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Traps and tricks of pension withdrawals

HM Revenue and Customs figures show that over £30 billion has been withdrawn from pensions since the Pensions Freedoms were introduced in 2015.

There are pitfalls for people to be aware of when taking money from their pension, not least around the amount of tax they may have to pay

A concern of ours is that where people take their pensions as lump sums, everything over the tax free 25% HMRC taxes as income but also assumes they will be taking the same income amount on an ongoing basis and applies an emergency tax code. This can result in a large tax deduction which needs to be reclaimed.

Another issue is that much of the £30 billion has been taken out without Independent Financial Advice. Without forward thinking this can reduce an individual’s regular income when they need it most, in retirement when it is more difficult to supplement their income stream.

Where people take money out of a pension (this is termed crystallising the pension) it can trigger unintended consequences, including limiting the amount people can subsequently save into a pension. Currently, this reduces from £40,000 to £4,000 a year. This can be restrictive for those who plan to continue working and continue to pay into their pension, especially where they are also benefiting from employer contributions.

To take pension money out and reduce the tax bill, the timing of withdrawals is key – for example, spreading the withdrawals over more than one tax year to use more than one personal allowance.

For those withdrawing money from their pension to create an income stream, Independent Financial Advice can help in making sensible decisions about how much of their pension to withdraw and when. Taking too high a percentage can deplete the pension too quickly and leave them with a reduced income or worse case that they run out of funds in their lifetime.

Accessing pensions in the right way and retirement planning are complex and require forward planning if people are not to be caught out. We strongly recommend anyone thinking about accessing a pension under the Pension Freedoms rules, in particular before their retirement date, seeks Independent Financial Advice.


State Pension: What will you receive?

Full basic state pension:

Male born before 6 April 1951

Female born before 6 April 1953

Total of 30 qualifying years of NI contributions or credits

Full new state pension:

Male born on or after 6 April 1951

Female born on or after 6 April 1953

Total of 35 qualifying years of NI contributions or credits

Number of people receiving new state pension:

1.1 Million


% of pensioners who receive full new state pension:



% of pensioners who receive between 75% and 100% of new state pension:



% of pensioners who received full basis state pension:



Full basic state pension per week (currently):



Full new state pension per week (currently):



Source: DWP

When thinking about taking your pension benefits, whether you are retiring or not, there may be a number of different options available to you. Making the right choice will depend on your own personal circumstances. To discover what your options are, arrange a free, initial consultation with a Lowes Consultant:

Call: 0191 281 8811 or click here

Lowes Financial Management, Fernwood House, Clayton Road, Jesmond, NE2 1TL. Authorised and regulated by the Financial Conduct Authority.

About the author

Keith Hanna

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