What is the tax position when I take money from my pension flexibly?

Updated on 12 February 2019


You may be able to draw money out of your ‘pot’ very flexibly – as much as you like, when you like, from age 55. But do not rush. A hasty decision could cost you heavily in the form of an unwanted tax bill and even a tax credits/benefits overpayment. This section highlights key tax and related points to be aware of.

You have a great deal of control over what you take out of your pension and when.

The rules are very complicated in many ways and you should try to understand them before you act.

What is pension flexibility?

Flexible pensions were introduced from 6 April 2015. The rules apply to ‘defined contribution’ or ‘money purchase’ pensions – those where you have saved up a ‘pot’ of cash or investments and have to choose what you do with it.

Your pension provider might allow you to take what you like, when you like from your pension (as long as you meet certain requirements such as the minimum pension age). But they are not obliged to do so; so even though the tax rules allow flexibility, the options from your own pension provider might be limited. You might then be able to move your pension savings to another provider to get more flexible options, but this could also come at a cost.

After your death, your beneficiaries may be able to keep taking money flexibly from your remaining pension pot. See What happens to my pension after I die? below.

It may become less common for people to use their pension savings to buy an annuity, but this could still be an option for some.

Back to the top

From what age can I take money out of my pension?

The minimum pension age (the earliest age from which you can take money from your pension) is 55 for most people. Some public sector schemes are excepted from this rule, such as those for firefighters, police and the armed forces. People working in certain professions such as sports people, ballet dancers and deep-sea divers also have special exemptions. Some people will be allowed to retire early due to ill-health.

Back to the top

What are annuities and how are they affected by pension flexibility?

An annuity is a way of taking a regular income. It is normally paid for the rest of your life, but can be for a fixed period. It means that you hand over your capital to an insurance company (not necessarily the same one you saved up your pension pot with) and in return they promise to pay you a guaranteed income stream.

You can buy different varieties of annuity to suit your personal or family circumstances – some scenarios are explained below. Consideration of what to do with your pension pot requires careful thought and it is usually helpful to take financial advice. The examples below are given simply to help you understand how annuities work and should not be used to consider the advantages and disadvantages of taking an income by way of an annuity.

Level annuity

This pays a fixed sum for life. For example, a pot of £100,000 might pay you a flat-rate annuity of, say, £5,000 a year at age 55. When you are 85 it will still be £5,000 in cash terms but its value will have been reduced by inflation – so, for example, it may have only £2,000 in purchasing value in today’s terms.

Increasing or indexed annuity

This will increase each year in line with inflation or some other agreed percentage so that it preserves some or all of its purchasing value. It will, however, start at a lower level, perhaps £3,000 for the same £100,000 pot as in the example above, because the insurance company is going to have to pay out more over the term of the annuity. Thus, it may take 11 or 12 years before the initial £3,000 catches up with the £5,000 of the level annuity. Thereafter it may take another 11 or 12 years before the increase matches up the amount you did not receive in the first years. After that, you may show a profit.

Decreasing annuity

The opposite of the above. It may sound odd, but you may need a higher amount initially – then after a few years your state pension or a company pension may kick in, so you can then afford a reduced annuity while maintaining your usual income.

Joint life annuity

These annuities continue on the death of one member of a couple, thus providing the survivor with an income. It will then cease on second death. It would typically start being paid at a lower level than a single life annuity, since the insurance company know that they may have to pay out for a few years longer. The survivor’s annuity may be contracted to continue at the full rate, or perhaps only two-thirds or half. This will affect the starting point.

Guaranteed annuity

These involve the insurance company giving you a guarantee that the annuity will continue to be paid for a set number of years regardless of the continued existence of the annuitant. So, if there is a 5-year guarantee and the annuitant dies after 3 years, the annuity will continue to be paid (to a nominated beneficiary) for another 2 years. Following the 6 April 2015 flexible pensions reforms, guarantees can be of any length; previously they were limited to 10 years. The longer the guarantee period, the lower the starting point of the yearly annuity income.

