There are many aspects to retirement planning. You’ll want to consider if you’d like to stop working fully and if so, how you’d like to spend your time, how to take your pension as retirement income and whether you’ll have any other responsibilities like caring for a loved one. Fundamentally, you’ll need to think about having enough income to support the kind of lifestyle you’d like in retirement. But like almost all types of income, most of what you take from your pension will be subject to income tax.
Pension Drawdown Calculator
You can grow a personal pension without paying tax on the money you pay into one. However, you’ll need to pay tax when you start withdrawing more than your tax-free allowance. Thankfully, a tax-free allowance is one of the other benefits of paying into your pension. Currently, you can take up to 25% of your pension without paying any tax. But you’ll pay tax at your usual income tax rate once you start withdrawing from the remaining 75% of your pension pot.
This is where our Pension Drawdown Calculator comes in. It’ll help you estimate how much tax you could pay and how much you’ll have left in your pot after withdrawing. Currently, you can start withdrawing from age 55 (rising to 57 from 2028).
How the Pension Drawdown Calculator works
What information will I need?
To use the Pension Drawdown Calculator you’ll need to know:
- the current combined value of your pension pots you haven’t accessed yet; and
- how much tax-free and taxable cash you’d like to withdraw.
Assumptions the calculator makes
When using the calculator it issues a few things about you and your situation, including:
- you’re over the age of 55;
- you haven’t started accessing your pension yet; and
- we’ll apply an emergency ‘Month 1’ (M1) tax code in line with HMRC guidelines. This means you’ll only get one-twelfth of the available tax allowances. If you were to draw down the amounts used in the example below, you may be over or under-taxed depending on your personal circumstances
*figures shown are for illustrative purposes only.
You must enter only the value of the pensions you haven’t started withdrawing. Once you start accessing your pension, the tax status of your pension changes. When entering the total value of your pension pots you’ll see exactly how much of your pension you can withdraw without paying tax (your 25% tax-free amount).
Tax-free and taxable cash
Next, enter how much you’d like to withdraw from your pension. You can withdraw your entire tax-free portion before withdrawing from your taxable portion but you won’t be able to withdraw your entire taxable portion before taking some of your tax-free amount. We do this because if you don’t withdraw your 25% tax-free amount each time you start accessing part or all of your pension benefits, after 12 months you’ll lose your right to take it tax-free and it will be treated as taxable income.
For example, if you want to withdraw £4,000, the calculator will show you how much tax you’ll pay depending on how much of that £4,000 you take as taxable income. The amount of tax you pay will depend on the tax code HMRC assigns, which in turn is based on your income, personal allowance and rules for a particular tax year.
We’ll always apply an emergency tax code on a withdrawal until we receive your individual tax code from HMRC directly. So, calculations done with our drawdown calculator apply an emergency tax code. Individual tax codes provided by HMRC can also be on an emergency tax basis. For payments on an emergency tax basis, you should settle any remaining underpaid or overpaid tax directly with HMRC. To discover more about tax rates and how they can impact your withdrawal, watch our video explainer on drawdown tax.
*figures shown are for illustrative purposes only.
After entering the tax-free and taxable cash amounts you’ll see how much of your withdrawal you’ll end up receiving and how much of your pension will be left to withdraw from. Drawing down from your pension is completely free, unless you withdraw everything within 12 months of having a live balance with us or the balance of your account is less than £150 at the point of withdrawal (a full withdrawal fee of £150 will apply).
Prefer to watch? Learn about our Drawdown Calculator with our short how-to video.
Considerations for withdrawals
Lump sum vs. ad hoc withdrawals
You don’t need to withdraw your full tax-free allowance all at once. Instead, you can take smaller amounts as you decide. For most people, a pension will be their main source of income in retirement. It’ll need to support you during your whole retirement. So, you’ll want to consider carefully, how much and how early to withdraw. Taking too much too soon could mean you run out early.
Growing your savings
Keeping more of your pension invested means it has the opportunity to grow from long-term investment. If you were to take your entire tax-free amount at the same time you may have less to take as income in the future.
Tax efficiency
When you take taxable money from your pension it’s added to your other income. The total amount you take as income could push you into a higher tax band for that tax year. It’s important to understand how the amount you take from your pension could impact your total tax bill.
Making pension contributions
You can still add more money to your pension and benefit from tax-free top-ups from the government even whilst withdrawing. But the amount you’re able to take will reduce depending on whether you’re withdrawing from the tax-free or taxable portion of your pension. For the 2024/25 tax year, the tax-free annual limit is 100% of your salary or £60,000 (whichever is lower). This applies if you’re only withdrawing from the tax-free portion of your pension. If you start withdrawing from the taxable portion of your income, your contribution limit will reduce to £10,000 a year. This is known as the money purchase annual allowance (MPAA) and means you won’t be able to receive tax-relief on anything above this amount. You might be especially affected if you intend to continue working and contributing to your pension whilst withdrawing.
Getting support
If you need help understanding how to approach taking money from your pension, consider contacting Pension Wise.
If you’re aged 50 or over, you can book a free appointment. This is a government-backed service from MoneyHelper offering impartial guidance. You could also seek advice from an Independent Financial Adviser (IFA). An IFA will charge you for advice but it could be helpful as a second opinion and less costly than potentially making a mistake with taking your pension savings.
See more information on talking to an expert and how to find one.
Future product news
Keep your eye out for our next product blog or catch up on previous posts. We’re looking forward to spotlighting more of our handy features and free financial tools plus we’ve got lots of great new updates in the works we’re looking forward to bringing you. Once released, we’ll let you know what they are and how they can help you save for a happy retirement.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
