When I Retire, Will I Pay Tax on My Personal Pensions?
Tuesday 10 November, 2026
Importance of Pension Tax Advice
Seeking pension tax advice from a financial adviser will help you understand if you will pay tax on your personal pension when you retire. In most cases, the answer will be yes, but not necessarily on all the money you receive.
Understanding how pension tax works before you retire can help you plan your future income more effectively without any nasty surprises. The amount of tax you pay will depend on how you take money from your pension, how much you receive and what other taxable income you have.
The good news is that pensions can provide some valuable tax benefits, including the ability to usually take up to 25% of your pension as a tax-free lump sum, subject to the applicable allowances. The remaining pension income will generally be taxable as Income Tax. For most people, the standard Lump Sum Allowance is currently £268,275 across their pension arrangements, although some people may have a higher protected allowance.
As with all areas of retirement planning, it is important to look at your pension alongside your wider financial circumstances rather than considering it in isolation.
This is where professional Pension Advice and Pension Tax Advice can be particularly valuable, especially when deciding when and how much of your pension to take.
Is my personal pension taxable when I retire?
Yes, as the income you receive from a personal pension will normally be subject to Income Tax, although there are important exceptions.
For example, if you have a defined contribution personal pension, you can usually take up to 25% of your pension as a tax-free lump sum. You can then choose how to use the remaining pension, depending on the options available from your pension provider. This might include taking an income through pension drawdown, purchasing an annuity or taking pension benefits as lump sums.
Any taxable pension income is added to your other taxable income when working out whether you need to pay Income Tax.
This means retirement does not automatically mean that your income becomes tax-free. You may still have a Personal Allowance and may therefore be able to receive a certain amount of income before Income Tax becomes payable.
Jacob West, Independent Financial Adviser (IFA), St Albans, Hertfordshire said:
“One of the common questions we hear from people approaching retirement is whether their pension will be taxed. The important point is that retirement does not have a single tax outcome. Taking appropriate Pension Advice and Pension Tax Advice before you start taking your benefits can help you understand the choices available and how they could affect your wider retirement income.”
If you are approaching retirement and would like to discuss your pension options, you can contact Lonsdale's Financial Advisers on 01727 845500, email enquiries@lonsdaleservices.co.uk or complete our contact form to arrange an initial consultation.
How much of my pension can I take tax-free?
For most people, up to 25% of their pension benefits can normally be taken as a tax-free lump sum, subject to the Lump Sum Allowance.
For the 2026/27 tax year, the standard Lump Sum Allowance is £268,275 across all of your pension arrangements. It is important to remember that this is generally a total allowance rather than £268,275 for every pension you hold.
For example, if you had a pension worth £200,000 and were eligible to take the full 25% as a tax-free lump sum, you could potentially take £50,000 tax-free. The remaining £150,000 would normally remain invested or be used to provide taxable retirement income, depending on the pension option you choose.
The actual amount you can take tax-free can be affected by your individual circumstances, including whether you have previously taken pension benefits or have certain protected allowances.
It is also important to consider when you take your tax-free lump sum. You do not generally have to wait until you reach State Pension age before accessing a personal pension. Most personal pensions can normally be accessed from age 55, although the normal minimum pension age is due to increase to 57 from 6 April 2028, subject to scheme rules and certain protections.
This means that taking your tax-free cash before or after State Pension age can form part of your wider retirement planning. Taking it earlier may mean that less money remains invested for future growth and could affect the amount of pension income available later, while delaying withdrawals may allow the pension to remain invested for longer.
The tax-free percentage itself does not simply increase because you wait until State Pension age, so the timing and amount taken should be considered alongside your income needs, tax position and wider financial circumstances.
This is one reason why it is important to review all your pensions and investments with the help of a financial adviser before deciding how much and when to take your pension benefits.
Example 1. John retires at 57 with an £800,000 pension
John retires at 57 with a pension pot of £800,000. He wants around £45,000 a year to cover his living costs and expects to receive the State Pension from age 67.
He could potentially take £200,000 as tax-free cash, leaving £600,000 in his pension to provide future income. The £200,000 tax-free cash would not itself be subject to Income Tax.
Before John reaches State Pension age, however, any taxable pension income he takes will be his main source of retirement income.
If he wanted to receive £45,000 a year after Income Tax from taxable pension withdrawals alone, an illustrative withdrawal would be around £54,000 a year. This would produce approximately £45,000 after Income Tax, assuming the standard Personal Allowance and no other taxable income.
Once John starts receiving his State Pension at 67, the picture changes. Assuming he receives the full new State Pension of around £12,548 a year, this uses much of his Personal Allowance. He would then need less taxable income from his personal pension to achieve the same £45,000 net income.