Impaired life annuity

Insurance companies might pay a higher annuity to you if they consider that you are in poor health, so it is worth getting quotes that take into account your medical history and other circumstances to see if you can get more.

‘Open-market option’ (or shopping around for the best deal)

You can shop around for a better offer from insurance companies other than the one you saved with – this is called taking an ‘open-market option’. 

A beneficiary can be anyone you nominate. It does not need to be a family member.

Back to the top

What are the rules for ‘defined benefit’ or ‘final salary’ pensions?

‘Defined benefit’ or ‘final salary’ pensions are a type of workplace pension which provide benefits based on your salary from your employer and length of time as a member of the scheme. The amount is determined by the rules of your pension scheme.

They have stricter rules than defined contribution pensions as far as what you can do with them is concerned, so you might not be able to take advantage of the new flexible pension rules. Decisions on these pensions need careful thought and advice before taking action.

Although you might be allowed to transfer your fund from a private sector defined benefit scheme to a defined contribution scheme (excluding pensions that are already in payment), you will have to get advice before doing so unless your transfer value is under £30,000.

But if you are a member of a public sector defined benefit scheme, except for a Local Government scheme, transfers to defined contribution schemes will be restricted. (Although such transfers may be allowed in very limited circumstances.)

You will need to talk to your pension provider to establish the exact position in relation to the scheme that you are a member of.

If your defined benefit pension is worth only a relatively small amount, you may still be able to take it as a lump sum under the trivial commutation rules.

Back to the top

What should I consider when taking money from a pension?

It is important not to rush a decision on your pensions, if you can avoid it.

Consider everything – your circumstances (personal and financial), investment choices, charges you might incur on taking pensions early, future plans and, importantly, the consequences for tax, tax credits, universal credit and other state benefits.

Plan ahead: for example, you might pay less tax on money from pensions if you take it in stages, spread it out over a number of tax years, or wait until after you have stopped work.

But tax is not the only factor – there might be other reasons you need more money sooner, you will need to take into account possible future changes in your circumstances and you will have other investment-based issues to think about. We cannot cover those on this website, but we do strongly suggest you think about the tax situation very carefully before acting.

The rest of this page covers some important tax and state benefits points to consider before taking money out of your pension.

Back to the top

How much tax will I have to pay on taking money out of my pension?

You are allowed to take some money (usually 25%) out of your pension tax-free. But three-quarters (75%) of your pension savings are taxable as income.

Under flexible pensions rules, you can decide whether you:

  • take your full tax-free amount up-front (in which case any further payments will be treated as fully taxable income); or
  • take staged payments which are a mix of tax-free cash and taxable income (in which case, 25% of each payment will be tax free and the other 75% will be taxable).

Taxable amounts will be added to your other income, probably giving you an extra tax bill. The extra income could tip you into a higher tax rate, and/or could mean that you are no longer entitled to extra tax allowances.

For example:


Dave’s salary is £17,400 in 2018/19 before tax. He decides to cash in his pension pot of £40,000 in full on 1 June 2018. 25% (£10,000) of it will be tax free and the rest – £30,000 – will be added to his salary.

His 2018/19 tax calculation looks like this:



Pension – taxable part


Total income


Take off – personal allowance


Taxable amount, after allowances


Tax on this amount:

First £34,500 @ 20% (basic rate)


Remaining £1,050 @ 40% (higher rate)


Total tax bill



Without cashing in the pension, Dave would have paid only £1,110 in tax for the year. So, the extra bill on the pension is £6,210. This means that of his total pension pot of £40,000, he is left with only £33,790 after tax.

The way in which tax is deducted means that Dave might also have had far more than £6,210 taken off the taxable part of the pension under PAYE when he took the money out on 1 June 2018. HMRC might allow Dave to claim a refund immediately. See How will I be taxed when taking money out of my pension? below.

Dave – loss of marriage allowance

If Dave were married to Julie, who does not work or have any other income, Julie’s personal allowance for income tax would be unused and the couple would therefore be able to claim, in 2018/19, to transfer £1,190 of Julie’s allowance to Dave. This is under the marriage allowance rules and would save them £238 of tax.

