How to Draw Income from Your Pension Efficiently

Drawing income from your pension is one of the most important financial decisions you’ll ever make — and getting it wrong can mean unnecessary tax bills or running out of money too soon. In this week’s episode of the Wealth of Advice Podcast, we break down how to access your pension in a tax-smart, flexible way that suits your personal circumstances.

Whether you’re approaching retirement or already there, we share practical tips and cover some of the common traps to avoid.

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How Pension Withdrawals Are Taxed

Here’s a quick refresher on how pension income is taxed:

• 25% of your pension can usually be taken tax-free.

• The remaining 75% is taxed as income — but there’s no National Insurance to pay.

• You only pay tax on income above your Personal Allowance (£12,570).

• Income between £12,571 and £50,270 is taxed at 20%.

• Income between £50,271 and £125,140 is taxed at 40%.

• Income above £125,140 is taxed at 45%

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Make the Most of Your Personal Allowance

Your Personal Allowance – currently £12,570 (2024/25 tax year) – is the amount of income you can receive each year tax-free. If you are retiring prior to State Pension Age, you may have a significant amount of your allowance available. This means you can efficiently draw income from the taxable portion of your pension up to your allowance without paying a penny of income tax.

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Planning Around the State Pension (and other guaranteed income)

If you’re retiring before your State Pension kicks in, there’s an opportunity to use your full Personal Allowance more effectively. Currently, the full State Pension is £11,502 (rising to £11,973 from April 2026), so it’s worth considering how your income mix will change over time.

If you expect to have a higher guaranteed income in later years, it might make sense to take more income at a lower tax rate now, before your state pension or defined benefit pension pushed you into a higher tax bracket.

Here's an example of how your income sources may be split in the early years and later stages of retirement:

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Spread Lump Sums

If you need to take larger withdrawals from the taxable portion of your pension, spreading lump sums across multiple tax years can be a highly effective way to manage your tax liability.

Rather than withdrawing, say, £60,000 in one go – which would push a large portion into the 40% tax band – you could take £30,000 in March and £30,000 in April, straddling two tax years. This way:

• You use two Personal Allowances (e.g. £12,570 in each year).

• You also spread the taxable amount over two basic-rate tax bands (£12,571–£50,270), reducing or even avoiding higher-rate tax.

Use other Assets

While pensions are important, a well-structured income strategy doesn’t rely on pensions alone — it blends various sources to support flexibility, manage tax, and align with long-term goals.

Asset you may be able to use could include:

• ISAs – Withdrawals are completely tax-free and don’t affect your income tax position, which can be useful in years where other income is higher.

• Cash savings – Useful for short-term needs, especially when markets are volatile or if you want to avoid drawing on investments during downturns.

• General Investment Accounts (GIAs) – While taxable, they allow access to the Dividend Allowance and Capital Gains Tax exemption, which can be managed year-by-year.

• Rental income, dividends, or business profits – These can complement pension income but may push you into a higher tax band if not carefully coordinated.

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Planning for Married Couples

There are smart ways for married couples to optimise income and pension contributions:

• Marriage Allowance – If one partner is a basic-rate taxpayer and the other earns less than £12,570, you may be able to transfer part of the unused allowance, saving up to £252 a year (and you can backdate for four years).

• Pension Contributions – Even if a partner isn’t working, they can contribute £2,880 into a pension, which the government will top up to £3,600 via tax relief.

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Don’t Forget Death Benefits

The taxation of pensions on death also needs to be taken into account:

• If you die before age 75, your pension can usually be passed on tax-free — and beneficiaries can draw from it without paying tax.

• If you die after age 75, it still passes tax-free but will be taxed as income when drawn by your beneficiaries.

This may prompt you to take out tax-free cash as you are getting closer to your 75^th birthday, as if you don’t use it, you can’t pass the tax-free cash to your loved ones after you turn 75.

You should also be aware of possible changes coming in April 2027, which could affect estate planning rules around pensions.

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Common Mistakes to Avoid

• Triggering the Money Purchase Annual Allowance (MPAA) – Taking flexible income can reduce your future annual pension contribution limit to just £10,000 (2024/25).  

• Taking the full 25% tax-free cash on day one – This can limit flexibility later. Sometimes it’s better to take tax-free cash gradually, depending on your goals and income needs.

• Not updating death benefit nominations -This can affect how your pension is passed on and taxed. 

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Final Thoughts

There’s no one-size-fits-all approach to pension drawdown. The most tax-efficient strategy depends on your income needs, other assets, and long-term goals. But with careful planning, you can keep more of your money working for you and less going to the taxman. 

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Want to Make the Most of Your Pension? 

At Wealth of Advice, we help clients build personalised drawdown strategies that align with their goals and minimise tax. Whether you’re approaching retirement or already drawing income, we’re here to help. 

Book a free consultation today and start planning your retirement with confidence. 

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