We’ll help you understand the basics and show you how being tax smart could make your savings last longer
The good news
- You can dip into your pension whenever you like and normally get the first 25% tax-free. You can take this as one lump sum or in stages.
- The rest of your income is taxable but everyone has a personal tax allowance (normally £11,000 for the tax year 2016/2017). You don’t pay tax on this part.
- Whatever age you are, you don’t pay National Insurance on pension income and once you reach state pension age you won’t have to pay National Insurance on any income.
- You can pass on your remaining pot to anyone you choose, normally free of inheritance tax:
- If you die before age 75, the sum that you pass on will normally be completely tax free.
- If you die after age 75, your beneficiaries will be able to access the pension flexibly, at any age, subject to income tax.
The not so good news
- You'll pay tax on all your pensions including your state pension if your total income in a tax year from all sources is greater than your personal tax allowance.
- Taking out more than your tax-free cash limit can restrict the payments you or an employer can make to any of your pensions, normally to £10,000 a year. The government announced a proposal in their Autum Statement 2016, to reduce this to £4000. The closing date for the consultation is 15 February 2017. If passed this will take effect from 6 April 2017.
- Find out more
Some handy tips to reduce your tax bill
There are a few perfectly legal ways to help you reduce the amount of tax you pay.
Top up your pension or make a donation to charity
If you're still working then making payments into a pension scheme using Salary Exchange could reduce your total taxable income. Salary Exchange won't be right or available for everyone.
Donate to charity under Gift Aid and reduce your total taxable income.
Switch to tax-free savings
If you have money in a standard savings account, you could transfer it into an ISA (subject to limits).
Transfer assets to your partner
If your spouse is a non-taxpayer or pays a lower rate of tax than you then you could transfer income-producing assets such as savings or equities into their name. This could help if you're a higher rate taxpayer and they're not. You may need to seek specific financial advice if you are considering this option.
Reduce your flexible income
If you’re taking a flexible income and you're going to exceed your personal tax allowance for the year then you could think about how much you’re taking from your pension each year. For example, you could reduce your income by deferring some income until the next tax year but remember investment risk still applies to your pension.
It's important to note that fixed income (annuity) payments can't normally be reduced. These tips should not be regarded as financial advice. The right approach for you will depend on your individual circumstances.
Access to impartial guidance
We recommend you seek appropriate guidance or advice before you make any decisions. An adviser may charge a fee for this. You can also get free impartial guidance over the phone or face to face with Pensionwise. Go to pensionwise.gov.uk or call 0800 138 3944. Make sure you understand all your retirement options by reading the Money Advice Service guide – Your pension - it’s time to choose
This information is based on our understanding of taxation legislation and regulations in April 2016. The legislation and regulations can change. Your personal circumstances also have an impact on tax treatment.
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