Pension warning over easy mistake that could cost you £22,500 in your golden years

Scottish Sun

18-07-2025

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PENSION experts have warned of a mistake that could cost you up to £22,500 in your retirement.
If you're planning on taking money out of your pension while you're still paying into it, you need to be aware of a rule around the annual allowance.
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You can normally start taking money out of your pension at 55
Credit: Alamy
Typically from the age of 55, you're allowed to take out up to 25 per cent from your pension without paying any tax, as long as you take it out in lump sums rather than a regular income.
The Money and Pensions Service (MaPS) is warning people that they could end up hugely reducing the amount they can contribute to their pension if they take out more than the tax-free allowance.
'If you want to start taking an income from your pension - for example an annuity or drawdown - on top of your tax-free cash, your annual allowance could drop significantly," Rebecca Fearnley, from MaPS, told The Sun.
"Taking just the tax-free cash, which can be up to 25% of your pension pot, means that your annual allowance won't be affected.
'For most people, the annual allowance is £60,000, but this will reduce to £10,000 if you start drawing money from your pension while you're still paying into it, so it's important to be aware of, as you could lose a significant amount of tax relief.
If you were to lose £50,000 of your tax-free pension allowance, you'd suddenly be looking at a tax bill of £10,000 on £50,000 for a basic rate taxpayer.
If you're a higher rate taxpayer, that's £20,000, while an additional rate taxpayer pays £22,500.
Hargreaves Lansdown head of retirement analysis Helen Morrissey says the rule "can land you with a nasty unexpected tax bill if you are caught unawares."
"It affects those who have so-called flexibly accessed their pension so you won't be affected if you have only taken your tax-free cash.
"It has been a key issue for people who may have flexibly accessed their pension during a period when they were out of work and then want to rebuild it once they get a new job," she added.
You can visit MoneyHelper.org.uk for more guidance around taking money from your pension, or contact your pension provider.
What is the annual allowance?
YOUR annual allowance is the most you can save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax.
You'll only pay tax if you exceed the annual allowance, which is £60,000 this tax year.
Your annual allowance applies to all of your private pensions if you have more than one.
However, as soon as you take a lump sum from your pot, this affects how much you can continue to save for retirement.
The annual allowance falls to £10,000.
If you want to carry on building up your pension pot, this option might not be suitable.
How can I take money out of my pension?
You can take up to 25 per cent of your total pension as a tax-free lump sum, normally from the age of 55.
However, the maximum you're allowed to take out in this way is £268,275.
There are other ways that you can take money from your pension pot.
Some providers allow you to withdraw cash directly from your pension pot, either in its entirety or as smaller cash sums.
You may also be able to buy an annuity from an insurance company that will provide you with regular payments from your pension for life.
You can ask your pension provider to pay for this out of your pension pot.
Some annuities will be for a fixed number of years, while some will continue to pay your spouse or partner after you die.
The amount you get will depend on how long the insurance company expects you to live for and how many years they'll need to pay you.
They will take into account things like your age, gender and health, as well as interest rates and the size of your pension pot.
You can also invest into a drawdown, which is a way of taking money out of your pension pot to live on when you retire.
This gives you more flexibility over how and when you receive your pension.
You can take up to 25% as tax-free lump sum and the rest of your pension remains invested, meaning it can grow.
You can then choose whether you want a regular income or amounts as and when you need them.
It's important to note that your invested pot can go down as well as up, so you could run out of money.
You can find out from your pension provider which options they offer.
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