But if Dave takes the money out of his pension as above, he becomes a higher rate taxpayer in 2017/18. This means the couple no longer qualify for the marriage allowance, so this would be an extra ‘cost’ of £238 on top of the tax charge we calculated above.

If you live in Scotland and are a Scottish taxpayer, different income tax rates and bands apply to your pension income. There is more information in our section on Scottish income tax.

Back to the top

How will I be taxed when taking money out of my pension?

The tax ‘paper trail’ can be complicated, but in general:

  • Money from pensions will be taxed under the Pay As You Earn (PAYE) system.
  • You might not pay the right tax at the right time.
  • You might get PAYE ‘coding notices’ from HMRC or papers (such as a P45) from your pension provider.
  • You might need to claim a tax refund or pay some more tax later.
  • HMRC might send you a tax calculation or Self Assessment tax return.

Below we explain in a bit more detail.

Tax is deducted at source using the PAYE system. If you are or have been an employee, you may recognise this as similar to the way your employer took tax off your wages or salary.

How your pension payment is taxed depends on whether:

  • you decide to take part or all of your fund,
  • you have other PAYE income and
  • you receive the state pension.

As above, only part of your pension payment might be taxable, depending on how you choose to use your tax-free cash sum. The following comments apply only to the part of the sum that is to be taxed.

The pension provider uses a PAYE code number, but this is worked out on an ‘emergency’ or ‘month 1/week 1’ basis (see below for more detail on this). This is unless you give them an ‘in year’ P45, in which case the pension provider should use the code number from it. You should have a P45 from a previous employer if you have stopped work, or perhaps from another pension provider if you have already taken money out of another pension pot in full. A P45 shows how much you have earned and how much tax you have paid since 6 April, and what code number your employer has been using.

How emergency code works

When a pension provider operates an emergency code on a month 1 basis, they:

  • take off £988 from the payment – this is not taxed, being 1/12 of the standard personal allowance (£11,850 in 2018/19)
  • tax the next £2,875 at 20%, this being 1/12 of the basic rate tax band (1/12 of £34,500 in 2018/19)
  • tax the next £9,625 at 40%, this being 1/12 of the higher rate tax band (1/12 of £115,500 in 2018/19)

Any remaining amount (that is, above £13,488), they will tax at 45%.

If you live in Scotland and are a Scottish taxpayer, different income tax rates and bands apply to your pension income, but the same principles apply. There is more information in our section on Scottish income tax.

If the pension provider were to use a weekly payroll scheme, the yearly figures would be divided by 52 and would mean even more tax was deducted. However, most are likely to use a monthly calculation.

This can be difficult to understand. You do not need to learn it, but it explains why the tax taken on these payments can be so high. An example may be easier to follow:


Taxable payment taken from flexi-access drawdown fund of £50,000 (after 25% tax-free payment has been taken). Note this example uses the UK rates and bands. 

Payment from flexi-access drawdown (after 25% tax-free amount)


Less 1/12 personal allowance


Amount taxed under PAYE


Tax @ 20% on first £2,875


Tax @ 40% on next £9,625


Tax @ 45% on remaining £36,512


Total tax deducted



The result by the end of the year (whether you have paid too much or too little tax) could depend on, for example:

  • Whether or not you have already used all of your personal allowance, in which case the above calculation might have given you too much tax free. This could be the case if for example you take a pension payment and have worked and been taxed under PAYE throughout the same tax year on a standard personal allowance code (1185L for 2018/19, or S1185L if you are a Scottish taxpayer) and could then mean you have not paid enough tax. HMRC will contact you calculating this ‘underpayment’ and to agree with you how it should be paid. 

Or, as is more likely to be the case:

  • Whether or not you should be paying tax at the 40% and 45% rates on some of your income for the year overall. This is unlikely for many people, so you can see that you may have paid too much tax. HMRC may contact you about this ‘overpayment’ and refund it to you, but you might be able to claim it sooner depending on the situation.

Back to the top

How do I get tax back if my pension provider has taken too much under PAYE?

