Nearly half of over-55s don’t know this key rule around pensions. Do you?

Research shows that 43% of over-55s do not understand a crucial rule around pensions. Find out what you need to know before you retire here.

As the cost of living continues to rise, inevitably, the cost of retirement is also rising.

Indeed, a 2022 report from the Pensions and Lifetime Savings Association (PLSA) states that there has been an 18% “surge” in the minimum cost of retirement.

As a result, some retirees are returning to work, with the Institute for Fiscal Studies (IFS) reporting an “uptick” in those aged 50 to 64 rejoining the workforce.

With these statistics in mind, it is paramount that, if you are about to retire, you understand how to take your defined contribution (DC) pension, also known as your personal pension, tax-efficiently.

If you draw your pension without this knowledge, a significant portion of your funds could be sent straight to HMRC, potentially damaging your financial stability in your later years.

So, here is the one pension rule almost half of over-55s don’t know, plus more essential pension tax tips you should know about before you retire.

43% of over-55s don’t know that you can take 25% of your personal pension tax-free

Drawing your pension is an important milestone, so understanding how much tax you may pay on each withdrawal is essential.

But according to Standard Life, almost half of over-55s do not know that you can access up to 25% of your pension pot without paying tax.

Indeed, when you draw from your personal pension pot, 25% of this is usually “untouchable” by HMRC.

When planning your retirement, being aware of this golden opportunity could help you to create a later-life income plan that capitalises on the tax-efficient withdrawals you can make.

Read on to discover more vital information about how your pension could be taxed in excess of the 25% tax-free amount, and how a Kellands financial planner could help you cleverly draw your pension funds to avoid an unnecessary tax bill.

The tax you’ll pay on pension withdrawals depends on the method of drawdown you use

Above the 25% tax-free sum, the amount of tax you may pay depends on how you draw your pension.

There are typically two methods of drawdown: lump sum and flexi-access.

Drawing your pension as a lump sum

When you gain access to your DC pension, you might feel it’s easier to take the entire amount in one go, particularly if you are happy with the investment returns your pension has seen.

While tempting, if you take your pension all at once, 75% of it could be subject to your marginal rate of Income Tax. So, if your pension pot is large, it is likely that you would pay additional-rate Income Tax (45%) on this portion of your fund.

Of course, this is not ideal, especially with the cost of retirement rising. Fortunately, flexi-access can provide more tax-efficient opportunities in many cases.

Taking your pension flexibly

Instead of drawing your entire personal pension all at once, opting for flexi-access can help you make a more tax-efficient plan for your later-life income. Flexi-access lets you take funds from your pension whenever you choose.

Taking your pension in smaller sums can help you avoid a large Income Tax bill in retirement. As you read earlier, the first 25% of your pot can be taken tax-free, and any further flexible withdrawals may subject to your marginal rate of Income Tax.

Remember: your circumstances are unique, and there is no “one size fits all” way to take your pension tax-efficiently. That’s why working with your Kellands financial planner before you retire can add so much value – you can prepare your finances for this milestone in plenty of time.

Once you’ve drawn from your pension flexibly, the amount you can reinvest tax-efficiently is limited

One important thing to understand about taking your pension flexibly is that, although this option may be more tax-efficient than drawing a lump sum, the amount you can reinvest into your DC pension will then be limited.

Indeed, opting for flexi-access triggers the Money Purchase Annual Allowance (MPAA), which reduces your Annual Allowance to just £10,000 as of the 2023/24 tax year. Usually, your Annual Allowance – the amount you can contribute into your pension while receiving tax relief – sits at £60,000.

So, if you plan to keep paying into your pension throughout retirement, keep in mind that your tax-relievable contributions may only reach £10,000 a year.

Get in touch

Ultimately, if you retire at 55, you may need to draw from your pension sustainably for 30 years or more. So, the importance of understanding your tax liability – and how you can lessen it – cannot be overstated.

To work with an expert ahead of retirement, email us at, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

All contents are based on our understanding of HMRC legislation, which is subject to change.


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