Answers · UK 2025/26

How is a £850,000 pension pot taxed if I take income drawdown?

From a £850,000 pension pot, you can normally take up to £212,500 (25%) as a tax-free lump sum, subject to the £268,275 Lump Sum Allowance cap, leaving the remainder to draw down as taxable income added to your other income each year.

Last updated: 10 July 2026Last reviewed: 10 July 2026How we verify

Full answer

A £850,000 defined contribution pension pot accessed through flexi-access drawdown from normal minimum pension age (currently 55, rising to 57 from April 2028) allows a Pension Commencement Lump Sum of up to 25% tax-free -- £212,500 in this case, which remains within the standard Lump Sum Allowance of £268,275 -- leaving £637,500 in the taxable portion. Every withdrawal from that £637,500 is added to any other income you have in the tax year it is taken and taxed at your marginal Income Tax rate. A pot of this size sits close to where the Lump Sum Allowance cap starts to bind (pots above roughly £1,073,100 would see the 25% tax-free calculation capped at £268,275 rather than a quarter of the full pot), so it is worth checking your specific entitlement, especially if you have protection certificates from the old Lifetime Allowance regime. Spreading withdrawals over twenty-five-plus years, using the Personal Allowance and basic-rate band each year alongside the State Pension, keeps much of the tax at 0% to 20%, while large single-year withdrawals risk the 40% and 45% higher rates and the £100,000 Personal Allowance taper. Accessing the taxable portion also triggers the £10,000 Money Purchase Annual Allowance if you plan to keep contributing to a pension while working.