This depends on whether you have:

  • Taken all of your money out of a pension pot; or
  • Taken part of your money out of a pension pot

If you take all of your money out of a pension pot

If you pay your tax under PAYE or if you complete a Self Assessment tax return each year, you can claim the overpaid amount back during the tax year.

Your pension provider should provide you with a P45 showing details of the payment, which you may have to send to HMRC when you claim a repayment.

If you retire and have no other income or just receive your state pension, use form P50.

If you take all your money out of your pension pot and you have no other income, use form P50Z.

If you take all your money out of your pension pot and have other PAYE income, use form P53Z.

If you are not able to apply online or to download and print the forms yourself, telephone HMRC for printed copies.

The above are the forms to use to claim back tax during the tax year if you have taken everything out of a pension pot. For instance, you had £20,000 with XYZ Mutual and have taken all of the money and tax has been taken under PAYE. There is nothing left with XYZ Mutual (though you might still have another pension pot – say, £10,000 with ABC Investments – that you have not touched; that does not matter).

If you have taken only part of your money out of a pension pot

Tax overpayments and underpayments will be dealt with under the normal PAYE rules. This means that if you are taking regular payments or perhaps a series of irregular payments out of a pension pot, you may be refunded part of overpaid tax next time you take a payment if it is within the same tax year. 

So let us say you had two pension pots, one of £25,000 and the other of £10,000. You have taken out £5,000 from the first, so there is still £20,000 left in it. Although your pension provider will take some tax under PAYE and tell HMRC about the payment and tax deduction, they will not issue a P45 as you still have money left in the pot. HMRC should issue a code number to the pension provider in case you take any more payments from it during the tax year (in which case the PAYE system might give you a refund of earlier tax paid).

If you take only part of your money out of a pension pot, and you will not take another cash payment from the pension pot before the end of the tax year, you can claim a tax refund (if appropriate) using form P55.

If you do not, or are not allowed, to claim a tax refund during the year

If you do not make a claim during the tax year, HMRC should look at all of your PAYE records after the end of the tax year. Where there has been a tax overpayment of any amount or an underpayment of at least £50, HMRC will send you a ‘P800’ calculation. This should pick up on overpayments that have not been claimed within the tax year. But if the system fails, you may not hear from HMRC or you may get a P800 calculation that is incorrect, so you need to try to understand your situation for yourself.

Do I have to fill in a Self Assessment tax return?

If you usually complete a Self Assessment tax return, you will have to include the taxable element of your lump sum on the return. If you have claimed an in-year refund of part of the tax deducted under PAYE, using one of the forms mentioned above, you will also need to include details of the refund on the return.

If money you take from your pension means you have extra tax to pay or takes your total income over certain limits, you might be obliged to fill in a tax return even if you have not had to complete one in the past. See GOV.UK for who has to fill in a tax return and links to registering for Self Assessment.

If you have taken a defined benefit ‘trivial commutation’ (final salary pensions)

See our separate guidance on trivial commutations.

Back to the top

When is the best time to take money out of my pension?

This is not a question we can answer for you, as it will depend on many factors, such as your personal and financial circumstances, future plans, need for the money and so forth. But this guide shows that you can trigger a large tax bill when you take taxable lump sums from pensions under flexi-access arrangements. Not only that, but you might incur a further cost by creating a tax credits overpayment, incurring a high income child benefit charge, or by affecting your entitlement to means-tested state benefits. If your lump sum causes you to become a higher or additional rate taxpayer, you may also lose the ability to claim the marriage allowance and will also face restrictions to your personal savings allowance.

Planning ahead could therefore save you a great deal in potentially unnecessary tax charges and adverse impacts to your benefits position. For example, if you can afford to wait to take pension monies until the tax year after you retire from work, you might be liable to tax at a lower rate (and suffer no adverse tax credits consequences if you are no longer eligible to claim them).

Or, you might be able to consider taking your money out in stages. For instance, if you had a pension pot of £80,000, £60,000 of it would be taxable after taking out 25% tax-free cash. If this £60,000 is taken over six years, for example, and you have no other taxable income in those years, you might pay no tax at all (with the standard personal tax allowance set at £11,850 for 2018/19, and with this possibly to increase in future tax years – to an anticipated £12,500 by 2020).

