Blog » Your pension: the good, the bad and the tax

Your pension: the good, the bad and the tax

April 23, 2021
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

The subject of tax is a topic many people tend to shy away from. Apart from it being a very dry subject, it can be immensely complex. But perhaps most of all it is forever perceived as the ultimate reason why our hard-earned cash is reduced before we have a chance to spend it. And we have little control over that. Yet, there are lots of plus points when it comes to tax and your pension. Read on to discover what these are.

Preparing for saving with tax in mind

The tax world, a little like the pension world itself, may get too little thought when considering how best to prepare for our futures. Yet, if we are armed with a knowledge of how tax affects our pensions, it can be very useful in creating strategies for maximising our funds in retirement. Most of all, there is some refreshingly good news about pensions and tax benefits.

The fact is, the tax office isn’t all about take, take, take. There are definitely some great benefits we can access – especially with pensions. If you don’t look at the overall picture, you are going to miss the good bits. So, let’s take a look at those pension tax benefits you automatically receive from the taxman. Please bear in mind all our opinions on taxation and related matters are based upon our understanding of the current tax laws and practice of HMRC, which are subject to change. Tax treatment depends on your circumstances.

You receive tax relief on your pension contributions

If you are under 75 and a UK resident, every time you make a contribution to your pension, the government gives you tax relief. In fact, the government adds 20% basic rate tax relief for every contribution you make. Your pension provider claims the tax relief for you, does all the calculations and makes sure this sum is added to your investment. If you normally pay tax at a higher rate, you will generally need to claim back yourself any relief from HMRC above this basic 20% rate.

It is most likely that tax relief was originally designed to encourage people to save for their retirement. However, if it was, it doesn’t seem to have had the desired effect as so many people saving for their retirement seem to be unaware of this benefit. It clearly makes a huge difference to how much you contribute to your pension and put away for your retirement.

For instance, if you are a basic rate taxpayer and add £5,000 to your pot, this contribution will be topped up by a further £1,250 thanks to tax relief.

When you start thinking about how much you contribute to your pension during your adult life, tax relief can make a significant difference to your retirement pot.

Retired couple fishing on lake | Pension tax

You will not be taxed on your pension investment

Where and how your retirement savings pot is invested can all seem a little complex to the layman. But one thing you can be sure of: you do not pay any tax on your pension investment. In other words, unlike everyday savings accounts where you pay tax on interest above your personal savings allowance, your pension savings are not taken into account by the taxman at all. (That is – not until you start to enjoy the benefits of your pension pot. But there is a whole lot of good news here too).

Tax benefits with pension freedoms

Since 2015, the government has allowed people with an eligible scheme to withdraw their pensions how they like from the age of 55 (pension freedoms). This is advantageous for those individuals who are in the later stages of their working careers and need that extra bit of cash to pay off debts, or a little bit of money for that much-needed treat. Well, that first 25% you take out of your pension is absolutely tax free.

If you have a pension which allows you to withdraw your funds at 55, you can take money from your pot in various ways. You may just wish to take out one lump sum or you may find a series of lump sums are useful to your requirements. You could also take this money as an income. This is called drawdown and can be a great way to complement your own income in later years. You just need to bear in mind that releasing pension money early will leave you worse off in retirement.

Take your income tax rate into account

However, to steer clear of the taxman you need to be aware of when you go above that 25% limit. After this point, any monies taken from your pension pot will be seen as income and will therefore be taxed at whichever rate is relevant to you as an individual (i.e., at basic rate or higher rate whichever is applicable).

Friends celebrating with red wine

You also need to be aware of how much pension money you are withdrawing in any one given year. If you have a lot of money going out of your pension it could propel you into a situation where you move from basic rate of tax to a higher rate of tax.

So, you will need guidance as to how you can best keep money accessed at a rate that in the end is not detrimental to your overall assets and savings.

Hopefully, all through your working life you will have monitored your pension. Subsequently you will have a good idea as to how your pot will grow and the financial options open to you. Perhaps most importantly, you will be receiving sound advice as to how to manage your funds in the most efficient way. If you haven’t don’t worry – it’s never too late.

Where to find the right advice

You can find great guidance on the internet with such websites as Pension Wise and the Money and Pensions Service. This type of website will offer free guidance and inform you of the facts and options which are available. What they cannot do is give you regulated advice in terms of your own circumstances and aspirations for the future. This can only be given by a company such as Pension Access who are authorised and regulated by the Financial Conduct Authority.

Conclusion and how Pension Access can help

It is a good idea to review your pension on a regular basis. Not only to check how your pension pot is fairing, but also to keep in step with what legal options are available to you. Important changes occur all the time. Your pension investments may need revisiting to see how they are performing. Also, when new laws and regulations are introduced (such as the pension freedoms act in 2015) changes to tax benefits or tax restrictions may mean it is beneficial to facilitate your savings in a different way.

This is, of course, a broad area of concern. Here at Pension Access we can offer a no obligation pension check. Our initial investigation into your pension will not cost you a penny and any advice charges are confirmed in writing before you have to make a decision to proceed. This means you can walk away better informed with nothing to pay.

Article updated: 16/02/2024

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Pension Access is a trading name of Harbour Rock Capital Limited which is registered in England & Wales as a Limited Company, No. 10290349. Authorised and regulated by the Financial Conduct Authority, No. 754580. Registered Offices: Affinity House, Beaufort Court, Sir Thomas Longley Road, Rochester, Kent, ME2 4FD. Telephone: 0800 009 3388. Email:
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