Do you have to pay tax on your savings when you're retired?
- Reeves Independent
- Oct 8
- 6 min read
Retirement - the golden years! Time to travel, relax, maybe take up golf (even if it’s just at the crazy variety). But just as you're settling into this well-earned freedom, a familiar face shows up uninvited: the taxman.
One of the most common questions people ask as they approach or enter retirement is: “Will I have to pay tax on my savings?” And unfortunately, just because you’ve hung up your work boots doesn’t mean HMRC hangs up theirs.
The truth is, not all savings are treated equally when it comes to tax - some are safely tucked away from the taxman’s reach, while others could still raise his eyebrows. Whether it’s ISAs, pensions, interest from savings accounts, or investments, each pot plays by different rules.
In this article, we’ll break down what’s taxable, what’s not, and how to make the most of your money without giving away more than you need to - because you’ve earned every penny, and we’d rather you spent it on holidays than HMRC’s Christmas party.
So, do I have to pay tax on my savings?
When you retire, the rules around tax on savings don’t suddenly change - they largely follow the same principles as when you were working.
Just because you’ve clocked out of work doesn’t mean HMRC clocks out of your life. Even in retirement, your income - including pension payments and your State Pension - may still be subject to income tax.
You’ll still benefit from a personal allowance, which currently stands at £12,570. This means the first £12,570 of your total income - including any private or workplace pensions and your State Pension - is tax-free. Anything above that is subject to income tax at your applicable rate. Your personal allowance may be different depending on your individual circumstances.
One big advantage in retirement is that 25% of your pension pot can usually be taken tax-free, either as a lump sum or through flexible withdrawals. The remaining 75% is taxed like regular income.
And just like during your working life, your Personal Savings Allowance remains in place. This lets basic rate taxpayers earn up to £1,000 in interest on savings each year without paying tax. Higher rate taxpayers get up to £500 tax-free, while additional rate taxpayers don’t receive a savings allowance.
When it comes to accessing your pension, there are a few main options - each with different tax treatments. If you choose to buy an annuity (a guaranteed income for life), you can usually take 25% of your pension pot as a tax-free lump sum, while the regular income you receive is taxed at your normal income tax rate. With drawdown, where your money stays invested and you take flexible withdrawals, 25% of the amount you move into drawdown is tax-free, and anything you withdraw beyond that is taxed as income. Finally, with Uncrystallised Funds Pension Lump Sums (UFPLS), you can take lump sum payments directly from your pension, with 25% of each withdrawal tax-free and the remaining 75% taxed as income. Each option offers flexibility, but also different implications for your tax position.
How Is pension income taxed?
When you access your pension pot, the way you do so plays a big role in how you’re taxed. The good news is that you can normally take 25% of your pension pot tax-free, up to a maximum of £268,275 (if your pension savings are large enough). After that, the rest is taxed like normal income.
You don’t have to take all the money at once - you can withdraw it gradually to spread out tax charges over time.
When accessing your pension, you generally have several options, each with specific tax treatments. If you choose an annuity, which provides a guaranteed income, usually 25% of your pension pot can be taken as a tax-free lump sum, while the income payments you receive will be taxed at your normal income tax rate. With drawdown, where you take a flexible income, 25% of the amount moved into drawdown is tax-free, but any withdrawals you make from it are taxed as income. Alternatively, as stated previously, under the UFPLS (Uncrystallised Funds Pension Lump Sum) option, 25% of each lump sum withdrawal is tax-free, while the remaining 75% is taxed as income.
How and when you access your pension is a major decision - and one that can have long-term tax and financial consequences. You may only get one shot, so it’s important to understand your options clearly.
Use the government’s free Pension Wise service to get impartial guidance. Or speak with a professional adviser (like us!) who can walk you through your best strategy based on your situation.
Be aware of emergency tax on your first pension withdrawal. When you take your first taxable payment from a pension, HMRC often applies an emergency tax code. This is a default setting that assumes you’ll receive similar payments every month - which can result in too much tax being taken upfront.
Don’t panic, it’s a common issue, and if you’ve overpaid, you can reclaim the extra tax directly from HMRC. It’s important to check your tax code, and if you need to reclaim your tax you can do this through the government gateway website.
What about inheritance tax on pensions?
One of the advantages of pensions is that they usually sit outside your estate for inheritance tax (IHT) purposes. This means they can often be passed on free from IHT - unlike ISAs or other investments.
However, the government has announced changes to this rule from April 2027, so it’s important to keep updated.
In some circumstances, your beneficiaries may also be able to inherit your pension free from income tax, especially if you pass away before age 75.
Planning ahead can make a big difference - both for your own peace of mind and your loved ones' future.
Tax on dividend income
Dividends are payments made to shareholders from company profits or stock market funds. In the UK, dividend income is generally taxable unless it comes from investments held within an ISA or pension.
Every individual benefits from a tax-free dividend allowance of £500 per year, in addition to the personal allowance. If your dividend income exceeds £500, the tax rate you pay depends on your total taxable income. In such cases, you may be required to complete a Self-Assessment tax return.
For Scottish taxpayers, the tax rates and bands applied to savings and dividend income are the same as those in the rest of the UK.
Capital Gains Tax
Capital Gains Tax (CGT) applies to the profit you make when you sell or dispose of certain assets, such as personal possessions, shares or investments, UK property or business assets disposed of within the tax year. Tax is only due if you make a gain.
For the tax year 2025/26, you can realise up to £3,000 in gains before becoming liable for CGT. How and when you report any gains above this allowance depends on the type of asset involved.
Managing tax efficiently on your savings, pensions, and investment income is a vital part of securing your financial future in retirement. Understanding the rules around pension access options, IHT, dividend income, and capital gains tax can help you keep more of what you’ve worked hard to save. However, tax regulations can be complex and subject to change, making personalised advice invaluable. Reeves offers expert guidance tailored to your individual circumstances, helping you develop tax-efficient retirement and investment strategies that align with your goals. With Reeves by your side, you can confidently navigate the complexities of retirement planning and optimise your income to enjoy the retirement you deserve.