What this illustrates: John has a relatively large pension pot, but retiring at 57 means his pension may need to provide income for many years before his State Pension begins. Taking tax-free cash can provide flexibility, but the amount and timing of taxable withdrawals can affect both his tax bill and how long his pension lasts.
What happens to the rest of my pension?
The portion of your pension that is not taken as a tax-free lump sum will generally be subject to Income Tax when you receive it.
For example, you might choose to leave the rest of your pension invested and take a regular income through pension drawdown. Alternatively, you might use some or all of it to purchase an annuity, which can provide a regular income.
If you take a taxable lump sum, the taxable element is also generally treated as income for tax purposes. MoneyHelper explains that where a whole pension is taken as a single payment, 25% is usually tax-free and the remaining 75% counts as taxable income.
The way you access your pension can therefore have a significant effect on your tax position.
If you are unsure whether taking a pension lump sum, drawdown or an annuity is appropriate for your circumstances, professional financial advice can help you understand the potential tax implications before you make a decision. Lonsdale's Financial Advisers can be contacted on 01727 845500, by email at enquiries@lonsdaleservices.co.uk, or through our contact form.
How much Income Tax will I pay on my pension?
There is no separate special rate of Income Tax simply because you are retired.
Instead, taxable pension income is generally considered alongside your other taxable income and taxed according to the Income Tax rules that apply to you.
For the 2026/27 tax year, the standard Personal Allowance is £12,570. For taxpayers in England, Wales and Northern Ireland, the basic rate of Income Tax is 20% on taxable income from £12,571 to £50,270, the higher rate is 40% from £50,271 to £125,140, and the additional rate is 45% on income above £125,140. Different Income Tax rates and bands apply to Scottish taxpayers.
Your Personal Allowance can also be reduced if your adjusted net income is above £100,000. GOV.UK states that the allowance reduces by £1 for every £2 of adjusted net income above £100,000 and can reduce to zero once income reaches £125,140.
This is why the question is not simply “How much tax will I pay on my pension?”
A more useful question is often:
“How much taxable income will I have in retirement from all my different sources?”
Understanding your potential tax position is an important part of retirement planning, and Pension Tax Advice can help you consider the implications before you begin taking benefits.
Your pension is only one part of your retirement income
When planning retirement, you may have several different sources of income, including:
- Personal pensions
- Workplace pensions
- The State Pension
- Annuity income
- Employment income if you continue working
- Income from investments
- Savings interest
- Rental income
- Other taxable income
HMRC confirms that the State Pension is taxable income, although tax is not normally deducted before it is paid. Instead, it counts towards your total taxable income and may affect the tax you pay on other income.
This can be particularly important when you start receiving your State Pension alongside income from a personal or workplace pension.
For example, someone who has a relatively modest personal pension might assume they will not pay tax because their pension income is below the Personal Allowance. However, once their State Pension and other taxable income are included, their total income could be higher than the allowance.
At Lonsdale, our Financial Advisers can help you look at your personal pension alongside your other retirement income and consider how different sources could work together. For Pension Advice and retirement planning, call 01727 845500, email enquiries@lonsdaleservices.co.uk or contact us online.
Example 2. Jane retires at 62 after earning £70,000 a year
Jane is currently 57 and plans to work for another five years, earning £70,000 a year before retiring at 62. At retirement, she expects to have a £500,000 pension pot, together with £250,000 in a Stocks & Shares ISA. She expects to receive her State Pension from age 67.
From her £500,000 pension, Jane could potentially take £125,000 as tax-free cash, leaving £375,000 in her pension.
The important difference in Jane's case is that her £250,000 ISA is not pension income and withdrawals from an ISA are not subject to Income Tax. This gives her another potentially useful source of retirement income.
For example, if Jane needed £40,000 a year for general living costs, she could potentially use some of her ISA to provide income during the early years of retirement, rather than taking the same amount from her pension as taxable income.
If she used £40,000 a year from her ISA, she could potentially fund five years of spending with £200,000, leaving £50,000 in the ISA, while her pension remained invested. She would also have the potential £125,000 pension tax-free cash available, subject to how she chose to structure her pension benefits.
When Jane reaches 67 and starts receiving her State Pension, she could then potentially take a smaller taxable income from her personal pension. For example, assuming a full State Pension of approximately £12,548 a year, she would need around £34,300 of taxable pension income to provide approximately £40,000 of total income after Income Tax, assuming no other taxable income and the standard Personal Allowance.
