UK pension tax guidance warns savers and retirees of common misconceptions

Financial advisers at Evelyn Partners highlighted five widespread misconceptions about the tax‑free cash option in defined‑contribution pensions. The lifetime lump‑sum allowance remains capped at £268,275, but savers can withdraw tax‑free cash from age 55 (rising to 57 in 2028) multiple times, continue contributing to their pension and avoid triggering the Money Purchase Annual Allowance unless they also draw taxable pension income. Andrew King explained, "The 25% tax‑free entitlement is probably the most treasured feature of defined contribution pensions…" and warned against premature withdrawals driven by speculative policy changes.

HM Revenue & Customs clarified that the state pension is always taxable, with tax collected through adjustments to individuals' tax codes rather than at source. An HMRC spokesperson said, "The State Pension is taxable, but the DWP doesn't take tax at source, so we change your tax code to give enough of your tax‑free allowance to match the State Pension…". While a full exemption from income tax for pensioners whose only income is the state pension is planned from April 2027, concerns remain that rising pension payments could soon outstrip the frozen personal allowance, prompting debate over long‑term sustainability.