When taking benefits from a pension, 25% is usually tax-free and the rest is added to other income in that tax year and subject to income tax. For those planning to take large lump sums out, this could push income into a higher tax bracket. At the extreme, someone could instantly become a top rate taxpayer (45%).
One option to reduce tax is to spread withdrawals over a number of years. Investors - perhaps basic or non-taxpayers, might even consider taking some this tax year.
Although the new rules don’t take effect until 6 April, pensioners can already use income drawdown to take tax-free cash and some taxable withdrawals. Until April most people are restricted on the amounts they take out. From April the limits are effectively removed.
Please remember, a pension is intended to provide income for a retirement potentially lasting 20 years or more. Taking excessive withdrawals increases the risk of running out of money later and could have a significant impact on lifestyle. In income drawdown the pension fund remains invested so will rise and fall in value. It is a high risk option so will not be suitable for everyone and income is not secure. Tax treatment and pension rules will change over time and will depend on individual circumstances.