If you’re living on a pension, you probably wonder how much of it ends up in your bank account after tax. The good news is that most pensions aren't fully taxed, but the rules can be a bit tricky. This guide breaks down the basics, shows you where the taxes hit, and gives quick ideas to keep more of your money.
Not all pensions are the same. In the UK you’ll see three main shapes:
State Pension – the government‑run payment you earn by paying National Insurance. It’s partly taxable if your total income is over the personal allowance.
Workplace or private pension – the money you build up through your employer or a personal plan. You can usually take 25% as a tax‑free lump sum, then the rest comes in as regular income.
Defined benefit (final‑salary) scheme – a fixed amount based on your salary and years of service. This behaves like a regular salary for tax purposes.
Knowing which bucket you’re in helps you plan when to draw down cash and how much tax you might face.
Every penny you receive counts towards your taxable income. The personal allowance (£12,570 for 2025/26) is your free zone. Anything over that gets taxed at your marginal rate – usually 20% for basic‑rate earners, 40% for higher‑rate, and 45% for the top slice.
Here are three easy ways to keep more of your pension:
1. Use the 25% tax‑free lump sum – Take it early if you can afford a lower income later. That reduces the amount left to tax.
2. Spread withdrawals – Instead of pulling a big chunk all at once, take smaller amounts over several years. This may keep you under the personal allowance each year.
3. Consider a pension drawdown – With drawdown you keep the pension invested and pull out only what you need. The investment growth stays tax‑free until you actually take it.
Don’t forget other income like rental or savings interest – they add up and could push you into a higher tax band.
Finally, keep an eye on the tax‑free personal allowance changes each year. A small tweak can mean a big difference in what you keep.
Getting a simple picture of your pension income and the tax that applies is the first step to stretching your retirement funds. Talk to a local accountant or use an online calculator to see exactly where you stand, then adjust your withdrawals to stay in the lowest tax bracket possible.
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