Pension Withdrawal Options — 2025/26
Updated for the 2025/26 tax year
From age 55 (rising to 57 in 2028), you can access your defined contribution pension. How you take the money has a big impact on how much tax you pay. Here are the main options.
The 25% Tax-Free Lump Sum
You can take up to 25% of your pension pot tax-free. The maximum tax-free lump sum is capped at £268,275 (25% of the old £1,073,100 lifetime allowance). The remaining 75% is taxed as income when you withdraw it.
Drawdown vs Annuity
| Feature | Drawdown | Annuity |
|---|---|---|
| How it works | Pot stays invested, you withdraw as needed | Exchange pot for guaranteed income for life |
| Flexibility | High — choose when and how much | Low — fixed once purchased |
| Investment risk | You bear it — pot can go up or down | None — insurance company bears it |
| Income certainty | Variable | Guaranteed for life |
| Death benefits | Remaining pot passed on (tax-free if death before 75) | Usually stops (unless joint-life or guaranteed period) |
| Typical annual income | 3–5% sustainable withdrawal rate | ~5–7% at age 65 (2025 rates) |
UFPLS — Uncrystallised Funds Pension Lump Sum
UFPLS lets you take ad-hoc lump sums directly from your uncrystallised pot. Each withdrawal is 25% tax-free and 75% taxable. It is simpler than setting up drawdown but less flexible for managing your tax position.
Tax Implications
- All withdrawals above the 25% tax-free portion are taxed as earned income at your marginal rate.
- Taking too much in one year can push you into a higher tax band. Spreading withdrawals across tax years is usually more efficient.
- Money Purchase Annual Allowance (MPAA): Once you flexibly access your pension (beyond the 25% tax-free), your annual allowance for future contributions drops to £10,000.
- Emergency tax: First withdrawals are often taxed on a Month 1 basis (too much tax). Reclaim via P55 form or wait for HMRC to reconcile.
Worked Example: £300,000 Pension Pot
Option A: Take 25% lump sum + drawdown
- Tax-free lump sum: £75,000
- Remaining in drawdown: £225,000
- Annual withdrawal at 4%: £9,000/year
- Tax on £9,000 (added to State Pension of £11,973): within personal allowance and basic rate
- Income tax: ~£1,681 (20% on amount above £12,570)
- Net annual income: ~£19,292 (State Pension + drawdown after tax)
Option B: Buy an annuity
- Tax-free lump sum: £75,000
- Annuity purchase: £225,000
- Annuity rate at 65 (~6%): £13,500/year guaranteed for life
- Tax on £13,500 (with State Pension): ~£2,581
- Net annual income: ~£22,892 (guaranteed, no investment risk)
Option C: UFPLS — £20,000 lump sum
- Tax-free portion: £5,000 (25%)
- Taxable portion: £15,000
- With State Pension income, tax on £15,000: ~£4,881
- Net from this withdrawal: ~£15,119
Practical Tips
- You can combine approaches — take the 25% lump sum, put some into drawdown, and buy an annuity with the rest.
- Consider delaying withdrawals until a year when your other income is low.
- Use Pension Wise (free government guidance) before making decisions.
- If you have a defined benefit (final salary) pension, think very carefully before transferring — the guaranteed income is usually worth more than the transfer value.