I’m taking my 25% tax-free lump sum, how will the rest be taxed?

Any withdrawals you make from your pension savings are seen as income and are therefore taxable. All except for the first 25% which is tax-free. So, what happens with the rest?

How are my pension withdrawals taxed?

After you’ve taken your tax-free cash, any further withdrawals are subject to income tax at your marginal rate. This means that you will pay income tax based on the tax bracket you fall into. So, if you’re a basic rate 20% taxpayer, then this is what you will be taxed on your pension income.

Tax treatment depends on your individual circumstances and may be subject to change.

How do I avoid a large tax bill?

There are a few things you can be aware of to help you avoid a large tax bill.

Firstly, if you are taking an income from your pension while still working then both incomes will go towards your annual tax allowance. And exceeding this allowance will push you into a higher tax bracket, meaning that you will have to pay a higher rate of tax. So, it’s a good idea to keep an eye on your allowance and make sure any withdrawals you make from your pension fall below your remaining allowance amount.

The same thing applies if you are no longer working. If you take a lump sum from your pension that exceeds your annual tax allowance, then you will receive a large tax bill.

What options do I have for accessing the remaining 75% of my pension?

From the age of 55 you have a number of options when taking money from your pension. These include:

  • Taking lump sums as and when you need to
  • Setting up a regular income
  • Buying an annuity

You can mix and match these options based on your needs and what suits you best. When accessing your pension, it’s important to remember that these savings are meant to last you throughout retirement. Releasing pension money early isn’t right for everyone as it will leave you worse off in retirement.

How can a financial adviser help me?

A financial adviser can check your pension for you and let you know how much your pension is worth. From here they can advise on the best options for accessing your pension in a way that suits your needs and circumstances. And when withdrawing money from your savings, they can help you do it in the right way to avoid a large tax bill.

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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.
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