How much can I draw down from my pension and will I be taxed at 40%?

This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.


I have just read it will be possible to take 25% of a pension and then take money drawdown each year and pay tax at 20% so long as the amount taken is below £30,000 each year.

My husband spoke to Standard Life about this after the Budget changes and the person he spoke to said when you take the 25% tax-free, you then have to take what is left in full and pay tax at 40%. We would not be drawing any of the above until April 2015. Can you confirm what is correct?



From April 2015, you will have total freedom and flexibility in how you decide to use your pension savings. You will be able to continue to withdraw up to 25% as a cash lump sum tax-free, and with the remainder of your pension savings you can decide how to take benefits.

You can take the balance of your 'pot' as cash, which will be subject to income tax at your marginal rate in the tax year in which you withdraw the money.

Or you can decide to withdraw cash as an income on an ongoing basis to manage your tax bill each year. This is known as 'income drawdown'.

There is no requirement to take any sum over the tax-free cash entitlement in one go. In fact, it will likely be beneficial to take your money over a period of time, to manage your tax bill. If you want the security of a guaranteed income, annuities remain a viable option for many, especially if you can improve that income through qualifying for enhanced rates due to your health or lifestyle. Depending on your condition, this can make a 40% difference to the income you receive.

The income tax threshold for higher-rate tax will be £32,365 for 2015/16 when the new rules come into force.The first £10,500 of income each year will be free of income tax. Please note all income is treated as income for tax purposes including, for example, income from other pensions, annuities and the state pension, as well as interest on savings outside Isas when calculating your personal tax situation.

Seeking professional financial advice could be beneficial as the changes, although welcome, do create additional complexity for many people. Please note the tax thresholds are applicable for people born after 5 April 1948.

Andrew Tully is pensions technical director at MGM Advantage


Category: Bank

Similar articles: