19th August 2015 at 12:44pm
Many people have already chosen to take advantage of the pension freedoms to access their savings from the age of 55. This could be by taking some or all of their tax-free lump sum, a regular income (drawdown), a fixed income for life (an annuity), all their pension money – or a mix of these.
Others have decided to leave some or all of their pension money untouched so their family can benefit, sometimes tax free.
We take a look at just one of the burning issues people want to know more about so they can make the most of their options – tax and how it affects what you take out of your pension. Many posts on our MoneyPlus Community and MoneyPlus blog reflect this.
Tax: the big issue
Tax is so important when taking money out of your pension.
If you take money out gradually over a number of tax years you could keep more of your savings. Take a large, one-off sum, or your entire pension as cash, and the tax will probably be much higher, particularly if you’re still working.
The first 25% is tax free with the rest subject to income tax of 20%, 40% or 45%, depending on the amount involved.
Here’s how it can work. You have a £50,000 pension with 25% of this tax free, leaving £37,500 liable to tax. If you have no other income, your personal tax allowance, £10,600 for most people, is available – leaving £26,900, which is subject to tax at 20%. If you’re still working, your personal allowance isn’t available and it’s likely you’ll pay 40% tax on some of your pension money.
Watch out for the emergency tax code if you make a one-off withdrawal as this can mean too much tax paid up front, but the good news is you can claim a refund on the HMRC website.
Tax can be complicated, and we recommend you speak to an expert to stay on track.
It’s worth finding out more about the pension reforms to fully understand what they mean for you.
A personal pension is an investment. Its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in July 2015.