The £1 pension technique that could save you thousands

How to save money – and hassle – when drawing down your pension.

A bizarre and annoying aspect of drawing down your pension lump sum once you reach 55 is that you may end up having to pay emergency tax on it. 

Doing so can come as a shock to pension savers, expecting to enjoy the fruits of their labour tax-free, especially as it can often take months to get their money back. 

In just the first three months of 2025, pension savers have had to reclaim £44 million in excess tax payments on their pension withdrawals, with over 15,000 claims submitted to HMRC, averaging £2,881. 

According to a Freedom of Information request from pension provider Royal London, in the 2022 to 2023 tax year, 2,300 claims were submitted for more than £10,000. 

‘Unacceptable’ tax bill

Tom Selby, director of public policy at AJ Bell, said the system was “unacceptable” and “arcane”. 

“We have only just blown out the candles on the cake celebrating 10 years of pensions freedoms,” he told the Telegraph. 

“It is simply unacceptable that, after all this time, the Government has still not managed to adapt the tax system to cope with the fact Britons are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.”

Once savers reach the age of 55, they can make flexible withdrawals from their nest egg, and the first 25% is tax-free.

However, anything above that figure is taxed at their normal rate. 

Certain flexible pension withdrawals can trigger the emergency tax payments and pension savers often have to wait months for their money to be repaid. 

Although the Government has made changes to the tax code process since April 2025 to try to prevent such issues and ensure individuals are given the right tax code, the problem often persists with those making one-off withdrawals from their pension nest eggs.

£1 HMRC pension trick

However, one technique, recommended by Clare Moffat, pensions commentator at Royal London, is to withdraw a small amount from your pension – from £1 to £100 – to generate a tax code from HMRC. 

Once you have received this, then you should be free to withdraw your chosen figure from your pension and be taxed appropriately. 

“How much you would need to take out would depend on your provider, so you need to check with them first,” added Moffat.

“But even if you can’t take £1 out, taking out £100 may still be enough to generate a tax code from HMRC that the provider can apply,” she told the Telegraph.

It is worth checking with your pension provider to see what small figure they would allow you to withdraw. You may also have to submit a paper request to them to do so. 

However, if this doesn’t work, you may still need to submit a tax reclaim form (P55, P53, or P50Z) to HMRC. 

Moffat also warned that, if you are still paying into your pension, accessing it could mean that the money purchase annual allowance (MPAA) is also triggered, meaning that the tax-free figure you can pay into your pension each year, including employer contributions, could reduce to £10,000 from £60,000.