When’s the best time to make a pension withdrawal?

When you take money from a personal or workplace pension (like the HL Self-Invested Personal Pension), most people are entitled to up to 25% tax free (up to a maximum of £268,275) and the rest is taxed as income.

There are ways that you can minimise the amount of tax you pay on your withdrawals. And in some cases, you could end up paying no tax at all. Below we explain some key things you need to consider before taking money from a pension.

This article, and our guides and calculator, aren’t personal advice. If you’re not sure what’s right for you, ask for advice or seek guidance. Pension and tax rules can change, and benefits depend on your circumstances. Money in a pension isn’t usually accessible until age 55 (rising to 57 in 2028).

As well as tax implications, there are other factors to consider when taking money out of a pension. It’s important you check that your income withdrawals are sustainable. You should also find out how much you’ll need to retire for certain standards of living in retirement. Our retirement hub offers useful tools to help.

It's a juggling act - balance your income and tax

The taxable income you take from your pension is added to any other income you receive in the same tax year and taxed at your marginal rate.

A sensible consideration when managing your income is to take payments in line with particular tax bands. Those who have a standard personal allowance of £12,570, will normally start paying basic-rate tax (20%) when their annual income exceeds that amount and higher rate tax when their income exceeds £50,270.

Different tax rates and bands apply to Scottish taxpayers.

More on income tax allowances and bands

Plan your withdrawals with your partner

It can pay to plan your finances with your other half. You can cut your tax bill by balancing your pension payments and earnings based on your combined situation.

Let’s say your partner is a basic-rate or non-taxpayer. You work full time and pay higher-rate tax. As a couple you need some extra income. Between you, it could make more financial sense to withdraw from your partner’s pension first. If you made the withdrawal from your own pension, you could become an additional-rate taxpayer overnight, by accidently pushing yourself into the next tax bracket.

If you’re married or in a civil partnership, you might be able to benefit from the marriage allowance. If one of you is a basic-rate taxpayer and the other is a non-taxpayer, the lower earner can transfer up to 10% of their tax-free personal allowance to the higher earner.

More on transferring your allowances

March is a popular month, but why?

Our data suggests that the number of people taking money out of their HL SIPP soars in March compared to other months.

Timing is key, so it could be because people are making the most of their tax-free personal allowance (£12,570 for most people) before the new tax year. Once April 6 hits, any unused allowances will be lost.

Another reason for the surge in withdrawals could be because tax codes are typically applied on a cumulative basis. This means more of any allowances are taken into account as you progress through the tax year. Depending on your tax code, withdrawals made in March could be allocated 12/12ths of any personal allowance.

Spread your income withdrawals across two tax years

Taking large one-off withdrawals could push you into a higher tax band. This can be particularly important if you’re still receiving income from employment, and you plan to take an income from your pension too.

A good way to combat this could be to spread your income withdrawals across two tax years. For example, if you need to take a taxable lump sum of £55,000 from drawdown, you’d be taxed £9,432 if you withdrew it all in March. If you spread this across two tax years and withdraw £27,500 in March and £27,500 in April (the new tax year), you’d only be taxed £5,972 in total. This example assumes a standard (1257L) tax code in 24/25.

Our income tax calculator gives you an idea of how much income tax you might pay on a lump sum withdrawal both from drawdown and as an Uncrystallised Funds Pension Lump Sum (UFPLS).

Try the calculator