Pensions: cut your tax to get the max


By Personal Investing Team

01 September 2019

If you’re saving for retirement in a workplace pension, personal pension or SIPP, a little careful planning could pay dividends.

If you’re saving for retirement in a workplace pension, personal pension or SIPP, a little careful planning could pay dividends.

Pensions are designed to replace your regular income when you stop working so you can hopefully continue to enjoy the standard of living you were used to.

But although they are super tax efficient when you’re putting money in, the tax man is ready to pounce when you take it out. So it’s useful to know how pensions work and important to plan carefully if you want to cut your tax liability and keep more of your money for yourself.

Your pension options

Up to 25% of a pension is usually tax free and most people take this as a one-off cash lump sum.

You can then use the rest to provide a regular income either through an annuity or something called flexi-access drawdown.

An annuity provides a guaranteed regular income for life or a fixed period of your choice. You need to shop around for the best rates as they can vary widely, just like utility bills, and you will get better rates if you have poor health or medical conditions that shorten your life expectancy. You can also add a spouse’s or dependant’s pension or a guaranteed minimum payment period in case of early death, although such add-ons do come at a cost. Annuity payments are subject to income tax.

Flexi-access drawdown allows you to leave some or all of your pot invested to provide a regular income or occasional cash lump sums or a combination of the two. Many people like the flexibility of this approach but if you withdraw too much or your investment funds don’t perform as well as expected, you could run out of money before you die. Your provider may charge for setting up a flexi-access drawdown facility and, after you take the 25% tax-free cash, withdrawals are subject to income tax.

A third option is to spread your 25% tax free cash over a number of withdrawals so that 25% of each one is tax free. This is called, somewhat unhelpfully, ‘uncrystallised funds pension lump sums’ or UFPLS for short. With UFPLS, if you withdraw, say, £40,000 from your pension pot then the first £10,000 is tax free. The other £30,000 will all be subject to income tax.

Cutting your tax bill

When you stop work, you’re still entitled to the personal allowance which is currently £12,500 a year. This is the amount you can earn or take out of your pension in any financial year before you start paying income tax. Juggling this figure with your tax-free pension cash over the years of your retirement can minimise or even wipe out the amount you pay in tax.

Similarly, if you have ISA savings, any withdrawals are free of tax so you can use this money first to minimise your tax obligations.

When you start taking your money out, especially as a UFPLS, your provider may need to apply an emergency tax code. Otherwise they will use your tax code but you need to check you’re not paying too much. You can reclaim any overpayment via a P50Z tax form or through your self-assessment tax return.

Your state pension is liable to income tax too and needs to be taken into account. Your pension provider will deduct this amount too.

The total amount of tax you pay will depend on your total income for the year including any part-time work.

See for more information and there’s lots of free guidance on other websites.

The more money you have, the more complicated it’s likely to be so it may be wise to seek professional financial advice. If you don’t have a financial adviser, you can find a list at

Whatever you do, remember a little bit of research and a little bit of careful planning could save you a lot of money when you need it most.

*You can pay up to 100% of your earnings into your pension each year or £3,600 gross, whichever is greater, and still get tax relief if you are eligible. The total amount you can pay into all your schemes is subject to the government’s annual allowance of £40,000. Anything above this, including any contributions made by an employer or someone else on your behalf, would be subject to a tax charge.

All tax and allowance figures are correct as at April 2019.

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Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest . Tax rules for ISAs may change in the future and their tax advantages depend on your individual circumstances.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.