Your Retirement Income
Full new State Pension: £11,502/year. Enter 0 if not yet claiming.
Part-time work, rental income, savings interest, etc.
25% Tax-Free Lump Sum (PCLS)
You can take up to 25% of your pension pot tax-free when you first access it.
Total Deductions
£2,786
Effective rate: 10.5%
Pot Longevity
~12.5 yrs
Remaining: £187,500
Lump Sum Taken
£62,500
Pot Before
£250,000
Pot After Lump Sum
£187,500
Income & Tax Breakdown
| Pension Drawdown | £15,000 |
| State Pension | £11,502 |
| Total Taxable Income | £26,502 |
| Personal Allowance | −£12,570 |
| Taxable Income | £13,932 |
| Income Tax | −£2,786 |
| Total Deductions | −£2,786 |
| Net Annual Income | £23,716 |
| Net Monthly Income | £1,976 |
Effective Tax Rate
10.5%
Marginal Tax Rate
20.0%
Tax on your next £1
How Pension Drawdown Tax Works
When you reach age 55 (rising to 57 from 2028), you can start accessing your defined contribution pension pot. The most flexible option is pension drawdown (also called flexi-access drawdown), which lets you take income as and when you need it, while the rest stays invested.
The key tax rules are simple: 25% of your pot can be taken tax-free as a lump sum. Everything else you withdraw is taxed as income at your marginal rate. Crucially, pension income is not subject to National Insurance, making it more tax-efficient than equivalent employment income.
Your total retirement income — State Pension, private pension drawdown, and any other income — is added together to determine your tax band and Personal Allowance.
25% Tax-Free Lump Sum (PCLS)
The Pension Commencement Lump Sum (PCLS) allows you to take up to 25% of your pension pot completely tax-free. Key points:
What You Can Take
- Up to 25% of your total pension pot
- Lifetime maximum of £268,275
- Can be taken in stages (phased drawdown)
- No tax or NI to pay on this amount
Things to Consider
- Taking it all at once reduces future growth potential
- Taking it in stages can be more tax-efficient
- Money Purchase Annual Allowance (MPAA) of £10,000 may apply
- Unused pot continues to grow tax-free
State Pension and Tax
The State Pension is taxable income, but it's paid gross (without tax deducted). For 2025/26, the full new State Pension is £221.20 per week (approximately £11,502 per year), which is just below the Personal Allowance of £12,570.
This means if the State Pension is your only income, you won't pay tax. But any additional income — even a small private pension drawdown — will push you over the Personal Allowance and become taxable.
HMRC typically collects the tax on your State Pension by adjusting your tax code on any private pension or employment income, so you don't receive a separate tax bill.
Tax-Efficient Drawdown Strategies
Use Your Personal Allowance
Draw down just enough to use your full £12,570 Personal Allowance (minus State Pension). This keeps your marginal rate at 0%.
Stay in the Basic Rate Band
Keep total income below £50,270 to avoid the 40% higher rate. Draw the rest in future years.
Avoid the 60% Trap
If total income is near £100k–£125k, the Personal Allowance taper creates an effective 60% rate. Plan drawdown to avoid this zone.
Phased Lump Sum
Instead of taking 25% all at once, take it in stages. Each withdrawal has 25% tax-free + 75% taxable, spreading the tax impact.
Pension Drawdown vs Annuity
| Feature | Drawdown | Annuity |
|---|---|---|
| Flexibility | High — withdraw as needed | Fixed — guaranteed income |
| Investment risk | You bear the risk | Provider bears the risk |
| Inheritance | Remaining pot passes to beneficiaries | Usually lost on death (unless guaranteed) |
| Tax on death | Tax-free if before 75 | N/A (nothing to pass on) |
| Longevity protection | Pot can run out | Guaranteed for life |