Pension freedom rules that make it easier for investors to access their pension savings may lead to excessive tax bills.


The pension freedom rules allow anyone aged 55 or over to access their personal pension funds, but there are complicated rules on how withdrawals are taxed. If you are looking to cash in all or part of your pension, you need to check that you are not paying too much tax.

The difficulties can occur if you decide to take a one-off lump sum – an ‘uncrystallised fund pension lump sum withdrawal’ (UFPLS) – from your pension, perhaps to re-invest, to buy a holiday or to pay off debts. This differs from using a personal pension to provide a regular income, through a drawdown plan or annuity.

Your pension provider will apply an emergency tax code, which assumes you are withdrawing the UFPLS on a monthly basis – unless the company has an up-to-date tax code for you. If you aren’t planning to take monthly amounts, it’s likely you will be paying too much tax.


If you aren’t planning to take monthly amounts, it’s likely you will be paying too much tax.



For example, if you take a UFPLS of £10,000 from your pension at the start of the tax year, HMRC may assume you will take an income of £120,000 across the year from your pension and will tax you accordingly.

The first 25% of a UFPLS withdrawal is tax free. Then, using the emergency tax code to calculate the tax on the remaining 75%, HMRC would apply only 1/12th of the personal allowance (the amount of income you don’t pay tax on – £11,850 in 2018/19) and assess the remaining payment against 1/12th of the appropriate income tax bands. So, for example, someone who should be a basic rate taxpayer could end up paying 40% tax, or even 45%, on a slice of their pension, and it could take some time to get back any overpayment.

However, as emergency tax codes are generally only applied the first-time people access their pension funds, one option is to make the first withdrawal a nominal amount, say £100. The emergency tax code will be applied, but this triggers HMRC to adjust your tax code and send an updated and correct version to your pension provider. Once the new code has been issued, any further, larger withdrawals are taxed correctly.



If you are taxed on an emergency code, you may be able to claim a tax rebate at the end of the tax year through your tax return. You can also apply for a rebate during the tax year.

Figures published by HMRC show 264,000 people aged 55 or over accessed their pension during the second quarter of 2018. Many of these are likely to have been taxed at the emergency rate.

It has been reported that HMRC is only processing an average of 10,500 rebate claim forms each quarter. This suggests some people may not realise they have paid too much tax, or are unaware that they can claim a rebate immediately.

If you are planning to withdraw a lump sum from your pension, or are concerned about a recent withdrawal, please get in touch.


The Financial Conduct Authority does not regulate tax advice.


Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances.


Tax laws can change.