From April this year it will be possible to take money purchase pensions benefits as virtually any mix of lump sum and income. The details are still being worked out but many people are not aware that there are tax implications to this.
The tax situation does not change, so if you take money out of your pension you will be taxed on any income above your tax-free Personal Allowance.
How much Income Tax you pay depends on the tax rate that applies to you.
Your income includes:
- The State Pension
- Private pensions (workplace, personal, stakeholder)
- Earnings from employment or self-employment
- Any taxable benefits you might get
- Any other income, money from investments, property, savings
When you start getting your regular pension payments, eg from an annuity, you’ll have to pay Income Tax on them.
Tax-free pension income
Lump sums
Most pension schemes let you take 25% of your pension pot as a lump sum, which is tax-free.
For example, if your pension pot is £60,000, you could take £15,000 without paying Income Tax on it. You then get regular payments from the remaining £45,000. These payments would be taxed.
Taking smaller pension funds as lump sums
You can take a smaller pension fund as lump sum and 25% is tax-free.
You can usually qualify to do this if you’re taking:
- A lump sum worth up to £30,000 from one or more pension pots (sometimes called a ‘trivial commutation’)
- Smaller pots worth up to £10,000 each from workplace pensions
- Up to 3 smaller pots worth up to £10,000 each from personal or stakeholder pensions.
However, if you’ve already started drawing a pension from the fund and then decide to take a lump sum, you would be charged 20% tax on the entire amount.
At the end of the tax year you might get a refund or have to pay more tax on the lump sum. This depends on your overall income for the tax year.
If you are confused or have any questions at all about the tax on your pension please call Vincent & Co. We can also help you to understand what happens to your pension fund in the event of your death.