Pensions should make retirement feel simple and secure, but the tax side can become complicated quickly. With the state pension rising, the personal allowance frozen, and HMRC still applying rules in their own mysterious way, more people are finding themselves paying tax on income they never expected to be taxed at all.
Below are four lesser known pension tips that can genuinely help you save money, avoid nasty surprises, and keep more of your income in retirement.
The state pension is about to nudge people into paying tax
Anyone getting the full new state pension will almost certainly become a taxpayer from 2027.
Right now it pays £11,973 a year. Thanks to the triple lock rising with wage growth, it is set to increase by 4.8 percent next year, rising to £241.30 per week or £12,548 a year.
That puts it only £22 below the £12,570 personal allowance. And because the triple lock guarantees at least a 2.5 percent rise each year, the state pension is almost guaranteed to tip over the tax threshold unless this changes in the 26 November budget.
So even people with no private pension income could soon find themselves owing income tax for the first time.
Let’s look at four tips that can help you manage things more efficiently.
1. Keep track of your lump sum certificates
Most people build up multiple pensions from different jobs. Whenever you dip into one of your pots, you can normally take up to 25 percent tax-free and the rest is taxed.
Since April 2024, the total tax-free lump sum you can take across all pensions is capped at £268,275.
Each time you take tax-free cash, your pension provider issues a certificate showing exactly how much of that allowance you have used. Other schemes will ask for this before letting you make withdrawals so they do not accidentally let you exceed your limit.
If you made withdrawals before April 2024, your certificate will show how much of the old lifetime allowance you used, expressed as a percentage. The lifetime allowance was abolished in 2024 but previously capped total pension savings at £1,073,100.
This paperwork matters. If you cannot find old certificates, you will need to contact the provider and ask for replacement information. Providers must keep records for at least six years, although in practice they usually hold them for longer.
If you want a pension that keeps all your contributions and activity visible in one clear dashboard, Penfold is ideal for business owners, freelancers and contractors who want everything simple and easy to track.
2. A little known certificate that protects your tax-free cash
When the lifetime allowance was abolished, HMRC kept the maximum tax-free lump sum limit at £268,275. At the same time they assumed that 25 percent of all previous withdrawals included tax-free cash.
For people who withdrew money without taking any tax-free lump sum at the time, this assumption could incorrectly reduce their remaining allowance.
HMRC allowed people in this situation to apply for a special transitional tax-free cash certificate to correct the record. But there was a catch. You had to apply before making any new withdrawals after April 2024.
If you did not apply in time, HMRC treats earlier withdrawals as if they included tax-free cash and reduces your remaining allowance accordingly. Depending on the size of your pensions, the amount lost could be very large.
You can write to HMRC and ask for leniency, but the guidance makes it clear the certificate needed to be in place before the next withdrawal and there is no guarantee they will reverse it.
3. The pension while you work trick
Many people still have a final salary pension from an old employer. These defined benefit schemes often start paying out at 60, even if you have no intention of retiring at that age.
You can usually defer these benefits and receive more later. But there is a clever opportunity if you take that pension while you are still working.
You could take the income from your final salary scheme and pay the same amount into your defined contribution pension from your salary. Thanks to tax relief, this can significantly boost the value of your contributions.
Here is the example:
- Salary: £60,000
- Final salary pension pays: £10,000
- As a higher rate taxpayer you pay £4,000 tax, keeping £6,000
- Pay that £6,000 into your DC pension
- It becomes £8,000 through basic rate tax relief
- You then claim an additional £2,000 through self assessment
- Total contribution: £10,000
You have effectively swapped £10,000 of income for £10,000 into your pension, but with the added advantage that 25 percent of the DC pot will eventually be tax-free. If your employer offers salary sacrifice, the benefit is even larger because you also save national insurance.
Importantly, taking income from a defined benefit pension does not trigger the money purchase annual allowance. You can still contribute up to the standard annual allowance of £60,000 or your full earnings.
If you want a defined contribution pension that is simple, flexible and works well alongside older DB schemes, Penfold is a strong option for business owners looking to make efficient contributions.
4. Avoid emergency tax with the one pound trick
Since 2015 you can take money from your pension flexibly, dipping in as and when you need it. The problem is that the first withdrawal often triggers emergency tax because HMRC assumes the payment will repeat every month.
Here is the example:
If you take £40,000:
- £10,000 is tax-free
- £30,000 is taxable
- Under an emergency code you could lose £12,350 upfront
You can reclaim this, but the refund can take weeks or months.
There is a simple fix.
Take a very small withdrawal first, even £1 if your provider allows it. This triggers HMRC to issue the correct tax code. When you then take the real withdrawal, the correct code should be applied from the start.
The bottom line
Retirement income planning is full of rules that can catch people out. Keeping your paperwork in order, understanding the tax-free lump sum rules, and planning your withdrawals can save you a lot of stress and tax.
If you run a limited company or work for yourself and want a pension that is genuinely easy to manage, we partner with Penfold and you can use the referral code deadsimpleaccounting when you sign up for a small boost in your pot.
If you would like us to check your pension setup or help structure withdrawals in a tax efficient way, just give us a shout. We are always happy to help. We also have plenty of useful calculators, such as the pension relief calculator, that can save you a lot of time and headaches..!