What this illustrates: Jane's situation shows why retirement tax planning is about more than the pension pot alone. Her salary, pension, tax-free pension cash and ISA could all be considered together, potentially giving her more flexibility over when taxable pension income is taken.
Do I pay tax on my State Pension as well?
Yes, as the State Pension is taxable income.
However, you do not normally receive your State Pension with Income Tax deducted at source. Instead, HMRC takes it into account when calculating your overall tax position. If you have other employment or pension income, HMRC will usually adjust your tax code so that tax due can be collected from those sources.
For 2026/27, the full rate of the new State Pension is £241.30 a week, although the amount you personally receive depends on your National Insurance record and circumstances.
This makes it particularly important to consider your State Pension when estimating how much of your private pension income you may actually receive after tax.
What if I am still working when I start taking my pension?
It is possible to take pension benefits while continuing to work, depending on your circumstances and the rules of your pension scheme.
However, if you are earning a salary and also taking taxable pension income, both sources can contribute towards your taxable income for the year.
This could mean that some or all of your pension income is taxed at a higher rate than you might have expected.
Taking a pension while still working can therefore require careful consideration of the timing and amount of withdrawals, particularly where you have other sources of taxable income.
There can also be pension contribution considerations when you flexibly access certain pension benefits. For example, the Money Purchase Annual Allowance can apply after certain types of flexible pension access and is £10,000 for the 2026/27 tax year.
Can I avoid paying tax on my pension?
There is usually no way to make all of your pension income permanently tax-free.
However, pension rules provide legitimate opportunities to receive some pension benefits tax-free, most commonly through the tax-free lump sum allowance.
The way you take the remainder of your pension can also affect when taxable income arises. For example, someone using pension drawdown may have more flexibility over the amount and timing of withdrawals than someone taking their entire pension as a single taxable payment.
That does not mean one approach is automatically better than another. The appropriate option depends on factors such as your income requirements, other assets, investment circumstances, life expectancy and financial objectives.
This is where professional retirement planning can be particularly useful. A Financial Adviser can help you consider the timing and amount of pension withdrawals alongside your other assets, income and longer-term plans.
Could taking too much pension income increase my tax bill?
Potentially, yes. If you take a large amount of taxable pension income in one tax year, it could push your total income into a higher Income Tax band.
For someone approaching retirement, it may therefore be worth considering not just how much pension income they need, but also when they need it.
This is particularly relevant where you have flexibility over when you take pension benefits.
Your pension is designed to provide income over the course of retirement, so decisions about withdrawals can have consequences beyond the immediate tax bill. Investment performance, inflation, longevity and the sustainability of withdrawals can all need to be considered as part of wider retirement planning.
Example 3. Steve and Sue retire as a couple
Steve is 58 and is about to retire with a £500,000 pension. Sue is 56 and has a £250,000 pension. Together, they have £750,000 in pensions and need approximately £60,000 a year for their general living costs. They both expect to receive the State Pension.
Between them, they could potentially take £187,500 of tax-free pension cash:
- Steve: £500,000 pension → £125,000 potential tax-free cash
- Sue: £250,000 pension → £62,500 potential tax-free cash
- Combined potential tax-free cash: £187,500
That would leave £562,500 in their pensions, assuming they took the full 25% tax-free amount. Their situation is particularly interesting because they have two separate Personal Allowances and their State Pensions will not necessarily start at exactly the same time.
Before either State Pension begins, if they split their pension withdrawals between them, they could potentially receive around £68,700 of combined gross pension income and pay approximately £8,700 in Income Tax, leaving around £60,000 after tax. This is a simplified illustration and assumes the income is divided between them in a tax-efficient way.
When Steve reaches State Pension age, his State Pension could provide approximately £12,548 a year, reducing the amount they need to withdraw from their personal pensions. When Sue subsequently reaches State Pension age, the combined State Pension income could reduce the amount they need to draw from their personal pensions further.
What this illustrates: For a couple, looking at their pensions separately can miss an important part of the tax picture. The timing of each person's pension withdrawals, Personal Allowance and State Pension can all affect how much Income Tax they pay and how much they need to take from their investments.
Do I have to take my tax-free cash when I retire?
You do not necessarily have to take your available tax-free cash as soon as you retire. This is why it is so important to seek professional pension tax advice, to ensure you are making the most informed decisions based on your personal circumstances.
For some people, taking it later may be worth considering. For example, if you have enough income from other sources to meet your living costs, leaving money invested in your pension could allow it to remain invested until you need it. Alternatively, if you are still working, delaying pension withdrawals could help avoid creating additional taxable income while you are earning a salary.
