Pension drawdown — taking flexible income from a defined contribution pension after age 55 (rising to 57 in 2028) — is taxed as income. How much tax you pay depends on how much you take, when you take it, and what other income you have in the same year.
For the full PocketWise guide to pension drawdown options, see the Pension Drawdown Hub.
How pension drawdown is taxed
The 25% tax-free rule
Every defined contribution pension pot has a 25% tax-free entitlement (the Pension Commencement Lump Sum or PCLS), subject to a lifetime cap of £268,275 (the lump sum allowance, 2024/25 onwards).
You can take the 25% in different ways:
| Method | How it works |
|---|---|
| Single lump sum | Take 25% of the whole pot as a one-off tax-free payment, then the remaining 75% is fully taxable when withdrawn |
| Phased drawdown | Each withdrawal is split: 25% tax-free, 75% taxable — so every withdrawal is 25% tax-free until you’ve used your full entitlement |
| UFPLS (Uncrystallised Funds Pension Lump Sum) | Similar to phased: 25% of each payment is tax-free, 75% is taxable |
Which to choose? Phased drawdown / UFPLS is typically more tax-efficient because it spreads your tax-free entitlement evenly, rather than creating a large taxable withdrawal all at once.
Income tax on the taxable portion
After your tax-free amount, all withdrawals are taxed as income in the year received:
| Income (2026/27) | Rate | Effective rate on pension withdrawal |
|---|---|---|
| Up to £12,570 (personal allowance) | 0% | 0% |
| £12,571 – £50,270 | 20% | 20% |
| £50,271 – £100,000 | 40% | 40% |
| £100,001 – £125,140 | 60% (effective — personal allowance taper) | 60% effective |
| Over £125,140 | 45% | 45% |
Warning: Withdrawals that push your total income above £100,000 cause your personal allowance to taper at £1 for every £2 above £100,000. This creates an effective 60% marginal rate — a very expensive trap for people withdrawing large amounts in a single year.
Worked examples
Example 1: Retiree with no other income
Age: 66, just reached State Pension age
Pension pot: £250,000 (25% already taken tax-free = £62,500)
Remaining taxable pot: £187,500
State Pension: £11,973/year
Target drawdown: £20,000/year
Income each year:
- State Pension: £11,973
- Drawdown withdrawal: £20,000
- Total income: £31,973
Tax calculation:
- Personal allowance: £12,570 → £0 tax on first £12,570
- State Pension uses: £11,973 of the allowance (£597 remaining personal allowance)
- First £597 of drawdown: 0% (uses remaining personal allowance)
- Remaining £19,403 of drawdown at 20% = £3,881 tax
Net annual income: £31,973 − £3,881 = £28,092
Example 2: Retiree with salary from part-time work
Salary from part-time work: £18,000
Pension drawdown withdrawal: £12,000 (after 25% tax-free)
Total income: £30,000
Tax:
- Personal allowance: £12,570
- Taxable income: £30,000 − £12,570 = £17,430 at 20% = £3,486
If the drawdown is removed, tax on salary alone: (£18,000 − £12,570) × 20% = £1,086
Additional tax from £12,000 drawdown: £2,400
Example 3: Higher earner taking too much, too fast
Salary: £45,000
One-off drawdown withdrawal: £30,000
Total income: £75,000
Tax:
- £12,570 × 0% = £0
- (£50,270 − £12,570) × 20% = £7,540
- (£75,000 − £50,270) × 40% = £9,892
- Total tax: £17,432
If instead this person withdraws £15,000 this year and £15,000 next year (with the same salary), they save approximately £6,000 in total income tax.
Emergency tax on first withdrawal
When you first access your pension, your provider may not have a current tax code and will apply emergency tax (typically a Month 1 basis). This often results in significantly more tax being deducted than is actually owed.
How to reclaim:
| Your situation | HMRC form to use |
|---|---|
| Taken a one-off lump sum (UFPLS) and won’t take more this year | P55 |
| Emptied your whole pension in one go (no other income) | P53Z |
| Stopped work and emptied your pension | P50Z |
Alternatively, wait until after 5 April — any overpaid tax is automatically refunded in the reconciliation process, but this may take until after 31 May.
Key strategies to reduce pension drawdown tax
1. Use your personal allowance each year
If you have no other income, you can withdraw up to £12,570/year completely tax-free (using your personal allowance). Over 10 years, this shelters £125,700 from tax entirely — significantly more than the single 25% tax-free lump sum on a £200,000 pot (which would be £50,000).
2. Fill the basic rate band — stop before higher rate
The optimal annual withdrawal for many retirees is £50,270 minus other income. This is the maximum that fits in the basic rate band. Every pound above £50,270 is taxed at 40%.
3. Start drawdown before State Pension age
Before the State Pension begins, your entire personal allowance (£12,570) is available for pension income. Once the State Pension starts, much of the allowance is used — leaving less headroom for tax-free drawdown.
4. Pension income splitting with a spouse
If your spouse or civil partner has a lower income, consider whether some of the pension income could come from their pension. Both partners can each use their own personal allowance and basic rate band.
5. Coordinate with ISA withdrawals
ISA withdrawals are tax-free and do not count as income. Supplementing pension income with ISA withdrawals in higher-income years avoids further tax — and the ISA does not count towards the £100,000 personal allowance taper.