Three quarters (75%) of each lump sum taken counts as taxable income.
This is added to the rest of your income. Depending on how much your total income for the tax year is, you could find yourself pushed into a higher tax band.
So, if you take lots of large lump sums, or even a single lump sum, you could end up paying a higher rate of tax than you normally do.
If you spread the lump sum amounts over more than one tax year, you might pay less tax on them.
For example, your pot is £60,000. You take out £4,000 each year – £1,000 is tax-free and £3,000 is taxable. You work part-time and earn £12,070 a year. The total of your earnings and the taxable cash you’ve taken from your pot is £15,070. This is above the standard Personal Allowance of £12,570. So you pay £500 in tax.
Your provider will usually deduct emergency tax from the first lump sum payment. This means you might pay too much tax if you take one large sum when you first start taking your money out and have to claim the money back. Or you might owe more tax if you have other sources of income.