Pensions can be confusing, people can find themselves overwhelmed with questions, figures and exactly how much of their pension is tax-free. We will answer some of the most frequently asked pension tax-free questions on the internet, below.
Do I have to pay taxes on my pension?
Yes – individuals do need to pay income tax on their pension. This is applicable for both state/government pensions and private pensions. There are several different rates of tax an individual may pay. This depends on the level of income they have, the amount in their pension and if they have more than one pension.
There are ways to avoid paying tax on an individual’s pension if they decide to withdraw money from their pension pot. Pension tax-free amounts can be withdrawn each year. However, the individual should always check with their pension provider how many times a year they can lift money from their pension and if they are able to lift from their pension. This exact advisory services can be provided by The Pension Transfer Specialist, so feel free to reach out. Some private pension companies do not allow individual’s to remove money from their pensions before retirement age unless it is an emergency circumstance, and if this is the case the pension companies may charge a fee for this.
How much of my pension is tax-free?
If an individual decides to take money from their pension pot, 25% of this amount is tax-free. However, they will still be required to pay income tax on the remaining 75%. A tax-free amount does not use up an individual’s Personal Allowance, which is the amount of income they do not have to pay tax on. The average Personal Allowance amount is around £12,500. The tax that an individual has to pay depends on the amount of money earned in the year and the rate of tax an individual pays.
How do I avoid tax on my pension lump sum?
There are a few ways an individual can go about this.
- Take it all in one go – take 25% as a lump sum payment, however, if you do this you can’t leave the 75% untouched and would need to do one fo the following to avoid tax:
Annuity (buying a guaranteed income)Flexi – access drawdown (getting an adjustable income)Taking the whole lump sum as cashMixing up options (this will depend on the options you decide to mix.
- The individual could take smaller amounts of the pension lump sum from their pension without paying tax. Every 25% of each lump sum is tax-free.
- Don’t touch the pot, if an individual doesn’t remove any money from the pot they will not be taxed for the time they leave their pensions untouched.
Can I take 25% of my pension tax-free every year?
An individual can access 40% of an individual pension fund and withdraw around 25% of the sum (this would be around 10% of the total pension). If an individual creates a drawdown the fund is created for the individual and they can take taxable income from it at any time, as well.
This would be a good option for an individual who needs some cash, but not as much as 25% of their full tax fund. Whatever is left in the pension pot could benefit from investment growth over a period of time and additional income.
When an Individual can’t Withdraw Cash from Their Pension Pot
An individual will be unable to withdraw cash from their contributed pension pot if they have the following:
Primary/enhanced protection covers a lump sum which is worth more than £375,000.If an individual has a lifetime allowance enhancement factor – i.e. if the individual has unused lifetime allowances which are less than 25% of the cash they would like to withdraw
Withdrawing from a Pension Before the Age of 50
An individual may have what is known as a reduced lifetime allowance that gives them the right to take their pension before they turn 50. This is under a pension scheme they would have joined before 2006 and it only applies to individuals in certain jobs such as professional sports, dance and/or modelling.
With this allowance individual’s can start taking money from their pension before the age of 55. An individual’s lifetime allowance is not reduced if they are in a pension scheme for government uniformed services. An example of government uniformed services would be the HM Armed Forces, Police and/or Fire Service.