A well tool having a magnetically coupled position sensor. In operation of a well tool, relative displacement is produced between members of the well tool. A magnetically coupled position sensor includes one magnet assembly attached to a member for displacement therewith and another magnet assembly movably attached to the other member and magnetically coupled to the first magnet assembly for displacement therewith. The position sensor further includes a magnetically permeable material which increases a magnetic flux density between the magnet assemblies. The magnetically permeable material may be positioned between magnets of the magnet assemblies and/or spaced apart therefrom.