A tax-efficient way to get money out of your pension
Reaching the point where you can finally access your retirement savings is a huge achievement. But as you prepare to start drawing from your pot, it’s important to have a strategy in place. The way you choose to take your money can significantly affect how much of it you keep, and how much goes to the taxman.
Whether you’re planning to retire fully, wind down your hours gradually, or simply want to understand your future options, here’s how to access your savings efficiently.
Make the most of your 25% tax-free lump sum
Under current UK rules, once you reach the minimum pension age (currently 55, and increasing to age 57 from 2028), you can usually take up to 25% of your total pension pot completely tax free.
You generally have two ways to structure this tax-free cash when accessing via pension drawdown:
A single tax-free lump sum: You can take the full 25% allocation in one go. If you do this, the remaining 75% of your pot stays in your pension and any future withdrawals you make from it will be taxed as regular income.
Phased drawdown: You can also take tax-free cash from your pension pot as and when you need it. If you choose this path, every withdrawal you make is tax free, but further withdrawals from your Drawdown Pot will be treated as taxable income.
Taking a massive tax-free sum all at once can be helpful if you want to pay off a mortgage or fund a specific project. However, leaving the money invested in your pension means it has the potential to continue growing throughout your retirement.
Balance your withdrawals to manage Income Tax
The remaining 75% of your pension pot is subject to standard UK Income Tax, exactly like wages from a job. When you take money out, it’s added to any other earnings you have in that tax year – such as part-time wages, rental income, or your State Pension.
If you pull too much money out of your pension in a single tax year, you risk accidentally pushing yourself into a higher tax bracket.
Spread payments to use your personal allowance
Most people in the UK have a standard Personal Allowance, which is the amount of income you can earn each year before you start paying income tax. By spreading your taxable pension withdrawals over several tax years, you can maximize this allowance year after year. Spacing out your payouts may keep your total taxable income within a lower bracket than if taken all in one go, preventing an unnecessary tax hit.
Watch out for the emergency tax trap
When you make your very first taxable withdrawal from a pension pot, providers are often required by HMRC to apply an emergency tax code.
This system treats your single withdrawal as if it’s the first of 12 identical monthly payments. If you take a large lump sum, the system might calculate your tax as though you’re earning a far higher income, resulting in a significantly larger tax deduction than you actually owe.
While you can claim this overpaid tax back from HMRC using a standard repayment form. To avoid this initial cash-flow squeeze, many savers choose to make a small, predictable taxable withdrawal first. This establishes your correct tax code with your provider before you request a larger sum.
Understand the money purchase annual allowance (MPAA)
If you’re planning to take flexible withdrawals from your pension while you’re still working and contributing to a pot, you need to be aware of the Money Purchase Annual Allowance (MPAA).
Once you take your first taxable payout from a defined contribution pension, the maximum you can contribute is permanently reduced. If you trigger the MPAA, the amount you can save into your pension each year without incurring a tax charge drops significantly from the standard limit.
Once triggered, the combined maximum amount you or your employer can contribute to your defined contribution pensions drops to £10,000 for the rest of that tax year and ongoing.
If you intend to keep building your retirement savings in excess of the MPAA through an occupational or personal pension, you could consider taking only your 25% tax-free lump sum. Accessing only the tax-free portion of your pot doesn't trigger the MPAA, allowing you to maintain your full annual contribution potential. However, this is a significant financial decision and it’s important to work out what’s right for you. If you’re unsure, we recommend seeking free guidance from Pension Wise or advice from a financial adviser.
*Moneybox, Pension fees comparison, as of 26/05/2026
As with all investing, your capital is at risk. The value of your pension can go up and down, and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future. You can only access your pension once you reach the minimum pension age.
When deciding whether to transfer your pension, it’s important to compare the charges, investment options & benefits between Moneybox and your existing provider. If you’re not sure whether transferring is right for you, we recommend you speak with an independent financial advisor.
There are a number of ways to withdraw from your pension at retirement, but not all of these options are currently offered by the Moneybox Pension. When weighing up your retirement choices, it is important to consider the specific benefits, risks, and charges associated with each method. You should compare products offered by other providers on the open market, as they may offer features or lower costs that are more suitable for your individual needs.