Once it comes time to start taking your savings, probably the last thing you want to be thinking about is tax.
That said, it’s something that really is worth paying attention to when deciding when and how you take your savings, as you don’t want to be landed with an unexpected tax bill.
Tax in less than two minutes
In order not to be caught out unexpectedly you need to bear in mind three things about tax and your pension:
- 25% of your pension savings can be taken tax-free. That means that the remaining 75% of you pension will be taxed at your normal rate of Income Tax.
- Cash lump-sums could push you into a higher tax-bracket. If you choose to take your entire pension as a cash lump sum this will be taxed as if it were income (25% will be tax free, the rest will be subject to Income Tax). Also remember that if you’re receiving other income (such as from other pension savings or you’re still working), then a cash lump sum could put you in a higher tax-bracket and land you with a higher tax bill.
- The Money Purchase Annual Allowance. If you decide to take your pension as either flexible income (drawdown) or as cash, your Annual Allowance will reduce to £10,000. This is known as the ‘Money Purchase Annual Allowance’ (and it could be reduced further to £4,000 very soon). It means that if you want to pay more pension savings once you’ve accessed some of your money in this way, you will only be able to pay £10,000 in over a tax year. If you pay more than that, you could end up paying a tax charge on the excess. Go to the Government's website for more information, and make sure you factor this in as you make plans for your retirement.
If you’ve built up a large amount of pension savings, you may want to read about the Annual and Lifetime Allowance, and the impact of tax on your savings.