 (rising to 57 from April 2028). However, some pension schemes might set the access date as older than the NMPA. If you are unsure, you should ask your pension provider.

It usually does not matter if you are still working – you don’t necessarily need to have retired from work in order to access your pension. However, accessing your pension flexibly might mean you become liable to the Money Purchase Annual Allowance (MPAA) on any future pension contributions you continue to make, limiting them to £4,000 gross a year (including any employer contributions). You can read more about the MPAA in our web guidance. Note that the MPAA is not triggered by purchasing a fixed lifetime annuity.

What tax do I pay when I take money out of my pension?

You are usually allowed to take 25% of the value of your pension pot as a tax-free lump sum. The remaining 75% is then subject to income tax as pension income as and when it is withdrawn.

The tax-free 25% could either be a single lump sum payment up-front, or you could choose to take staged payments – in the latter case, 25% of each withdrawal would be tax free and the remaining 75% would be taxable.

We explain more about taking cash from your pension flexibly and the practical implications in our page What is the tax position when I take money from my pension flexibly?.

What do I need to think about if I make a flexible pension withdrawal towards the end of the tax year?

As we approach the end of the tax year (5 April), you might need to think carefully about any withdrawals and how they might affect your tax position, either for this year or next year.

If you are making a taxable withdrawal towards the end of the tax year, you should try to understand how long it will take for the pension company to process the withdrawal, especially if you are hoping for the payment to be taxable in a specific tax year.

The law says that UK pension income is taxable when it accrues. We understand this may not be the same as the date it is claimed or the date when it is actually paid. We believe it depends on the pension company’s terms as to when the payment actually accrues – that is, when you become entitled to it under your pension contract.

Example – Reggie

Reggie is 57 and has been out of work since June 2022. His total earnings between April 2022 and the date his employment ended was £8,000. In October 2022, he took 25% tax free lump sum from his private pension pot to supplement his living costs during this time (he did not otherwise qualify for means-tested benefits due to his partner’s higher level of income). In February 2023 Reggie successfully interviews for a new job, which he has agreed to start on 6 April 2023.

In the meantime, Reggie would like to make a further withdrawal of £2,000 from his pension pot. Reggie contacts the pension company on 1 March 2023 to request the withdrawal. He is informed that, as per the terms and conditions of the pension company, they require 30-days’ notice to process any withdrawals, so he will be entitled to the sum on 31 March 2023. Fortunately this means that he will be due to receive the payment within the 2022/23 tax year and all income (including the pension withdrawal) falls below his tax-free personal allowance. If he had requested the withdrawal closer to the end of the tax year, he might not have become entitled to receive his payment until the 2023/24 tax year. Depending on Reggie’s level of employment (and any other) income in 2023/24, this might mean that he would suffer tax on the pension withdrawal.

What if there is a delay in processing my withdrawal request?

If there is an unreasonable delay in receiving the payment – for example, if due to a clerical error by the pension company, the withdrawal was received far later than the expected timeframe, meaning it is received in a later tax year – you may be able to ask that the withdrawal be taxed at the point it should have been received. This will be an area that you will need to discuss with the pension company in the first instance, as they will deduct tax at source under Pay As You Earn from withdrawals.

If your pension company is not able or willing to assist you, then you might try contacting HMRC to explain the circumstances, and ask that they treat the payment as taxable in the tax year that you believe you were entitled to receive the payment. It may be necessary to seek professional advice if HMRC are unwilling to treat the payment as taxable in the earlier tax year.

Where can I get advice about pensions?

When it comes to pensions and accessing your pension pot, taking professional advice is essential.

Free information and guidance about pensions is available on the government run MoneyHelper website. We also have information about the taxation of pensions on the section of our website dedicated to Pensioners.

Often an Independent Financial Advisor (IFA) will be well-placed to provide tailored advice about pensions and withdrawals. However, an IFA will charge a fee to advise you. You can read more about finding an IFA on the MoneyHelper website.

If you are unable to afford to pay for advice, MoneyHelper runs the Pension Wise service for people aged 50 or over. Through Pension Wise you can arrange a free 60-minute consultation with a pension specialist to discuss your situation. Consultations are usually over the telephone, but they do offer a limited number of face-to-face appointments. Appointments can be booked on the MoneyHelper website. We recommend that you consider making an appointment with Pension Wise before making any withdrawals from your pension pot.

If you are unsure how your tax and/or benefits position might be affected by any withdrawals from your pension, we would recommend taking separate advice from a tax adviser or welfare rights adviser. You can find details about these (including the tax charities, who may be able to provide free tax-advice if you are on a low income) on our Getting help page.

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