How you take money from your pension is just as important as how you build your wealth. In fact, it could be considered more important, as for most people there is no way of replacing their pension pot once it’s spent or paid in tax.

When it comes to withdrawing money from your pension, taking time and advice to put a plan in place is essential to avoiding costly mistakes and paying more tax than you need to.

Currently, if you have a personal pension (also known as a defined contribution pension), you can take out your money in the way you choose from the age of 55 (this will increase to age 57 from 2028).

For most people their pension will be core to their retirement wealth and, alongside the state pension, will be a main source of income. This can be taken in the form of flexible income, where the retirement pot is kept invested and drawn from according to an individual’s needs, bearing in mind it should last a lifetime. Some people may choose to take 25% out as a tax-free lump sum; or use it to buy an annuity.

Knowing how you will be taxed will influence how you draw the income. The first thing to know is that you do not have to take the 25% tax free portion of your pension in one go. Many people think of it as money they will spend enjoying the first few years of retirement and take it out all at once. But provided you are over 55, you can take it how and when you want. There can be advantages to leaving it in your pension, as the longer it remains invested the longer it has time to grow through investment, boosting the overall value of your pension pot.

Or you could take money out of your pension in smaller amounts over several years. This can be used to help supplement your income when needed. In addition, there are tax advantages to passing on pensions to beneficiaries as they fall outside of IHT liabilities. So, how we choose to take the tax-free cash from our pension is an important consideration.

Pensions receive tax relief when accumulating, but the income we take in retirement is taxed in line with our marginal rate of tax. Taking a lot of income from your pension each year could take you into a higher rate tax band. Remember, your state pension counts as your income too, it is not tax free. Most people will have a personal income tax allowance, which means they don’t have to pay tax on the first £12,570 of their income (tax year 2022/23).

By taking your pension income to keep you in the lowest tax band possible, while maybe drawing down on ISA investments (which are tax free) or using growth assets and using your capital gains tax allowance to supplement your income, could be a helpful way to retain more of your pension money during your retirement.

The best course of action will depend on your individual circumstances, the size of your pension pot and how much income you wish to draw down from your pension each year. Annuities provide a guaranteed sum each year for life, and with interest rates rising it is possible to get better annual payments per £100,000 than for many years. But if you choose to do this it is worth knowing, the money is then gone from your pension and any benefits it offered.

Currently, we find most people prefer to keep their pension invested, known as flexible drawdown (income), so they have more control over what they can take in income and their capital can benefit from long-term market growth.

Pensions can be complicated, with lots of elements to consider. Speaking with an Independent Financial Adviser will help you to decide the best course of action to ensure you are making the most of your pension and protecting the longevity of your wealth.

If you have questions about your pension, you can speak with one of our Financial Advisers at a free, no-obligation appointment. Fill in the form below and a member of our team will be in touch to book your free consultation.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.