Any money you take from your pension drawdown pot above the tax-free lump sum will be taxed as earnings in the tax year you take it.
For example, you have a pot of £80,000 and take a tax-free lump sum of £20,000. This leaves you with £60,000 to invest. If you take an income of £3,000 a year from your pension pot and are a basic rate taxpayer, you’ll pay 20% tax and so you’ll get £2,400.
Be aware that if you make large withdrawals, they could push you into a higher tax band. You might be able to reduce the amount of tax you pay by spreading payments and/or moving your money into drawdown over a number of tax years.
If you don’t take a regular income, your provider might deduct emergency tax from your payments.
Previously, if the value of your pension savings exceeded £1,073,100, a lifetime allowance charge might apply on any excess. For tax year 2023/24, this charge is being reduced to 0%, and from 2024/25 will be abolished.