When you reach age 55 (rising to 57 from April 2028), you can start taking money from your defined contribution pension. How you withdraw it makes a significant difference to how much tax you pay. With careful planning, many retirees can keep their tax bill far lower than they expect.
The 25% Tax-Free Entitlement
You are entitled to take 25% of your pension pot tax-free. The maximum tax-free lump sum is £268,275 — this is 25% of the old Lifetime Allowance of £1,073,100. Even though the Lifetime Allowance was abolished from April 2024, the tax-free cash limit remains.
The remaining 75% of your pension is taxable as income at your marginal rate when you withdraw it.
Two Ways to Take Your Pension: Drawdown vs UFPLS
There are two main approaches to flexible pension withdrawals, and they handle the 25% tax-free element differently:
Flexi-Access Drawdown
You “crystallise” your pension by moving it into a drawdown arrangement:
- You can take up to 25% as a tax-free lump sum upfront.
- The remaining 75% stays invested in a drawdown fund.
- You withdraw income from the drawdown fund as needed — every withdrawal is fully taxable.
UFPLS (Uncrystallised Funds Pension Lump Sum)
You take lump sums directly from your uncrystallised pension pot:
- Each withdrawal is split: 25% tax-free and 75% taxable.
- No need to formally move into drawdown.
- The tax-free element is spread across each withdrawal rather than taken upfront.
Which is better? Drawdown gives you more control — you can take the full 25% tax-free upfront (useful if you have a specific need like paying off a mortgage) and then manage taxable withdrawals separately. UFPLS is simpler but can result in higher emergency tax deductions on the first payment.
Tax on Pension Withdrawals: The Numbers
The tax you pay depends on your total taxable income for the year, including the State Pension. The table below shows the income tax on pension drawdown withdrawals at various levels:
Scenario A: No Other Income
| Annual Withdrawal | Tax-Free (25%) | Taxable (75%) | Income Tax | Effective Rate |
|---|---|---|---|---|
| £20,000 | £5,000 | £15,000 | £486 | 2.4% |
| £30,000 | £7,500 | £22,500 | £1,986 | 6.6% |
| £50,000 | £12,500 | £37,500 | £4,986 | 10.0% |
| £80,000 | £20,000 | £60,000 | £12,486 | 15.6% |
Assumes UFPLS withdrawals (25% of each withdrawal is tax-free) and no other income. Tax calculated using 2025-26 rates with £12,570 Personal Allowance.
Scenario B: With £11,502 State Pension
| Annual Withdrawal | Tax-Free (25%) | Taxable (75%) | Income Tax (total) | Effective Rate on Withdrawal |
|---|---|---|---|---|
| £20,000 | £5,000 | £15,000 | £2,786 | 13.9% |
| £30,000 | £7,500 | £22,500 | £4,286 | 14.3% |
| £50,000 | £12,500 | £37,500 | £8,286 | 16.6% |
| £80,000 | £20,000 | £60,000 | £17,286 | 21.6% |
Includes tax on the State Pension. The full State Pension for 2025-26 is £11,502.40/year. The State Pension uses most of the Personal Allowance, so pension withdrawals are taxed from almost the first pound.
Worked Example: Drawdown vs UFPLS
Margaret has a £500,000 pension pot and wants to withdraw £30,000 per year. She also receives the full State Pension of £11,502.
Option 1: Flexi-Access Drawdown
Margaret takes her 25% tax-free lump sum upfront: £125,000. Her remaining drawdown fund is £375,000.
- Annual withdrawal from drawdown fund: £30,000 (fully taxable)
- State Pension: £11,502 (taxable)
- Total taxable income: £41,502
- Personal Allowance: £12,570
- Taxable amount: £28,932
- Tax: £28,932 x 20% = £5,786
Margaret has already received her £125,000 tax-free, so every drawdown withdrawal is fully taxed.
Option 2: UFPLS
Margaret takes £30,000 per year as UFPLS from her uncrystallised pot.
- Tax-free portion: £30,000 x 25% = £7,500
- Taxable portion: £30,000 x 75% = £22,500
- State Pension: £11,502
- Total taxable income: £34,002
- Personal Allowance: £12,570
- Taxable amount: £21,432
- Tax: £21,432 x 20% = £4,286
UFPLS saves Margaret £1,500 per year in tax because the tax-free element is spread across each withdrawal. However, she has not received the large upfront lump sum. If she needs the £125,000 for a specific purpose, drawdown may still be the better choice despite the higher ongoing tax.
The Money Purchase Annual Allowance (MPAA)
Once you flexibly access your pension (either through drawdown income or UFPLS), your future Annual Allowance for pension contributions drops from £60,000 to just £10,000. This is the Money Purchase Annual Allowance (MPAA).
This matters if you are still working or plan to return to work. Taking even a small taxable withdrawal triggers the MPAA permanently. The 25% tax-free lump sum alone does not trigger it — only taxable income withdrawals do.
Emergency Tax: The First Withdrawal Trap
When you take your first pension withdrawal, your provider may not have your tax code from HMRC. In this case, they apply an emergency tax basis, which can dramatically overtax you:
- Month 1 basis: Assumes your withdrawal is your monthly income, annualises it, and taxes accordingly. A one-off £30,000 withdrawal would be taxed as if you earn £360,000/year.
- The result: you may see 40% or 45% tax deducted from a withdrawal that should be taxed at 20%.
How to reclaim the overpayment:
- Wait for HMRC to issue a P800 tax calculation (can take months).
- Or claim immediately using form P50Z (if you have no other income) or P53Z (if you have other income).
- Your pension provider should apply the correct tax code to subsequent withdrawals once HMRC provides it.
Tip: To minimise the emergency tax problem, make your first drawdown withdrawal a small amount. Once your provider has your correct tax code, take the larger amounts you need.
Strategies to Minimise Pension Tax
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Use your Personal Allowance. If you have no other income, you can withdraw up to £16,760 per year via UFPLS and pay zero tax (£12,570 / 0.75 = £16,760 — the taxable portion exactly equals the Personal Allowance).
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Spread withdrawals across tax years. Taking £60,000 in one year costs far more in tax than taking £20,000 over three years, especially if it pushes you into the higher rate band.
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Combine with ISA withdrawals. ISA income is tax-free, so drawing from ISAs in high-income years and pensions in low-income years can smooth your overall tax burden.
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Defer the State Pension. Deferring increases it by 1% for every 9 weeks (approximately 5.8% per year). Worthwhile if claiming it would push pension withdrawals into a higher band.
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Watch the £100,000 threshold. If total income exceeds £100,000, you lose £1 of Personal Allowance for every £2 over, creating an effective 60% marginal rate between £100,000 and £125,140.
Key Takeaways
- 25% of your pension is tax-free, up to a maximum of £268,275.
- UFPLS spreads the tax-free element across each withdrawal; drawdown lets you take it as a lump sum upfront.
- The State Pension uses most of your Personal Allowance, so pension withdrawals are taxed from almost the first pound.
- Emergency tax on your first withdrawal is common — claim a refund via P50Z or P53Z rather than waiting.
- Accessing your pension flexibly triggers the £10,000 MPAA, limiting future contributions.
- Spreading withdrawals across tax years and combining with ISA income are the most effective strategies for minimising tax.
Use our pension drawdown calculator to model different withdrawal strategies, or check the pension tax relief calculator to see the benefit of continued contributions.