Back to the top

Could taking money from my pension affect my tax credits claim?

You will need to take great care if you claim tax credits and take money from a pension as your decision could cost you dearly.

Taxable income from pensions is also income for the purposes of tax credits. (The tax-free element of any pension income or lump sum is not to be included as income for tax credits.)

Taking money out of a pension could therefore mean you end up with a tax credits overpayment for the year in which you take the money out – this means that you may have been paid too much and have to pay it back.

It could also mean you end up with less tax credits in the following year as well. This is because tax credits are worked out using yearly rates and yearly income figures. Your income may well change from one year to the next but only changes over or under certain limits will alter the amount of tax credits you were awarded at the beginning of each tax year. The limits for changes in income from one year to the next are known as the income ‘disregards’.

You do not actually have to tell the Tax Credit Office about changes to your income until you renew your claim at the end of the tax year, but you might wish to tell them sooner about money taken from a pension in order to reduce the amount of any overpayment.

Back to the top

Could taking money out of my pension affect my child benefit claim?

Taking money out of pensions can have unexpected consequences.

We have briefly looked at tax credits above and warn of some of the impacts on means-tested state benefits below. One further thing that might be overlooked is the impact on child benefit.

Child benefit is not in itself a means-tested benefit. This means that anyone with qualifying children can claim it. But there is a linked tax charge on some recipients of the benefits, or on the recipient’s partner if they are part of a couple, where income is over £50,000. This is called the ‘high income child benefit charge’ (HICBC).

We explain child benefit and the HICBC separately on our website. It is not something that most people on low incomes usually have to worry about, but it could become a problem for people taking sums out of their pension pot under the flexible rules if that tips their total income over the £50,000 limit.

You may not usually have income anywhere near £50,000 a year. But that could change if you take a pension lump sum. We show below how someone cashing in a £50,000 pension pot could be left with just £33,401 – only about two-thirds of what they took out.

Example – Peter and his family

Peter earns £22,000 a year. He is 55 and has built up a pension fund of £50,000. His wife, Sue, is 42 and does not work. The couple have two young children, aged 3 and 5. Sue claims Child Benefit totalling £34.40 a week (£1,823.20 for the 2018/19 year). Peter wants to cash in his pension to pay off his £47,000 mortgage.

If Peter takes the full pension fund at once, he gets 25% of the £50,000 tax-free – £12,500. He would have to pay tax on the rest – £37,500. The income tax on this works out to £10,130. See note 1 below if you want to see how this is worked out.

Also, Peter and Sue lose the ability to claim the marriage allowance for 2018/19. This costs them a further £238 in tax.

As the taxable part of the pension also counts as tax credits income, they lose all of their tax credits for the 2018/19 year, costing them around £4,500. See note 2 below – the couple could also lose over £1,000 in tax credits for 2019/20.

Finally, Peter has to pay a high income child benefit charge based upon total income of £59,500. This works out to additional tax of £1,732. See note 3 below if you want to see how this is worked out.

So what is Peter’s total cost in tax and lost benefits for 2018/19?

Income tax £10,130
Lost marriage allowance £238
Lost tax credits £4,500
High income child benefit charge £1,732
Total cost £16,600


This means that of the total £50,000 pot, Peter will have just £33,400 left. He will not have met his aim of paying off his £47,000 mortgage!

Added to that, Peter will have to register for Self Assessment and fill in a tax return so that he can pay the high income child benefit charge to HMRC.

Note 1 – income tax calculation on Peter’s pension lump sum

The £37,500 is added to his salary of £22,000, which comes to £59,500.

His salary has already used up his personal allowance (tax-free amount for the 2018/19 year) of £11,850. It has also used up £10,150 of his basic-rate tax band (the amount on which he pays tax at 20%).

Peter’s remaining basic rate band is therefore £34,500 minus £10,150 = £24,350. The tax on that part of the pension lump sum at 20% is therefore £4,870.

