APPROACHING
Tax considerations
It is important to create the most tax-efficient retirement income from your
pension pot.
With a pension, you pay tax on income above your
tax-free personal allowance, just like you do on
your salary.
The only difference is that you are allowed to
withdraw the first 25 per cent of your pension pot taxfree once you reach 55 years of age. This is called
income drawdown and it doesn’t use up your
personal allowance.
You could take out the rest of your pension, but any
further withdrawals would be taxed as income. As you
pay tax on your marginal rate on anything you take
out after the tax-free amount, this could entail paying
higher or additional rates of tax at 40 or 45 per cent.
Anyone withdrawing large sums could end up paying
as much as 60 per cent tax on some of this additional
money. This is because once your annual income
exceeds £100,000, your personal allowance is reduced
by £1 for every £2 of additional income you receive.
If you die after the age of 75, you will still be able to
leave your remaining pension pot to anyone you like,
but any income they take from it will be taxed at their
marginal rate. In addition, some older, less flexible
plans will be subject to transitional rules, where tax at
a flat rate of 45 per cent is charged for a year.
Key points
With a pension, you pay tax on income
above your tax-free personal allowance, just
like you do on your salary
The only difference is you can withdraw the
first 25 per cent of your pension pot tax-free
once you reach 55
Before the age of 75, any pension pot can be
left tax-free to anyone you like
Before the age of 75, any pension pot can be left taxfree to anyone you like, whether it is being used or
not. You can give it as a lump sum for them to spend
as they wish, or it can go into a pension pot for them.
If it does go into a pension, any income paid will be
tax-free too.
25%
75%
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