Trustnet Direct Retirement Programme | Page 52

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% Page 52