The rest of the pension lump sum is taxed at the higher rate of 40%. This is therefore £37,500 minus £24,350 taxed at basic rate; so that leaves £13,150 at 40% which works out to be £5,260.

The total income tax bill is therefore £4,870 plus £5,260 which works out to be £10,130.

This is before adding in the high income child benefit charge or considering the loss of the marriage allowance.

Note 2 – tax credits and the impact on the 2019/20 claim

Tax credits for the 2019/20 year can be affected by an increase in income for 2018/19. Peter and Sue could also lose over £1,000 in tax credits in 2019/20 because even if their income goes back to £22,000, they will be treated as having £24,500. This is because of what are called income disregards.

Note 3 – high income child benefit charge (HICBC) calculation due to Peter taking his pension lump sum

The HICBC takes away 1% of child benefit for every £100 of income over £50,000. As Peter’s income is £9,500 over £50,000, the charge is 95% of their child benefit. So 95% x £1,823.20 is £1,732.04.

Back to the top

What is the effect of taking money out of my pension on other state benefits?

You should check carefully the impact of your pension decisions on means-tested state benefits, such as universal credit and Pension Credit.

One-off or irregular sums taken from pensions could be treated as ‘capital’ for the purposes of means-tested state benefits, and regular amounts taken from pensions are likely to be treated as income. Either capital or income treatment could have an immediate effect on your entitlement to state benefits, depending on your overall circumstances.

‘Local’ benefits like Council Tax Support could also be affected.

It is not only the decision to take money out of a pension that could impact your current or future entitlement to means-tested state benefits. There could also be knock-on effects depending on how you use the money once you take it out. For example, if you were to decide to give pensions money away, for the purposes of state benefits (such as help with care costs) it might be considered that you ‘deprived yourself’ of your pension savings.

We therefore recommend that you check your situation carefully before taking money out of your pension. There is some guidance on the Government’s Pension Wise website on state benefits impacts. The Department for Work and Pensions have also published a factsheet, available on GOV.UK – this considers how the pension flexibilities could affect entitlement to state benefits.

But be aware that it is not only those currently in receipt of state benefits who might be affected. A decision you make now could affect your future entitlement, though that is of course harder to judge as you have to make assumptions as to your future plans, needs and whether indeed the state benefits system will remain the same.

Back to the top

What happens to my pension after I die?

This depends on your choices. If you have bought an annuity with your pension, it might stop being paid when you die, or it might carry on for a guaranteed period or still be paid – in full, or at a reduced amount – to someone else. See above for notes on different types of annuity.

If you have not taken anything out of your pension before you die, or taken flexible amounts from your pot, you will be able to pass the remainder on to others – your pension provider should have asked you to nominate one or more beneficiaries (and this need not necessarily be family members).

Tax on pensions after death of the original pensioner

The tax rules on pension pots left when you die will depend on the date of your death – specifically, whether it is before your 75th birthday, or on or after your 75th birthday.

For deaths before the age of 75, pension ‘pots’ can be passed to any nominated beneficiary tax free. Your beneficiaries can then take out the money as a lump sum or as an income under the flexible rules.

If you have used your pension to buy an annuity, any amount that is paid after your death is tax-free. 

For deaths on or after the age of 75, from 6 April 2016, both lump sums and income payments (including any continuing annuities) will be taxed along with the beneficiary’s other income.

This means that the beneficiary’s ‘marginal rate’ will apply. This is the usual rate at which you pay income tax. It could be 0%, 20%, 40% or 45% (or even higher if your income exceeds £100,000 a year so that you begin to lose your personal allowance). Different tax rates may apply to Scottish taxpayers – see our section on Scottish income tax for more information.

Back to the top

Where can I get further help?

You can use the Government’s ‘Pension Wise’ guidance service – either online, or by making a telephone or face-to-face appointment.

You might need to get specialist advice on your tax, tax credits and benefits position – see our getting help page for more information. Some help is available for free for those on low incomes, but we also guide you how towards sources of paid professional advice if you can afford them.

Back to the top