The arrival of your State Pension can also change the picture. Once you start receiving State Pension income, you may need to take less from your personal pension to meet your overall income requirements. You could potentially use tax-free pension cash at a later stage to supplement your income without increasing your taxable pension income.
Another option for some people is phased drawdown, where pension benefits are taken in stages and tax-free cash is taken progressively rather than all at once.
However, delaying your tax-free cash is not automatically more tax-efficient or financially beneficial. The money left in the pension remains invested and its value can rise or fall, while your circumstances, income requirements and tax position may change over time.
The decision about when to take tax-free cash should therefore be considered alongside your wider retirement income and financial plans.
Jacob West, Independent Financial Adviser (IFA), St Albans, Hertfordshire added:
“Good retirement planning is not simply about deciding how much money to take from your pension. The timing and amount of your withdrawals can affect your Income Tax position, the money you leave invested and the income available to you in future years. Taking Pension Advice and Pension Tax Advice before accessing your pension can help you make informed decisions based on your own circumstances.”
How is tax taken from my personal pension?
Taxable pension income is normally paid through PAYE.
HMRC uses your tax code to determine how much Income Tax should be deducted from your pension payments. The tax treatment can be more complicated when you first take money from a pension, particularly where HMRC does not yet have enough information to issue the correct tax code.
If too much tax has been deducted, there are processes through HMRC for claiming a refund in appropriate circumstances.
It is therefore worth checking the tax deducted from your pension payments and keeping your pension and HMRC records up to date.
What should I consider before taking my pension?
Before taking money from a personal pension, it can be helpful to consider the wider picture.
Questions to consider include:
- How much income will you need in retirement?
- When will you receive your State Pension?
- Do you have other workplace or personal pensions?
- Will you continue working?
- How much tax-free cash might you be able to take?
- When should you take your tax-free cash and how much should you take?
- How much taxable income will you need from your pension?
- Do you need your pension to provide an income for life?
- How much investment risk are you comfortable taking?
- How might inflation affect your retirement income?
- How long might your pension need to last?
The question of when to take your pension and how much to take deserves particular attention. You do not necessarily need to take your available 25% tax-free cash as soon as you become eligible and taking more or less than you need can affect the amount remaining invested and the level of taxable income you generate later.
The right approach will depend on your individual circumstances, so speaking to a Financial Adviser about Pension Advice and Pension Tax Advice before taking benefits can be worthwhile.
At Lonsdale, our financial advisers look at your income, expenditure, savings, investments and pensions as part of retirement planning, using personalised cashflow modelling to help assess how your finances could look over time.
Jacob West, Independent Financial Adviser (IFA), St Albans, Hertfordshire added:
“Retirement planning is about much more than simply finding out what your pension is worth. We encourage people to consider how different sources of income will work together and how pension withdrawals could fit into their wider plans. Having a clear picture before you start taking benefits can help you understand the choices available, the potential tax implications and how your pension could support you throughout retirement.”
If you are approaching retirement and would like to review your pension arrangements, Lonsdale's Financial Advisers can help you consider your options.
Call 01727 845500, email enquiries@lonsdaleservices.co.uk or complete our contact form to arrange an initial consultation.
So, will I pay tax on my personal pension when I retire?
Usually, yes, but the amount of tax you pay will depend on your circumstances.
You can normally take up to 25% of your pension as a tax-free lump sum, subject to the relevant allowances. The remaining pension income will generally be taxable and will be considered alongside your other taxable income, including your State Pension.
For some retirees, their total taxable income may remain within their Personal Allowance, and they may have little or no Income Tax to pay. For others, pension income combined with the State Pension and other sources of income could result in Income Tax being payable at the basic, higher or additional rate.
The key point is that there is no single answer that applies to everyone. Understanding your potential retirement income and tax position before you start taking pension benefits can form an important part of effective retirement planning.
The decision about when to take your pension and how much to take can be just as important as understanding the tax that may be payable. Taking professional Pension Advice and Pension Tax Advice before accessing your pension can help you understand the options available and how they could fit into your wider retirement plans.
If you are approaching retirement or would like to review your existing pension arrangements, speaking to one of our regulated Financial Advisers can help you understand the options available to you.
Call Lonsdale on 01727 845500, email enquiries@lonsdaleservices.co.uk or complete our contact form to arrange an initial consultation.
Important information
This article is for general information only and does not constitute personal financial advice. Pension and tax rules can change, and their impact depends on individual circumstances. The information above is based on the rules and allowances applicable at the time of writing and is not a guarantee of future tax treatment.
The Financial Conduct Authority does not regulate tax advice or cashflow modelling. Tax treatment depends on individual circumstances and may be subject to change.
A pension is a long-term investment and is not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of investments and any income from them can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.
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